As Russia’s war against Ukraine continues, the United States has further expanded the scope of its sanctions and export control restrictions against Russia and Belarus. On March 11, President Biden signed a new Executive Order that prohibits exports of U.S. dollar (“USD”)-denominated banknotes to the Russian government or persons located in Russia, lays the groundwork for the Treasury Secretary to prohibit new investment by U.S. persons in any sector of the Russian economy, and bars imports into the United States of additional Russian-origin products – namely, fish, seafood, alcohol, and non-industrial diamonds. In tandem with a new rule issued by the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”), the order also imposes a ban on exporting, reexporting, transferring, selling, or supplying “luxury goods” to or within Russia or Belarus and to sanctioned Russian and Belarusian oligarchs and other individuals.
In addition to these restrictions, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) added several individuals to its List of Specially Designated Nationals and Blocked Persons (“SDN List”), issued several related general licenses, and released new frequently asked questions (“FAQs”) relating to the new Executive Order and certain general licenses.
New U.S. Sanctions and Export Controls Measures
Prohibitions on the Export or Reexport of USD Banknotes to Russia and New Investment in the Russian Economy
The March 11 Executive Order prohibits, without OFAC authorization, the export, reexport, sale, or supply, directly or indirectly, from the United States or by a U.S. person wherever located, of USD-denominated banknotes to the Russian government or any person located in the Russian Federation. Importantly, it does not appear that this provision is intended to prohibit U.S. persons, including U.S. financial institutions, from making USD-denominated wire transfers to the Russian government or any person located in Russia, provided that such transactions are not otherwise prohibited by relevant sanctions. Rather, it appears to prohibit the export, reexport, sale, or supply from the United States or by a U.S. person of physical USD-denominated banknotes (i.e., hard currency) to the Russian government and persons located in Russia without OFAC authorization. Newly-issued OFAC General License No. 18 authorizes certain transactions otherwise prohibited by this provision, as detailed further below.
The Executive Order also gives the Treasury Secretary authority to prohibit U.S. persons from engaging in new investment in any sector of the Russian economy. The Treasury Secretary had previously, on February 22, 2022, designated the financial sector of the Russian economy for sanctions pursuant to Executive Order 14024, which was followed by a range of sanctions targeting Russian banks, as described in our client alerts of February 22, February 25, and March 7. The technology and defense sectors were similarly designated pursuant to Executive Order 14024 on April 15, 2021, as described in our client alert of April 16, 2021. These designations of the financial, technology, and defense sectors provided a basis for adding entities and individuals operating in those sectors to the SDN List, but did not include blanket prohibitions on new investment in these sectors. However, the energy sector of the Russian Federation was targeted for certain new sanctions, including a broad prohibition on any new investment by U.S. persons, pursuant to Executive Order 14066 issued on March 8, 2022, as described in our client alert of March 10. There have not yet been additional sectors of the Russian economy designated for new investment prohibitions under the new Executive Order, but the order lays the groundwork for the Treasury Secretary to quickly designate in the future, likely through formal determinations, sectors of the Russian economy in which U.S. persons are prohibited from investing.
Prohibition on the Export, Reexport, Sale, Supply, and Transfer of Luxury Goods to and Within Russia and Belarus, and to Certain SDNs Globally
The new Executive Order also prohibits, without authorization from OFAC, the export, reexport, sale, or supply from the United States, or by a U.S. person, of luxury goods and any other items as may be determined by the Secretary of Commerce, to any person located in Russia. OFAC FAQ 1027 refers exporters to BIS for guidance on defining luxury goods subject to this prohibition.
In tandem with the new Executive Order, BIS issued a new rule on March 11 requiring a license for any person (including both U.S. and non-U.S. persons) to export, reexport, or transfer (in-country) luxury goods subject to the U.S. Export Administration Regulations (“EAR”) to or within Russia or Belarus, as well as to certain Russian and Belarusian oligarchs and associated “malign actors” on the OFAC SDN List regardless of location (or in circumstances where such oligarchs or “malign actors” are otherwise a party to the transaction). In announcing the new rule, BIS officials highlighted that controls on luxury good exports previously applied only to North Korea, and explained that the new controls take away a “source of comfort” from Russian and Belarusian oligarchs and other elites and remind them “that Russia is increasingly isolated.”
The new rule is effective on March 11, but has a narrow savings clause that permits shipments of items covered by the new rule without a license that were en route aboard a carrier to a port of export, reexport, or transfer (in country) on March 11, pursuant to actual orders for export, reexport, or transfer (in country) to or within a foreign destination.
Applications for such licenses under the new rule are subject to a policy of denial, and the availability of EAR license exceptions for such items is severely limited. The only available license exceptions are for baggage (“BAG”) and aircraft, vessels and spacecraft (“AVS”). Specifically, the EAR’s License Exception BAG authorizes travelers to Russia to bring usual and reasonable kinds and quantities of personal effects and other items that would otherwise fall within the scope of “luxury goods” under the new BIS rule. Such goods may not be transported for resale and must be for individual use. Further, License Exception AVS authorizes usual and reasonable kinds and quantities of saloon stores and supplies on non-Russian airlines flying to Russia or Belarus. These license exceptions do not apply to exports, reexports, or transfers (in country) of luxury goods subject to the EAR to designated Russian or Belarusian oligarchs and malign actors.
BIS has listed a broad range of luxury goods subject to these prohibitions in Supplement No. 5 to Part 746 of the EAR. The goods are identified by Harmonized Tariff Schedule (“HTS”) code and include, among other things, certain alcohol, tobacco products, perfumes and cosmetics, clothing items and accessories, jewelry, vehicles, and artwork and antiques. Thus, even EAR99 items that qualify as “luxury goods” now require a license for export or reexport to, or transfer within, Russia or Belarus, as well as to certain Russian and Belarusian oligarchs and associated “malign actors” on the OFAC SDN List regardless of location, as do luxury goods exported, reexported, sold, or supplied to Russia by U.S. persons anywhere in the world, even if those items are not subject to the EAR. BIS had previously, on February 24, March 2, and March 3, 2022, imposed a series of new export controls with respect to Russia and Belarus, which imposed broad licensing requirements on many dual-use items, certain oil-refinery-related equipment, and on any items subject to the EAR (including EAR99 items) if destined for military end uses or end users in Russia or Belarus, as described in detail in our client alerts of February 25 and March 7. Unlike these previous measures, BIS’s March 11 rule extends to EAR99 items that qualify as luxury goods, even when not destined for military end uses or end users.
Prohibition on the Import Into the United States of Additional Russian-Origin Products
President Biden’s March 11, 2022 Executive Order also prohibits, without authorization from OFAC, the importation into the United States of the following products of “Russian Federation origin”: fish, seafood, and preparations thereof; alcoholic beverages; non-industrial diamonds; and any other Russian-origin products as may be determined by the Treasury Department. Newly-issued OFAC General License No. 17 authorizes certain transactions otherwise prohibited by this provision, as detailed further below. This targeted import ban follows the imposition last week pursuant to Executive Order 14066 of a prohibition on the importation of various Russian-origin energy products, along with a prohibition on new investment in the energy sector in the Russian Federation, as described in our client alert of March 10.
Concurrently with the new executive order, OFAC advised in the form of FAQs how these items newly subject to the import ban are defined. In particular, OFAC stated that for purposes of this Executive Order, “Russian Federation origin” refers to goods produced, manufactured, extracted, or processed in the Russian Federation, excluding any Russian Federation origin good that has been incorporated or substantially transformed into a foreign-made product, which aligns with how this term is defined for purposes of Executive Order 14066. See OFAC FAQ 1027 (referring to OFAC FAQ 1019). In addition, OFAC advised that “fish, seafood, and preparations thereof”; alcoholic beverages; and non-industrial diamonds subject to the import prohibition are defined at specified HTS codes. See OFAC FAQ 1027 (providing a full list of relevant codes).
OFAC FAQ 1024 clarifies that U.S. persons may still engage in transactions to sell or re-direct shipments of such Russian-origin goods outside the United States that were previously destined for the United States. The new Executive Order also does not appear to prohibit U.S. persons more generally from facilitating imports of such Russian-origin goods into countries other than the United States where such transactions do not involve U.S.-sanctioned persons or activities otherwise prohibited by U.S. sanctions. The Executive Order also does not prohibit transactions such as the unwinding of contracts or other business-related activities by U.S. persons in order to comply with this import ban. See OFAC FAQ 1023. “U.S. persons” for purposes of the Executive Order include U.S. entities and their non-U.S. branches; individual U.S. citizens and lawful permanent residents (“green-card” holders), no matter where located or by whom employed; and persons present in the United States.
In addition, OFAC has issued guidance confirming that non-U.S. persons who import Russian-origin fish, seafood, and preparations thereof; alcoholic beverages; or non-industrial diamonds into jurisdictions other than the United States are not exposed to sanctions, provided the transaction does not involve a sanctioned person or otherwise prohibited activity. See OFAC FAQ 1026.
New General Licenses and Guidance on Previous General Licenses
On March 11, OFAC issued the following General Licenses:
- General License No. 17 authorizes transactions ordinarily incident and necessary to imports into the United States of fish, seafood, and preparations thereof; alcoholic beverages; and non-industrial diamonds of Russian Federation origin pursuant to written contracts or written agreements entered prior to March 11, 2022, through 12:01 a.m. EDT on March 25, 2022. The General License does not authorize transactions involving blocked persons.
The OFAC FAQs do not address whether amendments to contracts on or after March 11 would remove a contract from the scope of the General License, but amendments to material provisions of such contracts, including the quantity of the goods to be imported, likely would render the license inapplicable. OFAC has additionally advised that, for imports on or after March 25, it may issue specific licenses on a case-by-case basis. See OFAC FAQ 1024.
- General License No. 18 authorizes transactions otherwise prohibited by the prohibition on exports of USD banknotes that are ordinarily incident and necessary to the transfer of USD-denominated banknote noncommercial, personal remittances from the United States or a U.S. person to individuals located in Russia, or from a U.S. person who is an individual located in Russia. This does not include charitable donations to or for the benefit of an entity or funds transfers for use in supporting or operating a business, including a family-owned business, or transfers involving blocked persons.
OFAC FAQ 1028 clarifies that this General License authorizes methods of payment including withdrawals of USD banknotes from ATMs and physically carrying USD banknotes. It also notes that it does not authorize U.S. financial institutions to process transactions for the provision of USD banknotes to foreign financial institutions for subsequent distribution or supply to the Russian government or persons located in Russia.
- General License No. 19 authorizes individuals who are U.S. persons located in Russia to engage in all transactions otherwise prohibited by the prohibition on exports of USD banknotes that are ordinarily incident and necessary to their personal maintenance within Russia, including payment of housing expenses, acquisition of goods or services for personal use, payment of taxes or fees, and purchase or receipt of permits, licenses, or public utility services, provided these transactions do not involve blocked persons.
- General License No. 23 authorizes transactions otherwise prohibited by Executive Order 14065 (which imposed comprehensive sanctions against the so-called Luhansk People’s Republic and Donetsk People’s Republic regions of Ukraine, collectively the “Covered Regions”) that are ordinarily incident and necessary to certain activities of nongovernmental organizations (“NGOs”). These activities include support for humanitarian projects in the Covered Regions; democracy building; general education; non-commercial development projects, such as improving food security and water sanitation; and environmental and natural resource protection projects, such as pollution remediation. The General License does not authorize transactions involving any persons blocked pursuant to Executive Order 14065.
New SDN Designations and Additional Guidance
OFAC also announced on March 11 the addition of a number of Russian officials and their family members to the SDN List. These new additions include the wife and adult children of Kremlin spokesman Dmitriy Peskov; the full Management Board of VTB Bank; and twelve members of the Russian State Duma who have publicly lobbied for Russian recognition of Ukrainian separatist regions. OFAC also designated Russian oligarch Viktor Vekselberg as an SDN pursuant to Executive Order 14024 of April 15, 2021 for having acted on behalf of the Russian government and for operating in the Russian technology sector. Vekselberg was already designated as an SDN pursuant to Executive Order 13662 of March 20, 2014 for operating in the Russian energy sector.
Finally, OFAC confirmed in FAQ 1021 that all Russia-related sanctions are applicable regardless of whether a transaction is conducted in traditional currency or virtual currency. Consistent with recent guidance from the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”), OFAC noted that sanctioned Russian persons are known to utilize a wide range of tools and tactics in seeking to evade U.S. and international sanctions, including potentially through the use of virtual currency. OFAC reiterated that U.S. persons must remain vigilant and take risk-based steps to ensure that they do not engage in prohibited transactions involving virtual currency.
* * *
We are closely monitoring developments concerning the U.S., UK, and EU sanctions against Russia, and will issue further updates in the event of material developments. In the meantime, we would be happy to address any questions you may have.
Covington’s International Trade Controls team—which includes lawyers in the firm’s offices in the United States, London, Brussels, and Frankfurt—regularly advises clients across business sectors, and would be well-placed to provide support in connection with the emerging Russia sanctions. Our trade controls lawyers also work regularly with Covington's Global Public Policy team—consisting of over 120 former diplomats and policymakers in the United States, Europe, the Middle East, Latin America, Africa, and Asia—many of whom have had substantial government experience in sanctions and export controls matters, and who regularly advise our clients on emerging sanctions policy matters and related engagements with government stakeholders. Moreover, as the Ukraine crisis continues to unfold, Covington is exceptionally well-positioned to assist clients in navigating their most complex challenges, drawing on the multidisciplinary capabilities of additional practices in areas such as international arbitration and disputes, cybersecurity, anti-money laundering, insurance, and corporate restructuring.
If you have any questions concerning the material discussed in this client alert, please contact the members of our International Trade Controls team.
Back
