Taken together, today’s sanctions package is a dramatic escalation by the US Government as compared to the relatively limited steps taken on February 21 and 22. Nevertheless, there is still a range of additional measures that the US Government has not yet adopted, including designating the Central Bank of Russia, Gazprombank and Sberbank for asset freeze measures as Specially Designated Nationals and Blocked Persons (SDNs), “disconnecting” all Russian banks from the SWIFT payment system, imposing sector-wide sanctions on Russia’s key industries (aside from the financial services sector, which was designated on February 22, and defense and technology sectors designated last year under E.O. 14024), and designating Russian President Vladimir Putin personally as an SDN.
For universities and other entities in the U.S. education sector, we note that there has been no change to the definition of “fundamental research” or the availability of the Fundamental Research Exclusion (FRE) under the Export Administration Regulations (EAR). However, please note that a number of Russian parties were added to the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) Entity List. Although it is still permissible for these Entity List parties to participate in FRE projects in collaboration with U.S. universities, it is important to carefully review whether any input data or other technology would be transferred from the United States, since it could remain subject to the EAR and thus require a BIS export license (given that, subject to certain exceptions, all items subject to the EAR involving these newly-added Entity List parties require a license from BIS and no license exception is available).
Economic sanctions
According to a fact sheet released by the White House, the economic sanctions are intended to further isolate Russia from the global financial system. In particular, the financial sanctions target in varying ways all ten of Russia’s largest financial institutions, including through a range of 1) full blocking, 2) correspondent and payable-through account sanctions (which effectively impact their ability to process U.S. dollar payments), and 3) debt and equity restrictions. In the aggregate, these financial sanctions target institutions reportedly holding nearly 80% of Russian banking sector assets. The sanctions were imposed pursuant to E.O. 14024 from April 2021, which authorizes sanctions against Russia for its harmful foreign activities, including violating core principles of international law such as respect for the territorial integrity of sovereign states.
Notably, the financial sanctions include the following key provisions:
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Impose correspondent and payable-through account, and payment processing, sanctions on Sberbank and 25 subsidiaries, thus restricting Sberbank’s access to U.S. dollar transactions. To implement sanctions on Sberbank, OFAC issued Directive 2 under E.O. 14024, “Prohibitions Related to Correspondent or Payable-Through Accounts and Processing of Transactions Involving Certain Foreign Financial Institutions” (the “CAPTA Directive”). The CAPTA Directive prohibits U.S. financial institutions from: (i) opening or maintaining a correspondent account or payable-through account for or on behalf of any entity determined to be subject to the prohibitions of the CAPTA Directive, or their property or interests in property; and (ii) the processing of transactions involving any such entities determined to be subject to the Russia-related CAPTA Directive, or their property or interests in property. Sberbank and other affiliated entities determined to be subject to the CAPTA Directive have been added to OFAC’s List of Foreign Financial Institutions Subject to Correspondent Account or Payable-Through Account Sanctions (“CAPTA List”). All foreign financial institutions owned 50 percent or more, directly or indirectly, by Sberbank are covered by the prohibitions of the CAPTA Directive, even if not identified on OFAC’s CAPTA List. The prohibitions of the CAPTA Directive take effect beginning at 12:01 a.m. eastern daylight time on March 26, 2022.
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Designate Russia’s second largest financial institution, VTB Bank (“VTB”), and 20 subsidiaries, as SDNs, thus requiring U.S. persons to freeze VTB’s assets and prohibiting U.S. persons from dealing with them. All entities owned 50 percent or more, directly or indirectly, by VTB are subject to blocking, even if not identified by OFAC on the SDN List.
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Designate three other major Russian financial institutions: Bank Otkritie, Sovcombank OJSC, and Novikombank as SDNs, as well as 34 of their subsidiaries, thus requiring U.S. persons to freeze their assets and prohibiting U.S. persons from dealing with them. All entities owned 50 percent or more, directly or indirectly, by Otkritie, Sovcombank, and Novikombank are subject to blocking under E.O. 14024, even if not identified by OFAC.
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Prohibit transactions and dealings by U.S. persons or within the United States in new debt of longer than 14 days maturity and new equity of 13 Russian state-owned enterprises, entities that operate in the financial services sector of the Russian Federation economy, and other entities. To implement this action, OFAC issued Directive 3 under E.O. 14024, “Prohibitions Related to New Debt and Equity of Certain Russia-related Entities” (the “Entities Directive”). This includes the 11 state-owned enterprises and two large privately owned entities that operate in the financial services sector listed in Annex 1 to the Entities Directive, as follows: Sberbank, AlfaBank, Credit Bank of Moscow, Gazprombank, Russian Agricultural Bank, Gazprom, Gazprom Neft, Transneft, Rostelecom, RusHydro, Alrosa, Sovcomflot, and Russian Railways Certain of these entities, including Gazprombank and Sberbank, are already subject to the same restrictions under Directive 1 issued under E.O. 13662 in 2014 while certain others, such as Gazprom Neft is subject to similar debt-related restrictions with a longer maturity period (60-day maturity under Directive 2 issued in 2014).
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Designated several Russian elites and their family members as SDNs, thus requiring U.S. persons to freeze their assets and prohibiting U.S. persons from dealing with them.
To limit unintended consequences on third parties, OFAC has issued eight general licenses authorizing certain transactions involving these sanctioned parties (in some cases all, in others only some of them) related to: a) international organizations and entities; b) agricultural and medical commodities and the COVID-19 pandemic; c) overflight and emergency landings; d) energy; e) dealings in certain debt or equity; f) derivative contracts; g) the wind down of transactions involving certain blocked persons; and h) the rejection of transactions involving certain blocked persons.
Export controls
The Administration indicated that the heighted export controls under the Export Administration Regulations (“EAR”) are intended to deny Russia’s ability to import advanced technologies in the Russian defense, aviation, and maritime sectors. Effectively, these revisions to the EAR impose a higher level of export control on Russia than on any country other than Cuba, Iran, North Korea, Syria or the Crimea region. These controls apply broadly to a wide range of items including semiconductors, telecommunication, encryption security, lasers, sensors, navigation, avionics and maritime technologies. In particular, exports of nearly all U.S. items (except food and medicine) are now restricted for military end-uses and end-users in Russia and limited license exceptions are available for exports to Russia for civil end-uses and end-users. Also, most of the items on the Commerce Control List (CCL”) now require a license for export to Russia. In addition, due to a significant expansion of the foreign direct product rule as applied to Russia, many more items manufactured outside the United States will be subject to the EAR when exported to Russia.
To implement these export control measures, the US Commerce Department’s Bureau of Industry and Security issued a final rule, “Implementation of Sanctions Against Russia Under the Export Administration Regulations (“EAR”),” which implements new Russia license requirements and licensing policies to protect U.S. national security and foreign policy interests. Notably, the export control measures, which take effect immediately, include the following:
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New controls and license requirements on exports to Russia of items that are subject to the EAR and specified in Categories 3, 4, 5, 6, 7, 8, and 9 of the CCL. Many of these items were not previously controlled to Russia and include microelectronics, telecommunications items, sensors, navigation equipment, avionics, marine equipment, and aircraft components.
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Two new foreign direct product rules (“FDP rules”). The new FDP rule for all of Russia (“Russia FDP Rule”) applies to foreign-produced items (other than those classified as EAR99) that are: (i) the direct product of certain U.S.-origin software or technology subject to the EAR any ECCN in product groups D or E in Categories 3, 4, 5, 6, 7, 8, or 9 of the CCL); 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. The new Russian military end users rule (“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.
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License review policy of denial for all license requirements added to the EAR pursuant to this new rule with certain limited exceptions on a case-by-case basis. The categories reviewed on a case-by-case basis are applications related to safety of flight, maritime safety, humanitarian needs, government space cooperation, civil telecommunications infrastructure, government-to-government activities, and to support limited operations of partner country companies in Russia.
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Restrictions on the use of most EAR license exceptions for Russia. In particular, only certain sections of the following license exceptions are available for Russia: TMP, for items for use by the news media; GOV, for certain government activities; TSU, 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, for baggage, excluding firearms and ammunition; AVS, for aircraft flying into and out of Russia; ENC, for encryption items only if they are not destined for Russian ‘government end users’ and Russian state-owned enterprises (“SoEs”); and CCD, for consumer communication devices only if they are not destined for government end users or certain individuals associated with the government.
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Expand existing Russia “military end use” and “military end user” controls to all items “subject to the EAR” other than food and medicine designated as EAR99, or ECCN 5A992.c and 5D992.c items unless those items are destined for Russian “government end users” and SoEs.
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Transfer 45 Russian entities from the Military End User (“MEU”) List to the Entity List with an expanded license requirement for all items subject to the EAR (including foreign produced items subject to the new Russia-MEU FDP Rule).
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Addition of two new Russian entities to the Entity List.
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Addition of Russia to Country Group D:5.
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Comprehensive export controls on the DNR and LNR regions consistent with the February 21 Executive Order.
Next steps
As noted above, we will provide further analysis of the significant additional economic sanctions and export control measures that were imposed today by the U.S. government. Taken together, these measures require U.S. and non-U.S. companies to carefully review a range of legal and practical challenges when considering business activities related to Russia.
Hogan Lovells is available to assist you in assessing your sanctions exposure and in ensuring compliance with US sanctions.
In the current, rapidly changing landscape, keeping on top of international sanctions regimes is more challenging than ever. Our comprehensive Sanctions Navigator collates sanctions regimes from the European Union, France, the United Kingdom, United Nations, and United States in one place, to help our clients answer any questions or address any sanctions-related issues they may have. Explore the Sanctions Navigator here.
Authored by Beth Peters, Aleksandar Dukic, Anthony Capobianco, Ajay Kuntamukkala, Brian Curran, Stephen Propst, Deborah Wei, Julia Diaz, Ashley Roberts, and Ari Fridman.
