U.S. Imposes Second Round of Sanctions on Russia and Belarus for Ukraine Invasion

February 24, 2022 – On February 24, 2022, President Biden announced a “second tranche” of sanctions and export controls targeting Russia following President Vladimir Putin’s authorization of a “special military operation” in Ukraine and subsequent initiation of a full-scale invasion.  (We summarized the first tranche of sanctions in a previous alert.)  This additional round of sanctions builds on the restrictions announced earlier in the week, and includes further economic sanctions restricting  access of major Russian banks to the U.S. financial system, as well as targeting Russian elites and their family members determined to be complicit in the Russian government’s actions.  The restrictions additionally include export controls with an unprecedented extraterritorial reach that target Russia’s access to key technologies and related products.  The U.S. also targeted a number of financial institutions, defense firms, and military officials in Belarus in response to that country’s facilitation of Russia’s invasion.

Export Controls

On February 24, 2022, the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”) issued a final rule (“Final Rule”) to implement the new significant export controls on Russia.  BIS also issued a Fact Sheet summarizing key parts of the Final Rule.  According to the Final Rule, the new controls are “primarily targeting the Russian defense, aerospace, and maritime sectors” by restricting “Russia’s access to items that it needs to project power and fulfill its strategic ambitions,” such as “sophisticated technologies designed and produced in the United States, as well as certain foreign-produced items that contain or are based on U.S.-origin technology subject to the EAR or other technology that is subject to the EAR that are essential inputs to Russia’s key technology and other sectors.”  The rule is effective February 24, 2022, but, under a savings clause, shipments of items subject to the EAR under the new versions of the foreign direct product rule that areremoved from eligibility for a license exception or reexport or transfer (in-country) without a license as a result of the Final Rule that were en route aboard a carrier may proceed to their destination through March 26, 2022. All other items have a savings clause effective for shipments en route as of February 24, 2022.

Export Embargo

The Final Rule implements a new, wide-ranging destination-based license requirement for any item subject to the EAR and classified under any Export Control Classification Number in Categories 3 through 9 of the Commerce Control List (“CCL”).  These categories cover items related to electronics, computers, telecommunications and information security, navigation and avionics, marine, and aerospace and propulsion.  All 56 ECCNs that did not previously require a license for Russia will now so require.  License applications for such items will be reviewed with a presumption of denial, with certain limited exceptions for, among other things, aviation and maritime safety and humanitarian aid, which will be reviewed on a case-by-case basis to determine if the item could benefit the Russian government or defense sector.  Further, BIS imposed limitations on the license exceptions that are available for exports, reexports and in-country transfers involving Russia.

Restrictions on Non-U.S.-Origin Items

Most significantly, the Final Rule expands the foreign direct product (“FDP”) rule, essentially creating two new versions: a Russia FDP Rule and a Russian Military End-User (“MEU”) FDP Rule.

Under the Russia FDP Rule, items produced outside of the United States are nevertheless subject to the EAR – and therefore subject to the export embargo discussed above – if:

• the item is not EAR99 and is the direct product of U.S.-origin technology or software that is specified in any ECCN in product groups D or E in Categories 3 through 9 of the CCL, or is the direct product of a plant or major plant component that itself is the direct product of such technology or software, and
• there is knowledge that the item is destined for Russia or will be incorporated into or used in the production or development of any item not classified EAR99 and produced in or destined for Russia. 

The Russia FDP Rule is therefore similar to the Huawei-specific “footnote 1” version of the rule, but much broader in scope in terms of the U.S.-origin technology and software that would trigger the rule.  Any item that is subject to the EAR under the above test requires a license from BIS to export, reexport, or transfer in-country to any destination.  In other words, where the Russia FDP test above is met, and therefore constitutes knowledge that the item will be ultimately sent to Russia or used in Russian-produced items, even exports to intermediary countries would require a license. 

Under the Russian MEU FDP Rule, items produced outside the United States are subject to the EAR if:

• the item is the direct product of any technology or software subject to the EAR and specified on the CCL, or the direct product of a plant or major plant component that itself is the direct product of such technology or software; and
• there is knowledge that:
  • the item will be incorporated into or used in the production or development or any item produced, purchased, or ordered by a party on the Entity List with a “footnote 3” designation; or
  • any party on the Entity List with a “footnote 3” designation is a party to the transaction involving the item.

Note that for purposes of this rule, whether a party is considered a “Russian MEU” depends on whether the party has a “footnote 3” designation on the Entity List, not whether the party necessarily meets the definition of a “military end user” specified in § 744.21 of the EAR.  As discussed below, BIS contemporaneously moved forty-five Russian entities from the Military End-User List to the Entity List, and designated a total of forty-nine Russian parties on the Entity List with “footnote 3.”

The Russian MEU FDP Rule therefore also represents a novel extraterritorial application of the foreign produced direct product rule.  In particular, this version of the rule is the first time that software or technology that is merely subject to the EAR – rather than U.S. origin – could trigger the rule.  It is therefore possible, by way of example, for items that are the direct product of non-U.S.-origin software that have more than a de minimis amount of U.S. controlled content – and are therefore subject to the EAR – would be controlled under the rule. 

Nevertheless, in recognition that certain other countries have committed to implementing substantially similar controls, BIS has identified those jurisdictions in a newly formed Supplement 3 to 15 C.F.R. Part 746.  Listed countries are exempted from the Russia FDP Rule and the Russian MEU FDP Rule.

Expansion of Military-End Use and Military End-User Controls

The Final Rule also expands the existing controls on military end-uses and end-users set forth at § 744.21 of the EAR.  Those controls previously only applied to items described under certain ECCNs specified in Supplement 2 to 15 C.F.R. Part 744.  The Final Rule removes this limitation and makes all items subject to the EAR subject to the Rule for Russia, except for food and medicine classified as EAR99 or mass-market encryption items and software classified under ECCNs 5A992.c and 5D992.c (unless such items are intended for Russian government end-users or state-owned entities).

The Final Rule also moves forty-five Russian parties from the Military-End User List (i.e., the list of parties determined by BIS to meet the definition of a military-end user for purposes of § 744.21) and relocates them to the Entity List.  The military end-user controls under § 744.21 are generally less restrictive than the Entity List, and this action accordingly would require a BIS license prior to any export to these parties.  BIS also added two new Russian entities to the Entity List and amended the entries for two others. All forty-nine entities also received a “footnote 3” designation, rendering them subject to the Russian MEU FDP Rule discussed above.   

Sanctions

Russia Sanctions

In coordination with BIS’s Final Rule, the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) also took significant actions to target Russia’s access to the global financial system and further target close associates of President Putin.  According to OFAC’s press release, these actions “target nearly 80 percent of all banking assets in Russia.”

Specifically, OFAC added four Russian banks and their subsidiaries to the Specially Designated Nationals (“SDN”) list.  These include one of Russia’s largest banks - VTB Bank Public Joint Stock Company (“VTB Bank”) – as well as Public Joint Stock Company Bank Financial Corporation Otkritie (“Otkritie”), Open Joint Stock Company Sovcombank (“Sovcombank”), and Joint Stock Commercial Bank Novikombank (“Novikombank”).  However, OFAC also issued General License 11, which authorizes a winddown period for VTB, Sovcombank, and Otkritie through March 26, 2022, as well as General License 12, which authorizes U.S. persons to reject, rather than block, transactions with those three banks through March 26, 2022.  OFAC additionally designated as SDNs seven Russian individuals – including three sons of designated oligarchs, the Chairman of Sberbank, two VTB officials, and the wife of one VTB official and two real-estate companies which one of those individuals controls.

In addition, OFAC also issued Directive 2 under Executive Order 14024,  adding Public Joint Stock Company Sberbank of Russia (“Sberbank”) and twenty-five of its subsidiaries to the List of Foreign Financial Institutions Subject to Correspondent Account or Payable-Through Account Sanctions (“CAPTA List”).  As a result of this listing, U.S. financial institutions are required to close any Sberbank correspondent or payable-through accounts by March 26, 2022.  This restriction also applies to any non-U.S. financial institutions owned by Sberbank fifty percent or more, directly or indirectly, whether or not such institution is on the CAPTA List. 

OFAC further issued Directive 3 under Executive Order 14024, which prohibits U.S. persons or persons within the United States from transactions involving new debt of longer than 14 days maturity or new equity issued on or after March 26, 2022 of thirteen entities listed in the annex of its order as well as their property and property interests.  Those entities are:

• Credit Bank of Moscow Public Joint Stock Company
• Gazprombank Joint Stock Company
• Joint Stock Company Alfa-Bank
• Joint Stock Company Russian Agricultural Bank
• Joint Stock Company Sovcomflot
• Open Joint Stock Company Russian Railways
• Public Joint Stock Company Alrosa
• Public Joint Stock Company Gazprom
• Public Joint Stock Company Gazprom Neft
• Public Joint Stock Company Rostelecom
• Public Joint Stock Company Rushydro
• Public Joint Stock Company Sberbank Of Russia
• Public Joint Stock Company Transneft

For any entities subsequently determined to be subject to the directive, the prohibitions will become effective thirty days after the date of the determination.

Belarus Sanctions

OFAC additionally sanctioned twenty-four Belarusian individuals and entities in response to their support for Russia’s invasion of Ukraine.  These designations include two state-owned banks - Belarussian Bank of Development and Reconstruction Belinvestbank Joint Stock Company and Bank Dabrabyt Joint-Stock Company – and their subsidiaries.  OFAC also designated the following key entities in the Belarusian defense industry:

•  Minsk Wheeled Tractor Plant (MZKT) and two executives
• State Authority for Military Industry of the Republic of Belarus and two officials
• State Owned Foreign Trade Unitary Enterprise Belspetsvneshtechnika
• OJSC KB Radar-Managing Company Holding Radar System
• JSC 558 Aircraft Repair Plant
• Public Joint Stock Company Integral
• Industrial-Commercial Private Unitary Enterprise Minotor-Service
• OOO Oboronnye Initsiativy
• OKB TSP Scientific Production Limited Liability Company
• LLC Synesis and its CEO

In addition, OFAC designated the Belarusian Minister of Defense, the State Secretary of the Security Council, and a member of President Alexander Lukashenka’s inner circle. 

OFAC relatedly issued new General License 6 to authorize official conduct of the United States Government and General License 7 to authorize the official business of the United Nations and other specified non-governmental organizations.