Between April 5 and April 17, 2022, the US government took several steps to ratchet up economic sanctions, export controls, and other restrictive trade measures targeting Russia and Belarus.
President Biden issued a new Executive Order prohibiting US persons from engaging in new investment in Russia, and also establishing a framework through which US persons could in the future be prohibited from providing certain services to any person in Russia.
The US Treasury Department’s Office of Foreign Assets Control (OFAC) designated a darknet market and cryptocurrency exchange, several Russian banks and their subsidiaries, and a number of companies allegedly assisting the Russian military by adding them to the Specially Designated Nationals and Blocked Persons (SDN) List pursuant to Executive Orders (EOs) 14024 and 13694. OFAC also published seven new and amended general licenses, including authorizations related to the recent designations of Public Joint Stock Company Sberbank of Russia (Sberbank), Joint Stock Company Alfa-Bank (Alfa-Bank), and Public Joint Stock Company Alrosa (Alrosa).
Separately, the US Commerce Department’s Bureau of Industry and Security (BIS) announced new, stringent export controls so that all items subject to the US Export Administration Regulations, except items designated “EAR99,” require a license for export, reexport, or transfer (in country) to or in the Russian Federation and Belarus.
New Executive Order
On April 6, 2022, President Biden signed new Executive Order 14071, which prohibits:
- new investments in Russia by US persons;
- the export, reexport, sale, or supply, directly or indirectly, from the US or by a US person, of any category of services as may be determined by the Secretary of the Treasury to any person located in Russia;
- approval, financing, facilitation, or guarantee by a US person of a transaction by a foreign person where the transaction would be prohibited under the Order if performed by a US person or within the United States.
The new EO is significant and its scope is potentially quite broad, but will depend significantly on how it is implemented. Thus far, the Secretary of the Treasury has not issued any determinations regarding prohibited categories of services, nor whether the meaning of new investment will depart from OFAC’s interpretation in Frequently Asked Question (FAQ) 1019 defining that term under Executive Order 14066 of March 8, 2022.
New Russia-Related Blocking Sanctions and other Designations
On April 5, pursuant to EO 13694, OFAC sanctioned the Russia-based darknet market, Hydra for allegedly engaging in illicit cyber-enabled activities, including offering ransomware-as-a service, hacking services and software, stolen personal information, counterfeit currency, stolen virtual currency, and illicit drugs. Pursuant to EO 14024, OFAC also sanctioned the Estonia-based virtual currency exchange Garantex for allegedly facilitating malicious cyber activity. Both entities have been added to OFAC’s SDN List, including digital currency addresses associated with them and various types of convertible virtual currency. The property and interests in property of SDNs must be blocked (i.e., frozen) when within the control or possession of US persons or in the United States, and US persons are generally prohibited from engaging in any transfers, transactions, or dealings with SDNs. Entities owned 50 percent or more by one or more SDNs are also considered blocked. Under both EO 13694 and EO 14024, non-US persons also risk designation as SDNs if they provide financial, technological, or material support to, or furnish goods or services to, SDNs designated under those orders. Treasury is increasingly focused on the virtual currency sector and announced that it will publish an updated National Strategy to Combat Illicit Finance, which will highlight planned Treasury efforts to further combat the misuse of virtual currency and virtual currency exchanges.
On April 6, pursuant to EO 14024, OFAC announced extensive new sanctions against Sberbank and 42 of its subsidiaries, and Alfa-Bank along with six of its subsidiaries, all of which were added to the SDN List. OFAC also identified five vessels as blocked property. Sberbank was previously subject to payable-through-account and correspondent account sanctions under Directive 2 pursuant to EO 14024, but was not on the SDN List (see our prior blog post on those sanctions here). Additionally, two of President Putin’s daughters, as well as the wife and daughter of Foreign Minister Sergei Lavrov, were designated as SDNs. The remaining members of Russia’s Security Council, including former President and Prime Minister Dmitry Medvedev, were also designated.
On April 7, the State Department announced new SDN designations, pursuant to EO 14024, of Joint Stock Company United Shipbuilding Corporation, its board, and 28 subsidiaries for developing and constructing Russian military vessels. That same day, OFAC also announced a new SDN designation, pursuant to EO 14024, of Alrosa, a major Russian state-owned enterprise that is a significant diamond mining company. Alrosa was already subject to more targeted “new debt” and “new equity” restrictions pursuant to Directive 3 under EO 14024.
New General Licenses
In conjunction with the new designations, OFAC published revised general licenses (GLs) that expand the existing authorization for qualifying energy payments to include transactions involving Alfa-Bank; and expand the existing authorizations for certain debt and equity dealings and derivative contract wind-downs to include transactions involving Alfa-Bank and Alrosa. OFAC also published new general licenses providing specified wind down periods for transactions involving Sberbank, Alfa-Bank, Alrosa, Joint Stock Company SB Sberbank Kazakhstan, and Sberbank Europe AG. OFAC also published GLs authorizing the wind-down of US subsidiaries of Sberbank and Alrosa (Sberbank CIB USA and Alrosa USA). In addition, OFAC published a GL related to telecommunications and internet-based communications. The GLs are as follows:
- General License 8B authorizes energy-related transactions otherwise prohibited by EO 14024 involving one or more of the banks identified in the general license (which now include Alfa-Bank) through 12:01 a.m. eastern daylight time (EDT), June 24, 2022.
- General License 9C continues to authorize through May 25, 2022 12:01 a.m. EDT transactions otherwise prohibited by the Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587 (RuHSR) that are ordinarily incident and necessary to dealings in debt or equity issued prior to February 24, 2022 of State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (VEB), Public Joint Stock Company Bank Financial Corporation Otkritie (Otkritie), Sovcombank Open Joint Stock Company (Sovcombank), Public Joint Stock Company Sberbank of Russia (Sberbank), VTB Bank Public Joint Stock Company (VTB), or any entity in which one or more of the above entities own, directly or indirectly, individually or in the aggregate, a 50 percent or greater interest. Also, GL 9C now authorizes all transactions through 12:01 a.m. eastern daylight time, June 30, 2022, otherwise prohibited by the RuHSR that are ordinarily incident and necessary to dealings in debt or equity of Alfa-Bank or any entity in which Alfa-Bank owns, directly or indirectly, a 50 percent or greater interest, issued prior to April 6, 2022. Finally GL 9C now authorizes all transactions through 12:01 a.m. eastern daylight time, July 1, 2022 otherwise prohibited by the RuHSR that are ordinarily incident and necessary to dealings in debt or equity of Alrosa or any entity in which Alrosa owns, directly or indirectly, a 50 percent or greater interest, issued prior to April 7, 2022. Any divestment or transfer of, or facilitation of divestment or transfer of, debt or equity pursuant to GL 9C must be to a non-US person.
- General License 10C continues to authorize through May 25, 2022 12:01 a.m. EDT all transactions otherwise prohibited by the RuHSR that are ordinarily incident and necessary to the wind down of derivative contracts entered into prior to 4:00 p.m. EST, February 24, 2022, that (i) include VEB, Otkritie, Sovcombank, Sberbank, VTB or any entity in which one or more of the above entities own, directly or indirectly, individually or in the aggregate, a 50 percent or greater interest as a counterparty or (ii) are linked to debt or equity of such entities. Also, GL 10C now authorizes all transactions through 12:01 a.m. EDT, June 30, 2022 otherwise prohibited by the RuHSR that are ordinarily incident and necessary to the wind down of derivative contracts entered into prior to 4:00 p.m. eastern daylight time, April 6, 2022, that include Alfa-Bank or any entity in which Alfa-Bank owns, directly or indirectly, a 50 percent or greater interest as a counterparty or are linked to debt or equity of an Alfa-Bank entity. Finally, GL 10C now authorizes all transactions through 12:01 a.m. EDT, July 1, 2022 otherwise prohibited by the RuHSR that are ordinarily incident and necessary to the wind down of derivative contracts entered into prior to 4:00 p.m. eastern daylight time, April 7, 2022, that include Alrosa, or any entity in which Alrosa owns, directly or indirectly, a 50 percent or greater interest as a counterparty or are linked to debt or equity of an Alrosa entity. Any payments to a blocked person pursuant to GL 10C must be made into a blocked account.
- General License 21A authorizes US persons to engage in all transactions ordinarily incident and necessary to the wind down of Sberbank CIB USA, Inc., Alrosa USA, Inc., or any entity in which either of those entities owns, directly or indirectly, a 50 percent or greater interest, that are otherwise prohibited by the RuHSR, including the processing and payment of salaries, severance, and expenses; payments to vendors and landlords; and closing of accounts, through 12:01 a.m. EDT, June 7, 2022.
- General License 22authorizedall transactions ordinarily incident and necessary to the wind down of transactions involving Sberbank or any entity in which Sberbank owns, directly or indirectly, a 50 percent or greater interest that are otherwise prohibited by EO 14024 through 12:01 a.m. EDT, April 13, 2022.This license has expired.
- General License 23 authorizes all transactions ordinarily incident and necessary to the wind down of transactions involving Alfa-Bank or any entity in which Alfa-Bank owns, directly or indirectly, a 50 percent or greater interest that are otherwise prohibited by Executive Order 14024 through 12:01 a.m. EDT, May 6, 2022.
- General License 24 authorizes all transactions ordinarily incident and necessary to the wind down of transactions involving Alrosa or any entity in which Alrosa owns, directly or indirectly, a 50 percent or greater interest that are otherwise prohibited by Executive Order 14024 through 12:01 a.m. EDT, May 7, 2022.
- General License 25 authorizes all transactions ordinarily incident and necessary to the receipt or transmission of telecommunications involving the Russian Federation that are prohibited by the RuHSR. It also authorizes the exportation (where otherwise prohibited by the RuHSR) of certain services, software, hardware, or technology incident to the exchange of communications over the internet.
- General License 26 authorizes all transactions ordinarily incident and necessary to the wind down of transactions involving Joint Stock Company SB Sberbank Kazakhstan or Sberbank Europe AG or any entity in which these specifically blocked Sberbank subsidiaries own, directly or indirectly, a 50 percent or greater interest, that are otherwise prohibited by Executive Order (E.O.) 14024 through 12:01 a.m. EDT, July 12, 2022.
New Export Controls
On April 7, the Commerce Department’s Bureau of Industry and Security (BIS) issued three Temporary Denial Orders (TDOs) denying the export privileges of three Russian Airlines – Aeroflot, Azur Air, and UTair – effectively prohibiting the airlines from participating in transactions subject to the Export Administration Regulations (EAR), including exports and reexports from the United States, as well as other dealings in items subject to the EAR. The TDOs last for 180 days and may be renewed.
On April 8, BIS announced the addition of Iceland, Liechtenstein, Norway, and Switzerland to the Global Export Control Coalition; meaning these countries will be excluded from certain license requirements of the US Russia/Belarus Sanctions rules under the EAR, including certain foreign direct product (FDP) rules for Russia/Belarus and Russian/Belarusian Military End Users (MEUs) and the newer export controls discussed immediately below.
On April 9, BIS announced additional significant export control restrictions targeting the Russia Federation and Belarus as destinations. Specifically, the Export Administration Regulations (EAR) have been amended to:
- Expand the export license requirement for exports to Russia and Belarus, under § 746.8(a)(1), to include items classified under any ECCN in Categories 0-2 of the Commerce Control List (CCL). A savings clause does apply to items with such Category 0, 1, and 2 ECCNs pursuant to actual orders that are in-transit as exports, reexports, or transfers (in country) until May 9, 2022 that may proceed as No License Required. We note that a February 24, 2022 amendment to the EAR already had imposed license requirements on exports to Russia and Belarus of items falling within any ECCNs specified in Categories 3-9, among other significant restrictions. Accordingly, all items subject to the EAR, other than those designated “EAR99,” e., not elsewhere specified on the CCL, require an export license for export, reexport, or transfer (in country) to or in Russia or Belarus unless a license exception applies. Very limited export license exceptions are available to Russia and Belarus.
- As a result of the foregoing controls, the amendments expand restrictions applicable to foreign-produced items made or derived from US software and technology ECCNs in Categories 0 through 2, or from a foreign plant or major equipment of such controlled US software or technology, so that now all Categories of ECCNs on the CCL are subject to export, reexport, and transfer (in country) license requirements under the “Russia/Belarus FDP rule” at § 734.9(f). These restrictions pulling non-US items into EAR control do not apply if the non-US origin items are exported or reexported to or from the Global Export Control Coalition referenced above (as those countries are considered to have their own similar applicable controls for items produced in those countries).
- Finally, the amendment restricts the availability of parts of License Exception Aircraft, Vessels, and Spacecraft (AVS) in § 740.15 for aircraft registered in, owned, or controlled by, or under charter or lease by, Belarus or Russia, or by a Belarusian or Russian national.
On April 14, the Commerce Department publicly identified 10 additional aircraft “in likely violation” of the recent export controls on Russia / Belarus, including seven Belarusian owned/operated commercial aircraft. Commerce also updated the tail numbers of 32 previously identified planes. The aircraft are alleged to have violated the EAR by flying into Russia/Belarus. Servicing these aircraft will now require authorization. This is the latest in a series of such announcements, indicating the Commerce Department is particularly focused on these issues.
Additional News
On April 5, it was announced that the Treasury Department, pursuant to previously announced restrictions, stopped the Russian government from using accounts at US banks to make coupon or maturity payments to sovereign debt holders. General License 9C continues to authorize US banks to receive those coupon or maturity payments, provided the payments originate from accounts outside the United States. It is not clear whether Russia will use its non-US accounts to make those payments. This development greatly raises the risk that Russia will default on its foreign debt. On April 9, S&P Global said Russia may be in “selective default,” for attempting to service US-dollar denominated sovereign bonds in rubles rather than dollars, and on April 15, Moody’s Corp. stated that Russia may already be in default. If Russia does not make payments in dollars by May 4, the end of the grace period on the relevant bond contracts, it may be considered in default.
On April 6, the Department of Justice charged Konstantin Malofeyev, described as a “Kremlin-linked Russian oligarch,” with criminal sanctions violations under Ukraine-related Executive Order 13660. Separately, the State Department announced a reward of up to $5 million for “information leading to the arrest and/or conviction of Semion Mogilevich,” alleged to be a longtime leader of Russian organized crime.
On April 7, the House and Senate both voted overwhelmingly, and President Biden signed into law on April 8, new laws (1) banning the import of Russian oil and related products – a measure which had the effect of codifying President Biden’s March 8 Executive Order¸ subject to certain certification requirements by the President and authority for Congress to override such a determination – and (2) revoking Permanent Normal Trade Relations (PNTR) with Russia and Belarus. The termination of PNTR treatment is not a sanction per se but will raise the tariff rate on a range of Russian- and Belarussian-origin products imported into the United States.
For more information on how these measures could impact your organization, contact a member of Steptoe’s Economic Sanctions and Export Controls teams.