U.S. Imposes New Sanctions on Russia and Warns of Substantial Risks of Doing Business in Russia

The United States imposed a new round of economic sanctions and export restrictions on Russia today, marking the second anniversary of Russia’s invasion of Ukraine and following the death of Russian opposition leader, Alexei Navalny. Today’s package ratchets up existing sanctions on Russia by adding over 500 parties to the U.S. Department of the Treasury’s (Treasury Department) Office of Foreign Assets Control (OFAC) Specially Designated Nationals and Blocked Persons (SDN) List and 93 entities to the U.S. Department of Commerce’s (Commerce Department) Bureau of Industry and Security’s (BIS) Entity List. The newly sanctioned parties include Russian companies in the financial, industrial, and technology sectors and companies outside of Russia found to be engaged in sanctions evasion, circumvention, and backfill. To date, the U.S. Government has designated over 4,000 individuals and entities in response to Russia’s invasion of Ukraine.

The U.S. government also issued a strongly worded joint advisory on the risks of continuing business in Russia. The advisory notes that doing business in Russia “poses serious legal, financial, and reputational risks” including “severe civil and criminal penalties in navigating the raft of economic sanctions, export controls, and import restrictions imposed on Russia by the United States and its allies and partners.” Notably, the advisory warns that even rigorous due diligence is unlikely to address the substantial compliance risks presented by continued business in Russia.

OFAC & State Department Sanctions

OFAC and the U.S. Department of State (State Department) imposed blocking sanctions on over 500 individuals and entities pursuant to Executive Order (E.O.) 14024. The new blocking sanctions target hundreds of companies with ties to Russia’s military-industrial base, parties that support Russia’s financial infrastructure, those involved in supporting Russian future energy revenue sources, and over two dozen third-country sanctions evaders in the Middle East, Europe, East Asia, and Central Asia. The sanctioned entities include Russian engineering, finance, electronics, metals and mining, and transportation companies. The sanctions specifically targeted the following categories:

• Russia’s Financial Infrastructure. The operator of the Mir National Payment System, Russian banks, investment firms, and financial technology (fintech) companies were targeted as parts of Russia’s core financial infrastructure and to further hinder Russia’s use of the international financial system to support its war efforts.
• Sanctions Evasion, Circumvention, and Backfill. Companies and individuals in third countries, including China, Serbia, the United Arab Emirates, Kyrgyzstan, Vietnam, Liechtenstein, Estonia, Ireland, and Finland, that have facilitated sanctions evasion and the transfer of critical technology and equipment to Russia’s military-industrial base were targeted.
• Russia’s Military-Industrial Base and Industrial Sector. In an effort to disrupt and degrade Russia’s military-industrial base, OFAC designated entities across Russia that were directly or indirectly contributing to Russia’s defense production, including many industrial companies. The targeting of Russia’s industrial sector is the latest reminder that much of Russia’s industrial base is now actively engaged in defense production supporting Russia’s war effort.
• Russia’s Future Energy Production Projects. The sanctions targeted entities involved in the development of Russia’s future energy production and export capacity, including the financing, construction, and transportation support of the Arctic LNG 2 Project.
• Constraining Russia’s Metals and Mining Revenue. The new designations also included individuals and entities involved in Russia’s metals and mining industry due to that sector’s role in generating revenue for the Russian government.
• Disrupting Iranian and North Korean Military Cooperation, Arms Proliferation, and Munitions Transfers. The sanctions also focused on countering the cooperation between Russia and both Iran and North Korea to further Russia’s war efforts against Ukraine.
• Government Officials. The new tranche of sanctions also targeted certain Russian government officials deemed responsible for Navalny’s death in Russian custody.

OFAC published four new General Licenses authorizing certain wind-down, divestiture, and safety activities, three new FAQs relating to the import ban on diamonds, and amendments to eight previously issued Russia-related FAQs. The State Department also announced that it will impose visa restrictions on authorities involved in the transfer, deportation, and confinement of Ukraine’s children.

BIS Entity List Designations

In addition to the Treasury Department sanctions, BIS added 93 entities to the Entity List. The new additions to the Entity List included entities in several countries, including: Russia, Turkey, China, United Arab Emirates, Kyrgyzstan, India, and South Korea. The entities were designated for supporting Russia’s defense industrial base, including by illegally shipping U.S. goods to Russia. The designations prohibit U.S. and non-U.S. persons from exporting, reexporting, or transferring (in-country) any item (goods, software, or technical knowhow) subject to the Export Administration Regulations (EAR) to the listed parties.

BIS also designated more than 50 of the Entity List entities as Russian-Belarusian military end users subject to footnote 3 designation pursuant to EAR Section 744.21. When entities are tagged with footnote 3 designations as Russian or Belarusian “military end users,” those entities are then subject to the Russia/Belarus-Military End User Foreign Direct Product Rule (FDPR) in EAR Section 734.9(g), which applies U.S. export jurisdiction to foreign-made items that are based on or produced with controlled software, technology or equipment that are themselves subject to the EAR. The Russian-Belarus military end user rule captures even EAR99 items when there is knowledge that an item is intended for one of these entities.

Business Advisory on Legal Risks Related to Business Operations in Russia

The State Department, Treasury Department, Commerce Department, and the U.S. Department of Labor) jointly issued a business advisory highlighting the substantial risks associated with continued business or operations in Russia and the occupied regions of Ukraine, including those related to:

• Violating sanctions, export controls, import prohibitions, money laundering, and anti-corruption laws;
• Being implicated in the Russian government’s violations of international law (including war crimes, crimes against humanity, and human rights abuses); and
• Becoming subject to punitive Russian legal measures.

Among other risks, companies with continuing operations in Russia are subject to coercive local laws that allow the Russian government to direct production in support of its war efforts. For example, the Russian government has authority to impose special economic measures that require businesses to provide goods and services in support of Russia’s military and defense sector. Companies that refuse to fulfill defense contracts could be effectively expropriated under a decree that allows the Russian government to suspend shareholders’ rights and impose “external management” of the involved business. The advisory characterizes this environment as a “partial nationalization” of the economy because it allows Russian government representatives to manage businesses that do not comply with state orders. Employees in Russia also face the risk of detention and imprisonment on pretextual charges, raising the threat to U.S. and western personnel that remain in the country. The advisory notes that this has happened across multiple sectors.

Moreover, the Russian government has enacted increasingly restrictive measures aimed at making it difficult for U.S. and western companies to manage remaining operations in Russia. Those measures include restrictions on:

• Dividend payments exceeding 10 million rubles per month to shareholders affiliated with unfriendly countries unless transferred in rubles to a particular type of account held at a Russian bank;
• Transfer of funds to particular nonresident accounts; and
• Nonresident businesses’ ability to sell shares and participatory interests in Russia-incorporated entities except at a discount of at least 50% to the market value and a transfer of 10% of the transaction value to the federal budget.

Companies based in the United States and allied countries also face legal risks when attempting to fully exit from the Russian market, including punitive taxes, governmental approvals, forced sales to government-linked entities, and significant discounting of valuation, among other risks.

The advisory stresses the need for businesses, investors, consultants, non-governmental organizations, and due diligence service providers to undertake heightened due diligence to assess whether their activities in Russia or links to Russian parties implicate them in violations of export controls, sanctions regulations, international law, or human rights violations committed by the Russian government. The advisory includes an Annex with due diligence recommendations.

The advisory urges businesses to use these due diligence efforts to evaluate whether and how to responsibly end relationships when a business lacks the leverage to prevent or mitigate adverse impacts of its Russian ties, and how to mitigate the risk through a businesses’ value chain and extended operations. As noted, even the most rigorous diligence process and compliance program is unlikely to fully address the substantial and complex risks related to continued operations in Russia.

Key Takeaways

• Businesses and individuals should take immediate action to assess their current operations in and touchpoints with Russia and evaluate the risks associated with remaining in the Russian market.
• Companies with continuing operations or other touchpoints in Russia should continually reevaluate and update their due diligence practices and compliance programs. All companies, but particularly those headquartered in the United States and allied countries, should examine whether and to what extent their operations can reasonably remain in compliance with applicable laws given the increasingly complex and restrictive legal environment.
• Businesses not currently engaged in the Russian market but contemplating future operations should assess the significant economic, legal, and reputational risks associated with the Russian market and the increasingly complex hurdles to exiting the market.
• The expansion of sanctions and tightening of restrictions against Russia continue to be a policy objective of the U.S. government.
• The U.S. government has strongly signaled its continued focus on identifying and curbing evasion and circumvention including actions taken by third-country entities that continue to support Russia’s wartime efforts.