As Russia’s bloody invasion of Ukraine nears the end of its second month, with regular reports of human rights violations, possible chemical weapons attacks, and head of state musings regarding whether this campaign amounts to a genocide, governments around the world continue to coordinate and respond with increasingly severe sanctions and export controls. Specifically, the United States, European Union, United Kingdom, Japan, and other global allies have repeatedly responded by escalating trade restrictions targeting Russia. Since the developments discussed in our previous client alerts on Feb. 28 and Mar. 22, these jurisdictions have coordinated to significantly escalate sanctions and export controls targeting Russian President Vladimir Putin’s regime, Kremlin-connected Russian elites, and the Russian economy. While the new and expanded sanctions in each of these jurisdictions generally appear to have been coordinated, each jurisdiction has unique sanctions, deadlines, and applications, increasing compliance complexities.
Below we summarize certain significant new trade-related restrictive measures imposed by the United States, European Union, United Kingdom, and Japan.
U.S. Sanctions and Export Controls
Since our last alert, the United States has issued new sanctions targeting the Russian economy, members of the Russian government, and their family members. The United States also elevated existing sanctions on several key Russian entities to full blocking sanctions.
- New Investment and Services: On April 6, 2022, President Biden issued a new Executive Order (E.O.) – “Prohibiting New Investment in and Certain Services to the Russian Federation in Response to Continued Russian Federation Aggression” – that prohibits new investment in Russia by U.S. persons, wherever located. The new E.O. also prohibits the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any category of services as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, to any person located in the Russian Federation.
- Aerospace, Marine, and Electronics Sectors: On March 31, 2022, Secretary of the Treasury Yellen determined that sanctions apply to the aerospace, marine, and electronics sectors of the Russian Federation economy pursuant to section 1(a)(i) of E.O. 14024. This determination allows for sanctions to be imposed on any individual or entity determined to operate or have operated in any of those sectors, but does not immediately impose sanctions on any entity unless separately designated.
- Energy: On April 8, 2022, President Biden signed into law the “Ending Importation of Russian Oil Act” (H.R. 6968), which statutorily prohibits the importation of energy products, including crude oil, liquefied natural gas, and coal, from the Russian Federation.
- State-Owned Enterprises (SOEs): The Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated and imposed full blocking sanctions on Public Joint Stock Company Alrosa, a Russian SOE and the world’s largest diamond-mining company. Alrosa was previously subject to debt and equity restrictions. The Department of State redesignated United Shipbuilding Corporation (USC), a major Russian SOE responsible for developing and building the Russian Navy’s warships, and designated 28 USC subsidiaries and eight board members. Each of the USC-related individuals and entities is also listed by OFAC and is subject to full blocking sanctions. See the full list of related designations and several related general licenses, including authorized wind-down periods.
- Banking: OFAC designated and imposed full blocking sanctions on Sberbank (plus 42 subsidiaries) and Alfa-Bank (plus 6 subsidiaries and 5 vessels), which were previously only subject to certain correspondent account or debt and equity restrictions, and updated and issued several general licenses, including authorized wind-down periods. OFAC also designated and imposed full blocking sanctions on the CEO of Sberbank, Herman Oskarovich Gref.
- Other Notable Designations: OFAC targeted for designation entities enabling Russian cybercrime, sanctions evasion networks, Russia’s defense-industrial base, and the Russian State Duma. Specifically, OFAC designated and imposed blocking sanctions on:
- currency exchange Garantex, which operates in Russia, and Russia-based Hydra Market, the world’s largest darknet market;
- entities in the Russian technology sector and in significant sanctions evasion networks working to procure dual-use equipment and technology for Russia’s defense sector;
- all members of the Russian State Duma and the State Duma of the Federal Assembly of the Russian Federation as an entity;
- Russian defense companies that produce weapons that have been used in Russia’s assault against Ukraine; and
- family members of Russian President Putin and Russian Foreign Minister Sergey Lavrov and remaining members of the Russian Security Council who were not already sanctioned.
- Trade and Export Controls:
- President Biden signed into law the “Suspending Normal Trade Relations with Russia and Belarus Act” (H.R. 7108), which suspends normal trade relations with the Russian Federation and the Republic of Belarus. Under the Act, beginning on April 9, 2022, imports originating from Russia and Belarus will be ineligible for the “most-favored nation” (MFN) tariff rates the United States currently affords to all WTO Member countries.
- The Department of Commerce’s Bureau of Industry and Security (BIS) issued a final rule imposing on Russia and Belarus highly restrictive license requirements on all categories of items on the Commerce Control List, which expands U.S. scrutiny of transactions to almost any sensitive dual-use technology, software, or commodities that could be used to support Russia’s war effort.
- BIS issued Temporary Denial Orders (TDOs) for three Russian Airlines – Aeroflot, Azur Air, and UTair – due to ongoing export violations related to the comprehensive export controls on Russia. The TDOs terminate the right of these airlines to participate in transactions subject to the Export Administration Regulations (EAR), including exports and reexports from the United States.
- The U.S. Commerce Department added 120 new Russian and Belarusian parties in the aerospace, maritime, and defense sectors to its Entity List. As a result of being placed on BIS’s Entity List, these parties cannot deal in any items “subject to the EAR” without express authorization from BIS (which reviews such requests with a policy of denial).
EU Sanctions and Export Controls
In light of Russia’s continuing war of aggression against Ukraine, and the reported atrocities committed by Russian armed forces in Ukraine, the EU decided to impose its fifth package of economic and individual sanctions against Russia, and also issued additional sanctions against Belarus. The latest measures adopted and listed below intend to reinforce pressure on the Russian government and economy, and to limit the Kremlin’s resources for the aggression. The new sanctions became effective April 8 (additional designations) and April 9 (trade restrictions and further sanctions).
- Trade Controls:
- The purchase, import, or transfer of coal and other solid fossil fuels into the EU is prohibited if they originate in Russia or are exported from Russia (not applicable until August 10, 2022, for contracts concluded before April 9, 2022), affecting one-fourth of all Russian coal exports.
- Import bans target products such as wood, cement, fertilizers, seafood, and liquor (not applicable until July 10, 2022, for contracts concluded before April 9, 2022).
- Additional export bans target jet fuel and fuel additives, but also a long list of additional items such as quantum computers and advanced semiconductors, high-end electronics, software, sensitive machinery, and transportation equipment (not applicable until July 10, 2022, for contracts concluded before April 9, 2022).
- The provision of access to EU ports to vessels registered under the flag of Russia (including vessels that have changed their Russian flag or their registration after February 24, 2022) is prohibited after April 16, 2022. Derogations apply for agricultural and food products, humanitarian aid, and energy.
- Freight road operators established in Russia and Belarus are banned from transporting goods by road in the EU as of April 16, 2022. Derogations apply for a number of products, such as pharmaceutical, medical, agricultural, and food products, including wheat, and for road transport for humanitarian purposes.
- Financial markets and services:
- The provision of high-value crypto-asset services to Russian individuals and entities is prohibited, if the total value of crypto-assets per wallet, account, or custody provider exceeds EUR 10,000.
- It is prohibited to be a beneficiary or act as a trustee or in similar capacities for Russian individuals and entities.
- In addition, the pre-existing export restrictions on banknotes and prohibition on the sale of transferable securities on Russia and Belarus were extended to include not only EUR, but any official currency of the EU member states.
- Designated Persons:
- The EU adopted sanctions against 217 individuals and 18 entities, resulting in a total of 1,091 designated individuals and 80 designated entities.
- Among the newly listed individuals are oligarchs Boris Romanovich and Igor Arkadyevich Rothenberg, Oleg Vladimirovich Deripaska (owner of the Russian Machines industrial conglomerate), Viatcheslav Moshe Kantor (shareholder of the Acron Group), various family members of previously designated individuals (among them Maria Vladimirovna Vorontsova, daughter of Vladimir Putin), prominent businesspeople involved in key economic sectors, and proponents of disinformation and information manipulation, as well as various ministers and members of the “People’s Council” of the so-called “Donetsk People’s Republic” and “Luhansk People’s Republic.”
- The newly designated entities include four additional Russian banks (VTB Bank, Bank Otkritie, Novikombank, and Sovcombank), representing 23% of market share in the Russian banking sector, and various companies in the defense and industrial sectors (including subsidiaries of Rostec).
- Excluding Russia from public contracts and European money:
- The award and continued execution of public contracts and concessions with Russian nationals, entities, or bodies are generally banned.
- The provision of support, including financing and financial assistance or any other benefit, under a Union, Euratom, or Member State program to Russian publicly owned or controlled entities is prohibited.
- New exemptions and grounds for authorization:
- Effective April 8, 2022, the EU introduced additional grounds for authorization of the release of frozen funds for the termination of operations and business relationships, in particular in relation to the designated Russian banks.
- In view of the humanitarian crisis resulting from Russia’s invasion of Ukraine, the EU further adopted certain humanitarian exceptions, in force since April 14, 2022: Organizations and agencies acting as humanitarian partners of the EU, such as the International Committee of the Red Cross and the UN specialized agencies, are exempted from the prohibition of dealing with designated persons when the funds or resources are necessary for exclusively humanitarian purposes in Ukraine. In addition, certain clearly defined categories of humanitarian organizations are exempted from export restrictions if necessary for exclusively humanitarian purposes in the non-government-controlled areas of the Donetsk and Luhansk oblasts of Ukraine. Organizations not covered by the exemptions can request an authorization for humanitarian activities in Ukraine.
- Additional Guidance at EU and Member States Level: The EU Commission published additional guidance and continues to update existing guidance and FAQs on various prohibitions and restrictions under the Russia sanctions regime. EU Member States, to varying extents, are also offering guidance on specific sanctions issues. The guidance issued on the interpretation of certain restrictive measures reveals divergent approaches among the different authorities on a number of aspects, including on the question of whether to aggregate the shares held by two or more designated persons in another entity to determine whether the latter is also subject to sanctions.
- Whistleblower Tool: The European Commission launched a whistleblower tool to facilitate the reporting of potential sanctions violations.
UK Sanctions and Export Controls
The UK also implemented additional trade restrictions targeting entities and individuals in key strategic industries supporting Russia’s invasion of Ukraine. These restrictions target Russian banking institutions, Russian and Belarusian persons involved in energy production, defense operations, and the manufacturing of certain products.
- New Legislation:
- Changes were made to the UK Russia sanctions regime by way of the Russia (Sanctions) (EU Exit) (Amendment) (No. 7) Regulations 2022, which came into force on March 30, 2022. The Regulations introduce a number of changes, including: (i) empowering the UK Secretary of State to designate persons by description; (ii) extending certain existing investment, shipping, and trade prohibitions, and associated exceptions and licensing provisions that previously applied to Crimea to also apply to non-government-controlled areas of the Donetsk and Luhansk regions; and (iii) prohibiting designated persons from accessing UK maintenance on their aircraft and ships.
- On April 14, 2022, the Russia (Sanctions) (EU Exit) (Amendment) (No. 8) Regulations 2022 came into force, introducing a number of further changes to the UK Russia sanctions regime, including the prohibition on (i) the export of luxury goods to, or for use in, Russia; (ii) the import of iron and steel products which are consigned from, or originate in, Russia; (iii) the direct or indirect acquisition of iron and steel products which original or are located in Russia; and (iv) in relation to oil refining goods and technology, and quantum computing and advanced materials goods and technology, the export, supply, or transfer of, or the provision of technical assistance, financial services, or brokering services in relation to, such goods and technology.
- Guidance on Aggregation: The Office of Financial Sanctions Implementation (OFSI), the government authority within the UK responsible for administering and enforcing economic sanctions, updated its guidance on financial sanctions to address its position on aggregation of ownership and control. The guidance states that OFSI will not simply aggregate different designated persons’ holdings in a company when making an assessment on ownership and control; instead, it will give consideration to evidence of joint arrangements between such designated persons. If each designated person’s holding is not more than 50%, without evidence of a joint arrangement, the company will not be deemed owned directly or indirectly by a designated person. However, the guidance also emphasizes that ownership and control also relate to holding more than 50% of voting rights, the right to appoint or remove a majority of the board of directors, and the ability of a designated person to ensure that the affairs of a company are conducted in accordance with their wishes.
- Trade and Export Controls:
- On March 30, 2022, the UK Department of Trade issued a notice providing an overview of import prohibitions on certain goods imported into the UK that have originated in, or have been consigned from the Russian Federation, Crimea, or the non-government controlled areas of the Donetsk and Luhansk regions.
- On March 24, 2022, the UK government published a notice to exporters, regarding the revision of six open general export licences. The revisions include the introduction of a requirement to register before first use of licences in relation to: (i) the export after repair/replacement of dual-use items under warranty; and (ii) printed circuit boards and components for dual-use items. Revisions made to two of the open general export licences also allow items to be exported from the UK, after repair in the UK, or the country of original manufacture.
- Key Products: On April 1, 2022, the London Metal Exchange (LME) announced an immediate suspension of placing Russian brands on warrant in LME-listed UK warehouses unless exported from Russia prior to March 25, 2022. The suspension is understood to be a result of the UK government placing 35% additional duties on imports of Russian metals.
- Energy: On April 6, 2022, the UK government announced that, by the end of 2022, it will end all UK dependency on Russian coal and oil, and end imports of gas as soon as possible thereafter. As part of the crackdown on energy dependency, the UK government has banned the export, supply or transfer of oil refining goods and technology to, or for use in, Russia or to a person connected with Russia. The restrictions came into force on April 14, 2022.
- Designated Persons: Further UK sanctions designations continue to largely focus on Russian oligarchs and their families, Putin’s political allies, individuals involved in supporting Russian-backed breakaway regions of Ukraine, and key Russian financial institutions. Newly designated Russian banks now subject to an asset freeze include Sberbank, Credit Bank of Moscow, Alfa Bank, Russian Agricultural Bank, and Gazprombank. The UK has also designated a number of individuals and companies operating in the Russian or Belarusian energy, defense, agriculture, transport, and manufacturing sectors.
- Research and Innovation: On March 27, 2022, the UK government announced research and innovation sanctions on Russia, including pausing all payments for projects delivered through UK public research funds with a Russian dimension and preventing funding for any new collaborative projects with Russia through UK research and innovation organizations.
- Public Procurement: On March 28, 2022, the UK government published a Procurement Policy Note (PPN) regarding contracts with suppliers from Russia and Belarus. The PPN applies to all central UK government departments, their executive agencies, and non-departmental public bodies. The PPN states that the applicable agencies should: (i) review their contract portfolio and identify any contracts where the prime contractor is a Russian or Belarusian supplier; (ii) where a Russian or Belarusian prime contractor is identified, consider terminating that contract in accordance with the terms of the contract; and (iii) only proceed to terminate a contract if an alternative supplier can be sourced in line with value for money, affordability, and minimal disruption to public services.
- General Licences: Further General Licences have been issued by OFSI authorizing certain activities that would otherwise not be permitted under sanction laws. These include authorization to wind-down positions or transactions that involve certain sanctioned persons, as well as authorization to provide financial services for the purposes of the receipt and onward transfer of non-ruble-denominated interest/coupon or maturity/principal payments from certain entities in connection with debt issued by them before March 1, 2022. Each General License has a separate expiration date.
Japan Sanctions and Export Controls
Since the start of the Ukraine crisis, Japan has implemented a series of sanctions and other measures in line with other G7 members. These measures, including the latest round of sanctions announced on April 12, include the following:
- Freezing the assets of 499 Russian individuals, 398 of which (including the immediate family of President Putin and Foreign Minister Lavrov) were announced on April 12;
- Freezing the assets of 38 Russian companies, 26 of which were announced on April 12;
- Freezing the assets of nine Russian banks, two of which (Sberbank and Alfa Bank) were announced on April 12 (the measures against Sberbank and Alfa Bank will go into effect on May 12);
- Prohibiting new overseas direct investment into Russia, effective May 12;
- Banning imports of various goods from Russia, including vodka, lumber, and certain types of machinery, effective April 19 (for contracts executed before the ban, imports will be permitted for a three-month period);
- Prohibiting exports of monetary instruments, gold, and 17 categories of luxury goods to Russia (including luxury cars, pianos, tobacco, apparels, jewelry, and artwork);
- Prohibiting exports of high-technology products, including semiconductors and oil refinery equipment to Russia;
- Freezing the assets of 19 individuals, 12 companies, and three banks from Belarus, and prohibiting exports to two Belarusian organizations including the Ministry of Defense; and
- Freezing the assets of 30 individuals associated with the breakaway Ukrainian republics.
In addition, Japan has deported eight Russian diplomats and introduced legislation to strip Russia of its most-favored-nation trade status, which will increase customs duties on imports from Russia. On the energy front, Japan announced that it will gradually phase out imports of Russian coal, and that it will secure alternative sources for other strategic materials. However, Prime Minister Kishida and other senior officials have reiterated that Japan will not withdraw from its investments in the Sakhalin I and II LNG projects, which comprise a significant portion of Japan’s LNG supply.
While Russia and Belarus continue their bloody invasion of Ukraine, governments around the world will continue to increase pressure on the Putin regime through new and unprecedented restrictive sanctions. As more sanctions and export controls are imposed in the days and weeks to come, Morrison & Foerster’s National Security Practice stands ready to assist you in navigating this complex and ever-changing landscape.
Georgia Kinsella, London Trainee Solicitor, contributed to the drafting of this alert.