U.S., EU, and UK Impose Further Sanctions and Export Controls in Response to Russia’s Invasion of Ukraine

U.S., EU, and UK Impose Further Sanctions and Export Controls in Response to Russia’s Invasion of Ukraine

May 13, 2022, Covington Alert

The U.S. Treasury and Commerce Departments this week further expanded the scope of U.S. sanctions and export control restrictions targeting Russia in response to Russia’s ongoing invasion of Ukraine. On May 8, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) issued two new determinations, pursuant to Executive Orders (“E.O.s”) 14071 and 14024, prohibiting U.S. persons from providing accounting, trust and corporate formation, and management consulting services to persons in Russia and authorizing sanctions against persons operating in, or who have operated in, these sectors in Russia. These determinations were accompanied by a series of new designations to OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”), including three of Russia’s most prominent state-controlled television stations and executives at two major Russian banks, Sberbank and Gazprombank. On May 9, the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) issued a new rule imposing additional export controls on the Russian industrial sector, targeting inputs for military equipment, manufacturing, and construction. In addition, the White House announced that the Nuclear Regulatory Commission (“NRC”) would suspend general licenses related to transfers of nuclear materials to Russia.

In conjunction with these new measures, OFAC issued several related general licenses and released guidance in the form of responses to new frequently asked questions (“FAQs”).

Separately, the UK has introduced restrictions on the provision of internet-related services to designated persons, together with export restrictions on luxury goods to Russia. The UK also has announced plans to introduce a number of further measures, including restrictions on the provision of professional services (including accountancy, management consultancy, and public relations) to Russia.

Finally, the EU has proposed a sixth package of sanctions measures targeting Russia, including a potential ban on the import of Russian oil, which remains under discussion by Member States.

Prohibitions on the Provision of Accounting, Trust and Corporate Formation, and Management Consulting Services to Persons in Russia

The May 8 OFAC Determination Pursuant to Section 1(a)(ii) of Executive Order 14071 prohibits “the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of accounting, trust and corporate formation, or management consulting services to any person located in the Russian Federation.” This determination excludes (i) services to an entity located in Russia that is owned or controlled, directly or indirectly, by a U.S. person, and (ii) services in connection with the wind down or divestiture of an entity located in Russia that is not owned or controlled, directly or indirectly, by a Russian person. The prohibitions take effect at 12:01 a.m. Eastern Daylight Time (“EDT”) on June 7, 2022. Newly-issued General License Nos. 34 and 35 authorize certain transactions otherwise prohibited by this determination, as detailed further below.

“U.S. persons” are 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 employed; and persons present in the United States.

OFAC FAQ 1034 defines the terms subject to this prohibition:

• “Accounting services” includes “services related to the measurement, processing, and evaluation of financial data about economic entities” (but credit rating or auditing services are authorized through 12:01 a.m. EDT on August 20, 2022, as detailed below).
• “Trust and corporate formation services” includes “services related to assisting persons in forming or structuring legal persons, such as trusts and corporations; acting or arranging for other persons to act as directors, secretaries, administrative trustees, trust fiduciaries, registered agents, or nominee shareholders of legal persons; providing a registered office, business address, correspondence address, or administrative address for legal persons; and providing administrative services for trusts.”
• “Management consulting services” includes “services related to strategic business advice; organizational and systems planning, evaluation, and selection; development or evaluation of marketing programs or implementation; mergers, acquisitions, and organizational structure; staff augmentation and human resources policies and practices; and brand management.”
• “Russian person” is “an individual who is a citizen or national of the Russian Federation, or an entity organized under the laws of the Russian Federation.”

Designation of Russian Accounting, Trust and Corporate Formation, and Management Consulting Services Sectors under E.O. 14024

In tandem with the above new prohibitions, OFAC also on May 8 issued a Determination Pursuant to Section 1(a)(i) of Executive Order 14024, which authorizes sanctions against any person that the Secretary of the Treasury, in consultation with the Secretary of State, “determines operates or has operated in” “the accounting, trust and corporate formation services, and management consulting sectors of the Russian Federation economy.” These sectors are defined in the same manner as in OFAC FAQ 1034, as described above. See OFAC FAQ 1038.

The designation of the accounting, trust and corporate formation, and management consulting services sectors follows the earlier designation under E.O. 14024 of the aerospace, electronics, marine, financial services, technology, and defense and related materiel sectors of the Russian economy. While persons operating in, or who have operated in, these sectors are not automatically subject to U.S. sanctions, OFAC has the authority under Section 1(a) of E.O. 14024 to impose property-blocking sanctions on specific persons who are determined to operate or have operated in these sectors. See OFAC FAQ 1037.

The designation of the accounting, trust and corporate formation, and management consulting services sectors took effect on May 8.

New SDN Designations

OFAC also announced on May 8 the addition of a number of Russian companies, individuals, and vessels to the SDN List. U.S. persons are broadly prohibited, except as authorized by OFAC, from transacting or dealing with SDNs and entities that SDNs own 50% or more, directly or indirectly, individually or in the aggregate with other SDNs. In addition, the property of SDNs and entities that they own 50% or more must be blocked, or frozen, when it comes into the United States or the possession or control of a U.S. person.

Among the most significant of these new designations is the addition of three Russian state-controlled television channels: JSC Channel One Russia, Television Station Russia-1, and JSC NTV Broadcasting Company.

These new additions to the SDN List also include Moscow Industrial Bank and ten of its subsidiaries; weapons manufacturer LLC Promtekhnologiya; seven shipping companies and their associated vessels; and board members of prominent Russian banks Sberbank and Gazprombank. Both banks are themselves subject to various U.S. sanctions, as described in our client alerts of February 25 and April 11. Sberbank–but not Gazprombank–was previously designated as an SDN on April 6, 2022, and also is subject to correspondent and payable-through account (“CAPTA”) sanctions pursuant to Directive 2 under E.O. 14024. Both Sberbank and Gazprombank are also subject to debt and equity restrictions pursuant to Directive 3 under E.O. 14024 and Directive 1 under E.O. 13662.

New General Licenses and Revisions to Previous General Licenses

On May 8, OFAC issued the following general licenses:

• General License No. 25A replaces General License 25 to explicitly exclude the newly designated JSC Channel One Russia, Television Station Russia-1, and JSC NTV Broadcasting Company from the authorization.

  Specifically, General License 25A authorizes transactions ordinarily incident and necessary to the receipt or transmission of telecommunications involving the Russian Federation that are otherwise prohibited by the Russian Harmful Foreign Activities Sanctions Regulations (“RuHSR”). Subject to compliance with applicable export controls, it also authorizes the export, reexport, sale, or supply, directly or indirectly, from the United States or by U.S. persons, wherever located, to Russia of services, software, hardware, or technology incident to the exchange of communications over the internet, such as instant messaging, videoconferencing, chat and email, social networking, sharing of photos, movies, and documents, web browsing, blogging, web hosting, and domain name registration services, that would otherwise be prohibited by the RuHSR.

• General License 33 authorizes, through 12:01 a.m. EDT on June 7, 2022, U.S. persons to engage in all transactions ordinarily incident and necessary to the wind down of operations, contracts, or other agreements involving one or more of JSC Channel One Russia, JSC NTV Broadcasting Company, Television Station Russia-1, or any entity in which one or more of those entities owns, directly or indirectly, individually or in the aggregate, a 50% or greater interest, if those agreements were in effect prior to May 8, 2022.
• General License 34 authorizes, through 12:01 a.m. EDT on July 7, 2022, transactions ordinarily incident and necessary to the wind down of the export, reexport, sale, or supply, directly or indirectly, from the United States or by a U.S. person of accounting, trust and corporate formation, or management consulting services to any person in Russia otherwise prohibited by E.O. 14071.
• General License 35 authorizes, through 12:01 a.m. EDT on August 20, 2022, transactions ordinarily incident and necessary to the export, reexport, sale, or supply, directly or indirectly, from the United States or by a U.S. person of credit rating or auditing services to any person in Russia otherwise prohibited by E.O. 14071. OFAC FAQ 1035 defines “credit rating services” to mean “services related to assessments of a borrower’s ability to meet financial commitments, including analysis of general creditworthiness or with respect to a specific debt or financial obligation.” The FAQ defines “auditing services” to mean “examination or inspection of business records by an auditor, including checking and verifying accounts, statements, or other representation of the financial position or regulatory compliance of the auditee.”

OFAC has issued several other general licenses since our last client alert of April 11, as well:

• General License 7A authorizes all transactions ordinarily incident and necessary to the receipt of, and payment of charges for, services rendered in connection with overflights of Russia or emergency landings in Russia by aircraft registered in the United States or owned or controlled by, or chartered to, U.S. persons, as well as such transactions ordinarily incident and necessary to provide air ambulance and related medical services to individuals in Russia that are otherwise prohibited by the RuHSR.
• General License 27 authorizes all transactions ordinarily incident and necessary to certain activities by nongovernmental organizations that are otherwise prohibited by the RuHSR, provided that the only involvement of blocked persons is the processing of funds by financial institutions blocked pursuant to E.O. 14024.

  These activities include: (1) activities to support humanitarian projects to meet basic human needs in Ukraine or Russia; (2) activities to support democracy building in Ukraine or Russia; (3) activities to support education in Ukraine or Russia; (4) activities to support non-commercial development projects directly benefiting the people of Ukraine or Russia, including health, food security, water, or sanitation; and (5) activities to support environmental and natural resource protection in Ukraine or Russia.

• General License 28 authorizes, through 12:01 a.m. EDT on October 20, 2022, transactions involving Transkapitalbank or any entity in which it owns, directly or indirectly, a 50 percent or greater interest, that are ultimately destined for or originating from Afghanistan and otherwise prohibited by E.O. 14024. It also authorizes U.S. financial institutions to operate correspondent accounts on behalf of Transkapitalbank and its subsidiaries to effect such authorized transactions.
• General License 31 authorizes certain transactions in connection with patent, trademark, copyright, or other forms of intellectual property protection in the United States or Russia that would otherwise be prohibited by the RuHSR.

  These transactions include: (1) the filing and prosecution of any application to obtain a patent, trademark, copyright, or other form of intellectual property protection; (2) the receipt of a patent, trademark, copyright, or other form of intellectual property protection; (3) the renewal or maintenance of a patent, trademark, copyright, or other form of intellectual property protection; and (4) the filing and prosecution of any opposition or infringement proceeding with respect to a patent, trademark, copyright, or other form of intellectual property protection, or the entrance of a defense to any such proceeding.

• A number of additional general licenses authorize the wind down of certain transactions involving certain sanctioned entities, including GAZ Group (General License 15L); SB Sberbank Kazakhstan, Sberbank Europe AG, and Sberbank (Switzerland) AG (General License 26A); Transkapitalbank (General License 29); Gazprom Germania GmbH (General License 30); and Amsterdam Trade Bank NV (General License 32). General License 13R further authorizes transactions necessary to the wind down of certain transactions necessary to divesting or transferring the debt or equity of GAZ Group.

Imposition of New Export Controls Targeting the Russian Industrial and Nuclear Sectors

Also on May 8, the White House announced that it intends to impose additional restrictions on Russia’s “industrial sector, including a broad range of inputs and products including wood products, industrial engines, boilers, motors, fans, and ventilation equipment, bulldozers, and many other items with industrial and commercial applications.” It also indicated that the NRC will suspend general licenses for exports of source material, special nuclear material, byproduct material, and deuterium to Russia.

BIS issued a new rule implementing the non-nuclear aspects of these measures on May 9, 2022. The new rule further expands the scope of the Russian industry sector sanctions codified at EAR § 746.5 by adding additional Harmonized Tariff Schedule (“HTS”) codes and Schedule B numbers to Supplement No. 4 to EAR Part 746. As a result, a BIS license is required for all exports, reexports, and transfers (in-country) to or within Russia of the designated items if they are subject to the EAR. The several hundred new items include a wide range of industrial parts and materials, such as wood and timber products; metalworking, glassworking, and woodworking tools; industrial motors and generators; electrical equipment; industrial molds, valves, bearings, and seals; construction vehicles; railway and railcar components; truck engines and trailers; welding equipment; refrigeration equipment; paper and textile machinery; and domestic cleaning products, such as irons and laundry machine parts.

The rule also provides that applications for licenses to export, reexport, and transfer such items are subject to review under a policy of denial except for those items necessary for health, safety, or humanitarian reasons.

EU Sanctions and Export Controls Developments

Proposed Sixth EU Sanctions Package

On May 4, European Commission President Ursula von der Leyen outlined in a speech to the European Parliament a potential sixth package of EU sanctions targeting Russia (following earlier EU sanctions measures, which we have outlined in our prior alerts). Measures announced as part of this package include:

• Banning the import of Russian oil, with separate phase-out periods for imports of crude oil and refined oil products;
• Banning the provision of certain professional services to Russia (including services provided by accountants, consultants, and “spin doctors”);
• Banning Sberbank and two further “major” Russian banks from accessing the SWIFT financial messaging service;
• Prohibiting Russian state-owned broadcasters from distributing content in the EU (including via the internet and through smartphones); and
• Imposing asset-freezing sanctions on additional Russian persons and entities.

The underlying regulations relating to these proposed measures have not yet been published.

Implementation of the foregoing measures requires the approval of the 27 EU Member States. It has been reported that some Member States are seeking to secure exemptions from the ban on the import of Russian oil for an extended period beyond the end of 2022 in order to allow for a transition to alternative energy sources, and negotiations between Member States with respect to the sanctions package remain ongoing.

Removal of Russia as a Destination for EU General Export Authorizations under the EU Dual Use Regulation

Regulation (EU) 2022/699 amended the EU Dual Use Regulation (Regulation (EU) 2021/821) to remove Russia as a destination for the three general authorizations which previously permitted exports to Russia. These general authorizations had previously allowed the reexport of items after repair or replacement in the EU, the export of items for fairs and exhibitions, and the export of telecommunications equipment. The amendment came into effect on May 5.

UK Sanctions and Export Controls Developments

Restrictions on Internet-Related Services

The Russia (Sanctions) (EU Exit) (Amendment) (No. 9) Regulations 2022 amended the Russia (Sanctions) (EU Exit) Regulations 2019 (the “UK-Russia Regulations”) to introduce new restrictions targeting social media providers, internet access services (including broadband providers), and application stores (including on smartphones). These measures came into force on April 29.

The new restrictions require:

• Social media services and video sharing platforms to take reasonable steps to prevent content generated, uploaded, or shared by a designated person from being encountered by a UK-based user;
• Internet access service providers (including broadband) to take reasonable steps to prevent UK-based users from accessing websites provided by a designated person; and
• Application stores to take reasonable steps to prevent UK-based users from downloading or otherwise accessing an application provided by a designated person.

The Secretary of State will have the authority to designate persons to whom these new measures will apply. The amendment provides further that OFCOM, the UK’s communications regulator, will have the power to impose civil monetary penalties of up to £1,000,000 for breaches of these provisions.

The accompanying Explanatory Memorandum suggests that internet providers will likely need to engage in URL blocking with respect to websites belonging to sanctioned persons.

Trade Restrictions on Luxury Goods and Iron and Steel Products

The Russia (Sanctions) (EU Exit) (Amendment) (No. 8) Regulations 2022 introduced to the UK-Russia Regulations:

• A prohibition on the export, supply, delivery, or making available luxury goods to Russia, a person connected with Russia, or for use in Russia (the items to which these measures apply are listed in Schedule 3A);
• Prohibitions on:
  • lthe import or acquisition of iron and steel products consigned from, or originating in, Russia or located in Russia;
  • lthe supply of iron and steel products (listed in Schedule 3B) from Russia to a third country; and
• A prohibition on the export, supply, delivery, or making available of oil refining and quantum computing goods and technology to Russia, a person connected with Russia, or for use in Russia (“oil refining goods and technology” items are listed in Schedule 2D and “quantum computing goods and technology” items are listed in Schedule 2E). This restriction also includes a prohibition on related technical assistance, financial services, funding, and brokering services.

These restrictions came into force on April 14.

Further Designations under UK-Russia Sanctions Regulations

The UK has added to the UK Sanctions List a number of further persons and entities, including:

• Evraz plc, an international steel manufacturer owned by certain Russian persons;
• Individuals and entities connected to Russian state-owned media organizations;
• Further individuals and entities connected to the Russian military; and
• Additional Russian business persons.

The UK has also continued the process of moving many of the designations made under the “urgent” procedure introduced by the Economic Crime Act in March 2022 (as outlined in our previous alert) to the standard procedure designation. In practice, this means that the stated reasons for the designation of such persons within the UK Sanctions List are amended to provide specific reasons beyond reliance upon that person’s designation under a similar regime in another jurisdiction.

Announcement of Further Forthcoming UK Sanctions Measures

The UK Government has also announced a number of further sanctions measures targeting Russia which have not yet been implemented or brought into force with legislation:

• An announcement by the UK Department for International Trade on May 8 of a new package of import and export sanctions measures, which would include:
  • new import tariffs on platinum and palladium and a wide range of specified chemical products; and
  • export bans on "£250 million worth of goods in sectors of the Russian economy most dependent on UK goods," targeting chemicals, plastics, rubber, and machinery.
• An announcement by the UK Foreign, Commonwealth & Development Office on May 4 of a prohibition on UK professional services companies in the accountancy, management consultancy, and public relations sectors providing services to Russia.
• An announcement by the UK Department of International Trade on April 25 of an export ban on products and technology that Russia could use for the repression of the Ukrainian people, including interception and monitoring equipment.
• An announcement by the UK Department of International Trade on April 21 of import bans on silver, wood products, and high-end products, such as caviar, and increased tariffs on products from Russia and Belarus, including diamonds and rubber.
• An announcement by UK HM Revenue & Customs (“HMRC”) on April 19 of its intention to revoke the status of the Moscow Stock Exchange (“MOEX”) as a recognized stock exchange, which is a classification given by HMRC for tax purposes that makes securities traded on such exchanges eligible for certain tax treatments and reliefs. This restriction will apply to future investments and not to existing investments but has not yet been implemented.

As with previous announcements of prospective UK sanctions measures over previous months, legislation is required to bring these measures into effect, which is expected to follow in due course though the timing of those actions is unclear at present.

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We are closely monitoring developments concerning the U.S., UK, and EU sanctions and export controls 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 Russia sanctions and export controls. 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.