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March 7, 2022

US Imposes Additional Sanctions and Export Controls on Russia and Belarus

Advisory

The US continues to impose additional sanctions and export control restrictions in response to Russia’s invasion into Ukraine. The latest measures from both the Commerce Department and the Treasury Department specifically target Russian elites and Russia’s and Belarus’s defense sectors as well as other critical industries.

Specifically, on March 2, 2022, the Department of Commerce’s Bureau of Industry and Security (BIS) implemented new export control rules, including by extending to Belarus many of the export restrictions it placed on Russia in response to Belarus's involvement in Russia’s actions. The new measures include: imposition of licensing requirements on a large swatch of commodities, software, and technology (collectively, items) not previously requiring a license; elimination and/or limitation on the use of existing license exceptions; and application of the foreign direct product rule (FDPR) to impose export control jurisdictions on foreign-made items that are direct products of US-origin technology and equipment/plants that are derived from US-origin technology and not previously subject to US export controls.

Significantly, in addition to extending the restrictions to Belarus, BIS also modified and restricted the scope of EAR License Exception encryption commodities, software, and technology (ENC), effectively adopting an embargoed country approach to many consumer-level devices for Russia-headquartered and Belarus-headquartered companies.

In addition, on March 3, 2022, the Treasury Department announced new sanctions on Russian individuals who are suspected of providing direct or indirect support to the Russian government.

License Requirements Extended to Belarus

The Commerce Department made several changes to its Commerce Control List (CCL) to restrict Belarus’s access to certain US exports. Similar to Russia, license applications are now required for all Export Control Classification Numbers (ECCNs) in Categories 3-9 (no matter the reason for control), unless an exception or special provision applies. Additionally, these license applications will be reviewed under a general policy of denial. Only under certain circumstances, similar to those applied to Russia, will licenses be reviewed on a case-by-case basis to determine if the transaction would benefit the Belarusian government or defense sector and to assess the potential risk of diversion to Russia.

Belarus has also been added to the two new FDPRs created to directly impact Russia’s access to US-origin technology and equipment/plant. Now described as Russia/Belarus FDPR and Russia/Belarus-Military End Users (MEU), or Footnote 3, FDPR, Belarus and designated Belarusian MEUs are also restricted from receiving foreign produced items that are the direct products of US-origin technology or that are a direct product of a plant or equipment that itself is a direct product of US-origin technology.

Two Belarusian entities were added to the Entity List and designated as a Footnote 3 entity.

  • JSC Integral
  • The Ministry of Defense of the Republic of Belarus, including its armed forces

A license is now required for all items subject to the EAR for Belarusian MEUs, except for food or medicine designated as EAR99.

The changes made to the FDPRs were merely to expand the scope of the restrictions to Belarus and Belarusian MEUs. Therefore, the same “saving clause” that applies to Russia has been extended to cover similar shipments to Belarus. Additionally, the same countries that were exempt from the Russia-related FDPR rules will also be exempt in this case. A new rule issued by BIS on March 4, 2022 also added South Korea to the list of exempted countries.

Finally, Belarus has now been added to the military-intelligence end user’ (MIEU) restrictions in the EAR. This means a license is required for exports, reexports, or transfers (in-country) of all items subject to the EAR if destined for a MIEU in Belarus, except for food or medicine designated as EAR99. BIS officially designated the Ministry of Defense of the Republic of Belarus as a MIEU.

License Exceptions Restricted and Clarified

Similarly to extending new license requirements, the rule also limits the available license exceptions for exports, reexports, and transfers (in-country) to or within Belarus to mirror those available to Russia. However, BIS also used the new restrictions to further clarify and limit the scope of available license exceptions. One of the key changes relates to export licensing requirements for items eligible for License Exception ENC and the scope of License Exception ENC.

First, Commerce eliminated the licensing requirement for exports/reexports/transfer (in-country) to or within Russia/Belarus of commodities and software classified under ECCNs 5A992 or 5D992, if destined to civil end-users that are:

  • Wholly-owned US subsidiaries;
  • Foreign subsidiaries of US companies that are joint ventures with other US companies;
  • Joint ventures of US companies with companies headquartered in Country Group A:5 and A:6 in Supp. 1 to part 740 countries;
  • Wholly-owned subsidiaries of companies headquartered in Country Group A:5 and A:6; or Joint ventures of companies headquartered in Country Group A:5 and A:6 with other companies headquartered in Country Groups A:5 and A:6 (collectively, “Approved End-Users”).

Second, Commerce narrowed the use of License Exception ENC for all other Category 5 items exports/reexports/transfer (in-country) to or within Russia/Belarus of commodities, software, and items classified under Category 5 (other than ECCN 5A992 or 5D992), if destined to Approved End-Users.

Despite this change to License Exception ENC, specified consumer communication devices and related software may still be exported, reexported, transferred (in-country) to or within Russia/Belarus, under License Exception CCD; provided that they are for civilian end-users. However, by severely limiting the scope of License Exception ENC, exports/reexports/transfer (in-country) to or within Russia/Belarus of consumer communication devices related components classified under Category 5 are prohibited without a license, unless they are intended for Approved-End Users.

This means that items within ECCNs 5A992 or 5D992 (such as mobile phones) do not need a license to be exported to Russia if destined to an Approved End User. Exporters may then rely on License Exception CCD to retransfer these mobile phones to civilian end-users. However, because of the newly limited scope of the License Exception ENC, other Category 5 items (such as chips used to service mobile phones) may not be exported/reexported/transferred (in-country) to Russia, unless destined for an Approved End User.

Russia Oil and Gas Sectors

BIS also issued new rules on March 3, 2022, expanding the scope of the previous general prohibition on Russia’s energy sector by imposing additional license requirements.

A license is required to export, reexport, or transfer (in-country) any item subject to the EAR listed in Supp. 2 to part 746 (which are EAR99 items) and ECCNs 0A998, 1C992, 3A229, 3A231, 3A232, 6A991, 8A992, and 8D999 if there is knowledge that the item will be used directly or indirectly in exploration for, or production of, oil or gas in Russian deepwater or Arctic offshore locations or shale formations in Russia, or if the exporter is unable to determine whether the item will be used in such projects. Examples of items that fall within this prohibition include, drilling rigs, high pressure pumps, and subsea processing equipment, among others.

Additionally, any item subject to the EAR listed in Supp. 4 to part 746 requires a license, regardless of the exporter’s knowledge, if destined to or within Russia. To assist exporters, reexporters, and transferors in identifying prohibited items, BIS outlined the Harmonized Tariff Schedules (HTS) Codes and Schedule B Numbers subject to this license requirement.

All of these licenses will be reviewed under a policy of denial, except for items that may be necessary for health or safety reasons which will be reviewed on a case-by-case basis.

However, there is a limited “savings clause” available for shipments of items removed from eligibility for a License Exception or for reexports or transfers (in-country) without a license (NLR) as a result of this regulatory action if they were enroute aboard a carrier to a port of export, reexport, or transfer (in-country), on March 3, 2022, pursuant to actual orders for reexport, or transfer (in-country) to or within a foreign destination. Items that fall within this clause may proceed to that destination under the previous eligibility for a License Exception or reexport or transfer (in-country) without a license (NLR).

New Entity List Designations

BIS also added 91 new entities believed to be involved in or supporting Russia’s military and defense sectors to its Entity List. All items subject to the EAR require a license to be exported, re-exported, or transferred (in-country) to a designated entity.

The latest additions include:

  • 1 in Belize
  • 3 in Estonia
  • 1 in Kazakhstan
  • 1 in Latvia
  • 2 in Malta
  • 81 in Russia
  • 1 in Singapore
  • 1 in Slovakia
  • 2 in Spain
  • 3 in the United Kingdom

A full list of the entities added can be found here.

Russian Oligarchs

Meanwhile, the Treasury Department announced on March 3, 2022, new sanctions on Russian individuals who are suspected of providing direct or indirect support to the Russian government.

Acting pursuant to Executive Order (EO) 14024, the Treasury Department’s Office of Foreign Assets Control (OFAC) added three Russian elites and their families, six of their business, one of Russia’s largest privately-owned aircraft, and one of the world’s largest superyachts to the Specially Designated Nationals (SDN) list.

  • Alisher Burhanovich Usmanov, one of Russia’s wealthiest billionaires with ties to multiple sectors
  • Nikolay Petrovich Tokarev, President of Transneft, a major state-owned pipeline company
  • Yevgeniy Prigozhin, Russian financier of the Internet Research Agency (IRA)
  • Galina Alekseyevna Tokareva, wife of Mr. Tokarev
  • Maiya Nikolaevna Tokareva, daughter of Mr. Tokarev
  • Lyubov Prigozhina, wife of Mr. Prigozhin
  • Polina Prigozhina, daughter of Mr. Prigozhin
  • Pavel Prigozhin, son of Mr. Prigozhin
  • Limited Liability Company Ostozhenka 19, Moscow-based entity owned by Maiya Tokareva
  • Katina Drustvo s Ogranicenom Odgovornoscu za Nekretnine I Ugostiteljstvo, Croatia-based entity owned by Maiya Tokareva
  • T.G.A. D.O.O. za Trgovinu I Usluge (TGA), Croatia-based entity owned by Maiya Tokareva
  • Lakhta Park, OOO, entity owned by Pavel Prigozhin
  • Lakhta Park Premium, OOO, entity owned by Pavel Prigozhin
  • Lakhta Plaza, OOO, entity owned by Pavel Prigozhin
  • M-IABU, a business jet also owned by Mr. Usmanov
  • Dilbar, one of the world’s largest yachts owned by Mr. Usmanov

US persons, including US financial institutions, are prohibited generally from engaging in any transactions with SDNs and are required to block (i.e., freeze) any property or interests in property belonging to SDNs. Additionally, under OFAC’s 50% ownership rule, entities that are owned 50% or more, directly or indirectly, by one or more SDNs in the aggregate are also subject to OFAC’s sanctions, even if OFAC does not publicly list those entities as SDNs. US persons, therefore, need to conduct due diligence into their foreign counterparties to ensure that they are not owned 50% or more by SDNs.

However, OFAC issued General License 15, which authorizes transactions involving an entity owned 50 percent or more, directly or indirectly, by Usmanov that does not appear on the SDN List. Additionally, all property and interests in property of Usmanov’s blocked entities is unblocked and debits on accounts with US financial institutions are authorized.

Transnet is already subject to debt and equity prohibitions from earlier Directives, specifically Directive 2 under EO 13662 and Directive 3 under EO 14024.

Enforcement Measures

In an effort to further the sweeping sanctions and export control restrictions imposed against Russia, the US Department of Justice announced the formation of Kleptocapture, an inter-agency task force, tasked to immediately enforce the new sanctions and export control restrictions. The task force will focus on prosecuting violations of the sanction regime imposed on Russia and Belarus. It will also use various tools, including cryptocurrency tracing, to track down and seize assets of sanctioned individuals and will target any efforts to evade these restrictions.

Conclusion

The latest sanctions and export control restrictions continue a wave of economic measures taken by the US and its allies in response to Russia’s invasion of Ukraine. However, the US and its allies are still debating further measures if the crisis continues. For example, the US Congress is contemplating legislation that would ban the import of Russian oil and gas. Meanwhile, several private companies, such as Netflix, Mastercard and Visa, are severing ties with Russia by suspending their services in the country.

We will continue to monitor the sanctions and export control restrictions as they emerge.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.