Russian Sanctions/Export Controls Update: The Second Tranche

In the immediate wake of Russia’s full-scale invasion of Ukraine, President Biden announced a package of sweeping economic sanctions and export control measures intended to “impose severe costs on the Russian economy, both immediately and over time.”

According to the Biden administration, the new measures — which follow the imposition of new sanctions and export controls via President Biden’s Executive Orders (EO) of February 22 and February 23 — target nearly 80% of all banking assets in Russia and aim to restrict Russian access to technological inputs. 

Once again, the latest U.S. sanctions and export controls are being implemented in coordination with western allies, nearly all of which announced similar measures.     

As detailed in a White House Fact Sheet and press releases issued by the Department of Treasury’s Office of Foreign Assets Control (OFAC) and the Department of Commerce’s Bureau of Industry and Security (BIS) following the announcement, the new measures are divided into three categories: Blocking and Non-SDN Menu-Based Sanctions, Sectoral Sanctions and Export Controls. 

Blocking Sanctions

OFAC designated the following entities and individuals to its Specially Designated Nationals and Blocked Persons List (SDN List): 

• Financial Institutions: As detailed in our previous update, President Biden’s February 24 EO imposed full blocking sanctions on Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (VEB), Promsvyazbank Public Joint Stock Company (PSB), and 42 of their subsidiaries. The new measures impose full blocking sanctions on four additional financial institutions and their subsidiaries, including: 
  
  • VTB Bank Public Joint Stock Company (VTB), including 20 of its subsidiaries. According to OFAC, VTB is the second largest Russian financial institution and holds nearly one-fifth of the overall Russian banking sector’s assets. 
  • Public Joint Stock Company Bank Financial Corporation Otkritie (Otkritie), including 12 of its subsidiaries. According to OFAC, Otkritie is “a systemically important” Russian state-owned credit institution and is Russia’s seventh largest financial institution.   
  • Open Joint Stock Company Sovcombank (Sovcombank), including 22 of its subsidiaries. According to OFAC, Savcombank is the third largest privately owned financial institution in Russia by total assets and Russia’s ninth largest bank overall. 
  • Joint Stock Commercial Bank Novikombank (Novikombank). According to OFAC, Novikombank is state-owned, is among the 50 largest financial institutions in Russia, and primarily operates in the Russian defense sector. 

Note, however, that OFAC also issued a general license authorizing through March 25, 2022, the wind down of transactions involving VTB, Otkritie, Socvombank, and any entity in which VTB, Otkritie, or Socvombank own, directly or indirectly, individually or in the aggregate, a 50% or greater interest.    

• “Russian Elites and Their Family Members:” As detailed in our previous update, President Biden’s February 24 EO imposed full blocking sanctions on five individuals deemed as “elites” and “close to” Russian President Vladimir Putin. The new measures impose full blocking sanctions on nine additional individuals, including:  
  
  • Sergei Sergeevich Ivanov (CEO of Russian state-owned diamond mining company Alrosa and a board member of Gazprombank)
  • Sergei Borisovich Ivanov (Special Presidential Representative for Environmental Protection, Ecology, and Transport)
  • Nikolai Platonovich Patrushev (Secretary of the Russian Federation Security Council). 
  • Andrey Patrushev (reportedly served in leadership roles at Gazprom Neft and is employed in Russia’s energy sector)
  • Igor Ivanovich Sechin (CEO, Chairman of the Management Board, and Deputy Chairman of the Board of Directors of Rosneft)
  • Ivan Igorevich Sechin (reportedly the head of a department at Rosneft)
    
  • Alexander Aleksandrovich Vedyakhin (First Deputy Chairman of the Executive Board of Sberbank) 
  • Andrey Sergeyevich Puchkov (high-ranking VTB executive)
  • Yuriy Alekseyevich Soloviev (high-ranking VTB executive)

Per the new blocking sanctions, all property and interests in property of all listed persons or entities that are in the United States or in the possession or control of U.S. persons are blocked and must be reported to OFAC.

Critical to note is that even if not identified on the SDN List, the new blocking sanctions also currently apply to entities owned 50% or more, directly or indirectly, by VTB, Otkritie, Sovcombank, Novikombank or one of the individuals listed above. Identifying information on the listed individuals and entities can be found on the U.S. Treasury website.

• Belarusian Individuals and Entities: In response to Belarus’ “support for, and facilitation of” the Russian invasion of Ukraine, OFAC also announced that 24 Belarusian individuals and entities have also been added to the SDN List. According to OFAC, these measures are intended to specifically target Belarus’ defense and financial services sectors.

Non-SDN Menu-Based Sanctions List (NS-MBS)

Per Directive 2 Under EO 14024, Public Joint Stock Company Sberbank of Russia (Sberbank), including 25 of its subsidiaries, have been added to OFAC’S Correspondent Account or Payable-Through Account Sanctions (CAPTA List), also knowns as an NS-MBS designation. Effective March 26, 2022, Sberbank’s inclusion on the list will preclude it from accessing transactions made in the dollar. According to OFAC, Sberbank is the largest bank in Russia and holds nearly one-third of the overall Russian banking sector’s assets. A list of Sberbank’s affiliated entities that OFAC determined to be subject to Directive 2 can be found here.  

Sectoral Sanctions

To further target the financial services sector, OFAC also issued a directive prohibiting U.S. persons from engaging in certain transactions with 13 of the “most critical major Russian enterprises and entities,” including: 

• Sberbank
• Gazprombank Joint Stock Company
• Joint Stock Company Russian Agricultural Bank 
• Public Joint Stock Company Gazprom
• Public Joint Stock Company Gazprom Neft
• Public Joint Stock Company Transneft (Transneft) 
• Public Joint Stock Company Rostelecom
• Public Joint Stock Company RusHydro
• Public Joint Stock Company Alrosa
• Joint Stock Company Sovcomflot
• Open Joint Stock Company Russian Railway

Prohibited transactions include, but are not limited to, dealings in new debt of longer than 14 days maturity or new equity where such new debt or new equity is issued on or after March 25, 2022.  

In conjunction with the newly announced sanctions, OFAC also issued FAQs and eight general licenses authorizing certain transactions related to: international organizations and entities; agricultural and medical commodities and the COVID-19 pandemic; overflight and emergency landings; energy; dealings in certain debt or equity; derivative contracts; the wind down of transactions involving certain blocked persons; and the rejection of transactions involving certain blocked persons.

Export Controls

Aside from the new sanctions described above, the new measures also include new export controls aimed at depriving Russia from certain “cutting edge” technological inputs. As detailed in the White House and BIS press releases following the announcement, the new U.S. export controls include: 

• New Commerce Control List (CCL)-Based License Requirements: License requirements are added for all Export Control Classification Numbers (ECCNs) in Categories 3-9 of the CCL. Many of these items did not previously require licenses for export, re-export, transfer or release to Russia. They include microelectronics, telecommunications items, sensors, navigation equipment, avionics, marine equipment and aircraft components. 
• New Review Policy for Exports, Reexports or Transfers: For the export, reexport or transfer (in-country) of items requiring a license for Russia, applications will be reviewed, with certain limited exceptions, under a policy of denial. 
• Expansion of “Military End Use’ and “Military End User” Controls: Restrictions on exports to Russian “military end users” and “military end uses” will be expanded to cover, with limited exceptions, all items subject to the EAR. 
• New Foreign Direct Product (FDP) Rules 
  
  • All of Russia (Russia FDP rule): A new Russia FDP rule will restrict foreign-produced items that are: (i) “the direct product of certain U.S.-origin software or technology subject to the EAR”; or (ii) “produced by certain plants or major components thereof which are themselves the direct product of certain U.S.-origin software or technology subject to the EAR.” According to BIS, the rule applies “when it is known that the foreign-produced item is destined to Russia or will be incorporated into or used in the production or development of any part, component, or equipment produced in or destined to Russia.” EAR99 items will not currently be subject to the new rule. 
  • Russian Military End Users (Russia-MEU FDP rule): The Russia-MEU FDP rule applies to foreign-produced items that are: (i) “the direct product of any software or technology subject to the EAR that is on the CCL”; or (ii) “produced by certain plants or major components thereof which are themselves the direct product of any U.S.-origin software or technology on the CCL.” According to BIS, such items “will be subject to the EAR and require a license if an entity with a footnote 3 designation on the Entity List is a party to the transaction, or if there is knowledge that the item will be incorporated into or used in the production or development of any part, component, or equipment produced, purchased, or ordered by any entity with a footnote 3 designation ... on the Entity List.”  With certain exceptions, EAR99 items are covered by the rule.

Notably, the White House announced that partner countries that are adopting or have expressed intent to adopt substantially similar measures are not or will not be subject to the Russia and Russia-MEU FDP rules. According to Commerce, the following countries are not subject to these rules: Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, New Zealand, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom.

• Enhanced Restrictions on EAR License Exceptions: The new measures provide that only certain sections of the following license exceptions are available for exports to Russia: 
  
  • TMP (Temporary Imports, Exports, Reexports and Transfers in Country), for items for use by the news media.
  • GOV, for certain government activities.
  • TSU (Technology and Software Unrestricted), for software updates to civil end users that are subsidiaries of, or joint ventures with, companies headquartered in the United States or partner countries.
  • BAG (Baggage), for baggage, excluding firearms and ammunition.
  • AVS (Aircraft, Vessels, and Spacecraft), for aircraft flying into and out of Russia.
  • ENC (Encryption Commodities, Software, and Technology), for encryption items, but not if they are destined for Russian ‘government end users’ and Russian state-owned enterprises.
  • CCD (Consumer Communication Devices), for consumer communication devices, but not if they are destined for government end users or certain individuals associated with the government.

Looking Ahead

At this time, we do not believe that the above sanctions and export controls are the end of what additional measures will come if Russia continues to escalate this conflict. For example, removal of Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system was discussed but has not yet been implemented. Finally, we believe additional measures on the Russian oil and gas industry are still on the table.  

Please note that we will continue to closely monitor this situation and provide timely updates, as warranted. In the meantime, please do not hesitate to reach out to a member of the Faegre Drinker Customs and International Trade Team if you have any questions.