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Biden Administration Further Expands Sanctions on Russia as War in Ukraine ContinuesMay 16, 2022
The United States, in coordination with its G7 allies, has issued additional economic sanctions and export controls targeting Russia in response to Russia’s ongoing war against Ukraine. The Biden Administration’s eighth round of sanctions includes actions by the Commerce, State, and Treasury Departments to prohibit dealings with certain Russian banks, bankers, and television stations, cut access to accounting and consulting services, restrict exports of a wide range of U.S.-origin commercial and industrial goods, and impose visa restrictions on thousands of Russian and Belarussian military officials.
These new actions build upon earlier sanctions issued since the launch of Russia’s invasion in Ukraine in February 2022, discussed in our prior alerts: United States Expands Sanctions Against Russia’s Defense-Industrial Sector and Russian Elites, United States Adds New Sanctions Targeting Russia, United States Expands Sanctions on Russia to Target Energy Sector, Biden Administration Continues to Broaden Economic Sanctions on Russia in Response to Ongoing Aggression in Ukraine, Biden Administration Issues Second Set of Sanctions on Russia Broadly Targeting the Financial and High-Tech Sectors, and Biden Administration Issues Initial Set of Sanctions in Response to Russian Invasion of Eastern Ukraine.
The new sanctions are discussed below. As well, as the early rapid pace of new measures has now eased, it is timely to take stock of the current Russia sanctions scheme in its entirety, which presents a challenging, but not impossible business environment for U.S.-based companies.
Most Recent Actions
This latest round of sanctions is intended to further increase the costs to Russia of prosecuting the war in Ukraine by cutting Russian access to foreign revenue, services that could be used to evade sanctions, and finished goods and inputs used by Russian industry for military purposes. While there continues to be no indication that the United States will impose a comprehensive embargo on Russia, the incremental widening of sanctions and export controls in combination with unilateral withdrawals of private sector companies from Russia is steadily isolating major sectors of the Russian economy from the Western economic system.
Most notably, the new round of sanctions targets the services sector of the Russian economy. The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued a determination pursuant to E.O. 14071 identifying accounting, trust and corporation formation, and management consulting as services subject to the E.O.’s prohibitions (“Services”). As a result, beginning on June 7, 2022, “the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of accounting, trust and corporate formation, or management consulting services to any person located in the Russian Federation” will be prohibited.
Per OFAC guidance, the Services including the following:
- Accounting services - includes the measurement, processing, and evaluation of financial data about economic entities.
- Trust and corporate formation services - includes assisting persons in forming or structuring legal persons, such as trusts and corporations; acting or arranging for another person to act as directors, secretaries, administrative trustees, trust fiduciaries, registered agents, or nominee shareholders of legal persons; providing a registered office, business address, correspondence address, or administrative address for legal persons; and providing administrative services for trusts.
- Management consulting services - includes strategic business advice; organizational and systems planning, evaluation, and selection; development or evaluation of marketing programs or implementation; mergers, acquisitions, and organizational structure; staff augmentation and human resources policies and practices; and brand management.
Importantly, the Services prohibition excludes Services to entities in Russia owned or controlled by U.S. persons, and Services in connection with the wind down or divestiture of an entity located in Russia that is not owned or controlled by a Russian person. In addition, OFAC authorized transactions ordinarily incident and necessary to winding down non-excluded Services in Russia through July 6, 2022.
OFAC also designated 48 new individuals and entities deemed “critical to Russia’s ability to wage war against Ukraine,” including:
- Current and recent members of Sberbank’s Executive Board;
- Members of Gazprombank’s Board of Directors;
- Moscow Industrial Bank and 10 of its subsidiaries;
- LLC Promtekhnologiya, a private Russian defense company;
- State-owned television stations – Channel One Russia, Television Station Russia-1, NTV Broadcasting Company.
The Commerce Department’s Bureau of Industry and Security (“BIS”) expanded the scope of items subject to stringent license requirements for exports to Russia to “further restrict Russia’s ability to withstand the economic impact of multilateral sanctions, further limit sources of revenues that could support Russia’s military capabilities, and to better align with the European Union’s controls.”
The BIS actions impose a license requirement, subject to a policy of denial, for the export to Russia of 478 items identified by Schedule B numbers (also identified by 205 Harmonized Tariff Schedule codes). The 478 items include wood products, industrial engines, boilers, motors, fans, ventilation equipment, bulldozers, and other inputs and components for industrial or commercial items. All of the items are classified as EAR99 and are not generally subject to export restrictions.
To “promote individual accountability for human rights abuses,” the State Department announced a new visa restriction policy applicable to Russian military officials and Russian-backed purported authorities in Ukraine believed to have been involved in human rights abuses, violations of international humanitarian law, or public corruption. In tandem, the State Department imposed visa restrictions on nearly 2,600 Russian and Belarusian military officials. Family members of those subject to the policy and restrictions may also be ineligible for visas.
The Broader Pictures of U.S. Economic Sanctions Currently Targeting Russia
The Biden Administration’s approach since the beginning of Russia’s invasion of Ukraine in February 2022 has been to impose sanctions and export controls incrementally in reaction to events on the ground. These measures have usually been imposed in coordination with a broad coalition of allies, including most notably the European Union.
Cumulatively, however, the eight rounds of sanctions issued since February 2022, which build on sanctions targeting Russia that were first imposed in 2014 following Russia’s annexation of the Crimea region of Ukraine and support for separatist activity in eastern Ukraine, have imposed significant restrictions on the ability of U.S. persons to conduct business in major sectors of the Russian economy.
The following summarizes the various U.S. economic sanctions measures currently in place that target Russia:
- Blocking Measures – Since 2014, OFAC and the State Department have designated hundreds of Russian individuals and entities as Specially Designated Nationals and Blocked Persons involved in various activities contrary to U.S. interests. These include, among others: (1) Russia government leaders and officials, including President Putin, Foreign Minister Lavrov, and members of the Duma; (2) Russian oligarchs; (3) the largest banks in Russia, including Sberbank and VTB; (4) entities in the Russian defense-industrial base; and (5) Russian media and intelligence-directed disinformation outlets. The banking measures present the most significant challenges to continued business in Russia, even in sectors that are – as yet – not the target of sanctions
- Non-Blocking Sanctions on Certain Sectors – Since 2014, certain Russian entities in the Russian financial services, energy, and defense sectors designated on OFAC’s Sectoral Sanctions Identifications List have been subject to restrictions limiting access to capital markets through limitations on U.S. persons providing financing and other dealings in debt longer than certain periods of time (14, 30, or 60 days), and/or acquiring the equity of designated companies (E.O. 13662 – Directives 1-3).
Other non-blocking sanctions targeting the Russian economy and financial sector have also been imposed including: (1) a prohibition on participation in the primary and secondary markets for bonds issued by the Russian Central Bank, National Wealth Fund or the Ministry of Finance (E.O. 14024 – Directive 1A); (2) restrictions on dealings in equity and debt of major Russian banks (two of which were subsequently designated as SDNs), energy companies (which were already subject to restrictions under E.O. 13662- Directive 2), and transportation companies (E.O. 14024-Directive 3); and (3) a prohibition on engaging in any transaction involving the Russian Central Bank, National Wealth Fund or the Ministry of Finance (E.O. 14024-Directive 4).
U.S. persons are also prohibited from providing or exporting, directly or indirectly, goods, services, or technology in support of the exploration or production of oil in deepwater, Arctic offshore, or shale projects in Russia, or such projects outside of Russia owned 33% or more by a designated entity. (E.O. 13662 – Directive 4).
- Investment Ban – The United States has prohibited new investment in Russia by U.S. persons, wherever located.
- Services Ban – The United States has banned the provision of the following categories of services to Russia from the United States or by U.S. persons, wherever located: (1) accounting; (2) trust and corporate formation; and (3) management consulting. (See above for a detailed description of this prohibition).
- Import Ban – The United States has banned the import into the United States of Russian origin energy products including crude oil, LNG, and coal, as well as fish and seafood products, alcohol, and non-industrial diamonds.
- Export Ban and Restrictions – The United States has banned the export to Russia of luxury goods and U.S.-dollar-denominated banknotes. Concurrent with the economic sanctions imposed by OFAC, BIS issued regulations imposing restrictions on the export of certain goods and technology to Russia, many of which Russia cannot produce itself. These items include semiconductors, computers, telecom equipment, information security equipment, lasers, sensors, and oil and gas extraction equipment that are relied on by the Russian defense, maritime, aerospace, and energy industries, as well as the general commercial and industrial items discussed above. BIS also created a new “foreign direct product” rule that extends U.S. jurisdiction and related controls to certain foreign-produced items that are based on U.S.-origin technology destined for Russia.
- Territorial Bans – The United States prohibits transactions with three regions of Ukraine occupied by Russia: Crimea, and the so-called Donetsk People’s Republic and Luhansk People’s Republic (“Covered Regions”). The prohibited transactions include: (1) new investment in the Covered Regions; (2) the importation into the United States, directly or indirectly, of any goods, services, or technology from the Covered Regions; (3) the exportation, reexportation, sale, or supply, directly or indirectly of any goods, services, or technology to the Covered Regions; and (4) any approval, financing, facilitation, or guarantee of a transaction by a foreign person where the transaction by that foreign person would otherwise be prohibited if performed by a U.S. person.
- Secondary Sanctions - The United States has also enacted or issued sanctions designed to deter persons (including non-U.S. persons) from engaging in certain activities related to Russia, including: (1) for investing in deepwater, Arctic offshore, or shale oil projects in Russia; (2) investing in or providing goods, services or technology to Russia for the construction of energy export pipelines that originate in Russia and deliver hydrocarbons across international borders; (3) engaging in significant transactions with the Russian defense and intelligence sector; and (4) facilitating significant transactions for, or on behalf of, Russian SDNs sanctioned for activities related to the crisis in Ukraine (“CAATSA 228 sanctions”).
In combination with the legal measures implemented by the Biden Administration (as well as U.S. allies), almost 1,000 private sector companies have unilaterally withdrawn from Russia, and the White House reports more than 200,000 Russians have fled the country.
As Russia’s war in Ukraine continues and Europe implements steps to wean itself from reliance on Russian oil and gas, additional sanctions and unilateral withdrawals by Western companies are expected that will further isolate Russia from the Western economic system and limit the ability of U.S. persons to do business in Russia.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Greta Lichtenbaum, an O’Melveny partner licensed to practice law in the District of Columbia, David J. Ribner, an O’Melveny counsel licensed to practice law in the District of Columbia and New York, and Damilola Arowolaju, an O’Melveny associate, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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