Additional US Sanctions and Export Controls Issued Against Russia and Belarus as Russian Invasion of Ukraine Persists
By: Melissa Duffy , Mark S. Ostrau , Sofia Chalat
This alert summarizes the current state of trade measures and restrictions against both Russia and Belarus, following our last update on February 25, 2022.
As previously reported, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) under the Export Administration Regulations (EAR) imposed tightened controls on exports to Russia. In response to Belarus’ role in enabling the Russian invasion into Ukraine, BIS extended those stringent restrictions to exports to Belarus as well on March 2, 2022.
As a result, there are now expanded, or in many cases new, license requirements for Belarus for all Export Control Classification Numbers (ECCNs) in Categories 3-9 of the CCL (§746.8(a)(1)). This includes exports, reexports, and transfers to or within Russia or Belarus, with a general policy of denial, for semiconductors, computers, telecommunications, information security products, lasers, sensors, maritime and aviation items covered by the CCL.
However, BIS confirmed that in order to minimize unintended consequences, it will apply a case-by-case review policy to applications to export, reexport or transfer (in-country) items that ensure aviation, maritime or civil nuclear safety, meet humanitarian needs, enable government space cooperation and allow transactions for items destined to specified Western subsidiaries and joint ventures, support civil telecommunications infrastructure in certain countries or support government to-government activities.
In addition, BIS revised two foreign direct product rules (FDP rules) that are specific to Russia and Russian military end users to make them also applicable to Belarus and Belarusian military end users. Following the issuance of the Belarus rule, the same general restrictions and jurisdictional rules previously applied to Russia now also apply to Belarus.
BIS announced significant changes to the use and availability of license exceptions for both Russia and Belarus, which included narrowing the availability of License Exceptions ENC (for certain encryption items) and AVS (for aviation).
This new BIS rule narrowed the scope and availability of License Exception ENC (§ 746.8(c)(6)), that was previously available to overcome certain license requirements for encryption items. License Exception ENC is now no longer available for products or software classified as ECCN 5A002 or 5D002 to Russian or Belarus parties (except for exports to U.S. or close-ally-country companies’ operations, subsidiaries and JVs in Russia and Belarus). This shift will impact cybersecurity products, networking infrastructure, enterprise communications software and similar non-consumer products using encryption in a primary function. Restricted exports include software updates, upgrades, patches and other kinds of technical support relating to that software. This will impact companies working with contractors and third-party developers, as well as sales and support to customers in those regions.
The Consumer Communications Devices (CCD) License Exception does still apply for mass market products under ECCN 5A992 or 5D992, so long as the end user is an individual or private sector civil end-user – not government entities or state-owned enterprises, though. That would include handheld devices, mobile apps and other consumer products that use encryption.
The only license exceptions available to Russia or Belarus that can overcome the license requirements include:
BIS also issued new sanctions targeting the Russian oil industry in an effort to curb future revenue that could support Russian military capabilities. The new rule aims to further limit the Russian oil sector by restricting the export, reexport and transfer (in-country) of additional items needed for oil refining. This measure expands the scope of the 2014 sanctions against the Russian industry sector that were announced as a result of Russia’s occupation of the Crimea region of Ukraine.1
The rule adds a new general prohibition, by requiring additional licenses requirements, on the export, reexport or transfer (in-country) to or within Russia of any item subject to the EAR listed in new supplement no. 4 to part 746, including Harmonized Tariff Schedule (HTS)-6 codes and Schedule B numbers. Additionally, the new prohibition (under (a)(1)(ii)) does not include a “knowledge” requirement. For most applications, BIS will adopt a license review policy of denial, however, exports related to health and safety will be reviewed under a case-by-case policy.
BIS added 91 more entities to the BIS Entity List after determining that the entities were acting contrary to the foreign policy or national security interests of the U.S. through their involvement, contribution or support of Russian security services, military and defense sectors and military and/or defense research and development efforts. The destinations of entities included predominantly Russia, as well as Belize, Estonia, Kazakhstan, Latvia, Malta, Russia, Singapore, Slovakia, Spain and United Kingdom.
Placement on the Entity List imposes additional license requirements on and limits the availability of certain license exceptions for exports, reexports and transfers to the listed entities.
On February 28, 2022, OFAC announced that pursuant to Executive Order 14024 Directive 4, U.S. persons were prohibited from engaging in transactions with the Central Bank of the Russian Federation (Central Bank), the National Wealth Fund of the Russian Federation and the Ministry of Finance of the Russian Federation.
Notably, OFAC designated the Central Bank under the Non-SDN Menu-Based Sanctions List (NS-MBS List), rather than the Specially Designated Nationals and Blocked Persons List (SDN List). Under the NS-MBS List, U.S. persons cannot transfer assets to, transact with, or process foreign exchange with the Central Bank, as opposed to SDN List restrictions that would have caused Central Bank assets to be blocked and frozen.
This action aims to further de-stabilize the Russian financial sector by preventing the Central Bank from engaging in actions to protect the valuation of the Ruble, raise sovereign financing and buffer the economic impact on Russian banks through other international transactions.
On March 3, 2022, OFAC released a list of additional individuals and entities designated on OFAC’s SDN List. The exhaustive list included Russian oligarchs, defense companies and disinformation proliferators. The listed individual included Alisher Burhanovich Usmanov, tech titan and one of Russia’s wealthiest billionaires.
However, in a departure from OFAC’s traditional practice, OFAC has issued the Russia-related General License 15, unblocking any entities that Usmanov directly or indirectly owns, negating the standard OFAC 50% rule for Usmanov’s holdings, unless specifically included on the SDN List. Thus, the SDN designation is limited to Usmanov himself and does not automatically flow down to companies Usmanov has invested in.
On March 8, 2022, President Biden signed an Executive Order (E.O.) banning the import of Russian energy products to the United States and new investments into the Russian energy sector. The action aims to further limit the Russian Government’s access to economic resources as the invasion of Ukraine continues. The E.O. prohibits:
The E.O. also included defined terms identifying the applicability of the new restrictions:
Transactions or conduct (by employees, grantees, or contractors) performed as part of the official business of either the Federal Government or United Nations2 are not prohibited under the E.O.
The U.S. Department of Transportation and its Federal Aviation Administration also announced that it would close off U.S. airspace to all Russian commercial air carriers and other Russian civil aircraft, effective March 2, 2022. This move—which follows similar actions from other U.S. allies—blocks all aircraft owned, certified, operated, registered, chartered, leased or controlled (by or for) Russian individuals and impacts scheduled as well as chartered passenger and cargo flights.
Companies with operations in Russia, sales to Russia and software development work in Russia may be especially impacted by the significant narrowing of the eligibility of the ENC license exception, upon which many companies have relied to provide software and other equipment using encryption to support their activities in Russia. Companies should take stock of their exports of such items to Russia and whether they are now restricted from continuing those operations under the latest restrictions.
Also, in response to the increased number of sanctioned and export restricted parties in Russia, companies should remain vigilant about screening their third parties and evaluating their potential touchpoints with those parties, including in their investment/ownership structure.
1. See 79 FR 45675 (Aug. 6, 2014).↩
2. This includes United Nations specialized agencies, programs, funds and related organizations.↩