EU and U.S. Impose Additional Sanctions and Export Controls Against Russia and Belarus

EU and U.S. Impose Additional Sanctions and Export Controls Against Russia and Belarus

June 6, 2022, Covington Alert

On June 3, 2022, the European Council adopted a sixth package of economic and individual sanctions relating to both Russia and Belarus. These new measures – which had been anticipated for over a month and required substantial negotiation among the Member States to bring into effect – include additional asset-freezing designations, import restrictions on crude oil and certain petroleum products from Russia into the EU, specialized payment messaging bans on additional Russian and Belarusian banks, export restrictions, and restrictions on the provision of certain types of consulting services. 

Separately, last week, the U.S. Commerce Department made certain revisions to the U.S. export control restrictions targeting Russia and Belarus and designated 71 additional Russian and Belarussian entities to the Entity List to cut off their access to items subject to U.S. export controls. Additionally, in late May, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) extended the scope of General License 13A, which authorizes tax-related payments to, and other specified dealings with, the Russian Central Bank, Ministry of Finance, and National Wealth Fund. OFAC also designated a number of additional parties for property-blocking sanctions. 

New Russia Sanctions

On June 3, 2022, the EU adopted additional Russia sanctions measures, the key provisions of which are summarized below.

Additional Asset-Freezing Designations

Council Implementing Regulation (EU) 2022/878 adds 65 individuals and 18 entities to the EU asset-freezing list. The list of newly designated individuals includes politicians, public figures, businesspersons, and family members of previously sanctioned individuals.

Additional Sectoral Sanctions

Council Regulation (EU) 2022/879 introduces various amendments to Council Regulation (EU) No 833/2014, which is the principal EU measure imposing sectoral export and services sanctions in relation to Russia. Those measures include (among other measures) the following:

• Oil Import Restrictions: The regulation prohibits the purchase, import, or transfer of crude oil and certain petroleum products as listed in Annex XXV from Russia into the EU. Those restrictions are subject to a number of exemptions and licensing provisions, some of which are ostensibly broad in scope. The regulation furthermore restricts the provision of technical assistance, brokering services, or financing or financial assistance related to the transport to third countries (including ship-to-ship transfers) of the listed crude oil and petroleum products (again, subject to certain exemptions).
• Sanctions on Russian State-Owned Entities: The regulation introduces new exemptions to prohibitions, set forth in Article 5aa of the Regulation, against engaging in transactions with certain sanctioned Russian state-owned entities. The exemptions relate to certain payments due from those entities, activities relating to the winding down of transactions involving those entities, and certain transactions involving electronic communication services. 
• Receipt of Deposits: The regulation amends certain of the exemptions on pre-existing prohibitions on the receipt of deposits from Russian persons.
• Securities Transactions: Pre-existing exemptions associated with the restrictions, set forth in Article 5f, against certain securities-related transactions involving Russian persons have been expanded to cover nationals of a Member State, of a country member of the European Economic Area or of Switzerland, or to natural persons having a temporary or permanent residence permit in a Member State, in a country member of the European Economic Area, or in Switzerland.
• Export Restrictions: The regulation adds 80 chemicals which can be used to produce chemical weapons to Regulation 833/2014, and amends pre-existing Annex VII restrictions relating to frequency changers and components thereof, and certain types of materials processing equipment. (Annex VII includes a list of goods and technology that the EU determined contribute to the technological enhancement of Russia’s defense and security sector.) The regulation furthermore expands the list of Russian persons and entities that are subject to enhanced export restrictions.
• Trust and Business Administration Services: The regulation extends grandparenting provisions, and creates licensing provisions, for pre-existing sanctions, set forth in Article 5m of Regulation 833/2014, associated with providing registered office, business or administrative address as well as management services to, a trust or any similar legal arrangement having a trustor or a beneficiary that is a Russian person. 
• Consulting Services: The regulation introduces a prohibition on the provision of accounting, auditing, including statutory audit, bookkeeping or tax consulting services, or business and management consulting or public relations services to the Russian government or entities established in Russia. These restrictions are subject to a number of exemptions. Most notably, it allows for the provision of the foregoing services that are intended for the exclusive use of Russian entities that are owned by, or solely or jointly controlled by, an entity which is incorporated or constituted under the law of an EU Member State.
• Specialized Financial Messaging Services Restrictions: The regulation extends the existing prohibition on the provision of specialized financial messaging services (SWIFT) to three additional Russian banks, namely Sberbank, Credit Bank of Moscow, and Russian Agricultural Bank. Those restrictions come into force on June 14, 2022.
• Russian Media-Related Sanctions: The list of Russian entities that are subject to the EU broadcasting restrictions has been extended and now includes Rossiya RTR/RTR Planeta, Rossiya 24 / Russia 24, and TV Centre International. Those restrictions prohibit EU persons from broadcasting content by the designated Russian parties. In addition to these new designations, the restrictions now also prohibit EU persons from advertising products or services in any content produced or broadcasted by the listed entities.
• Additional Import Restrictions: The regulation adds new goods and technology to Annex XXI, which contains a list of products that are subject to import restrictions.

New Belarus Sanctions

The EU-Belarus sanctions have been amended as follows:

• Council Implementing Regulation (EU) 2022/876 adds 12 individuals and 8 entities to the EU asset-freezing list. The new designations include high-ranking state officials, major Belarussian business entities, businessmen and their family members, members of the judicial branch, and other public figures. Among the newly designated entities are companies such as Belaruskali, Belarusian Potash Co., the state television and radio broadcasting company Belteleradio, as well as certain companies manufacturing tobacco and public transport vehicles.
• Council Regulation (EU) 2022/877 adds Belinvestbank (Belarusian Bank for Development and Reconstruction) to the list of banks that are targeted by the EU restrictions on the provision of specialized financial messaging services (SWIFT).

New U.S. Sanctions and Export Controls

Revisions and Clarifications to Export Controls Targeting Russia and Belarus

On June 2, 2022, the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) issued a new rule revising, clarifying, and correcting certain provisions of the Export Administration Regulations (“EAR”) that expanded in certain respects the broad restrictions on exports, reexports, and in-country transfers to and within Russia and Belarus. Notable changes include:

• The introduction of new license requirements for exports, reexports, and in-country transfers of food and medicine classified as EAR99 to military end users or for military end uses in Russia or Belarus. EAR99 is the catch-all U.S. export controls classification for non-sensitive commercial items, and most food and medicine products are classified as EAR99 if of U.S. origin or otherwise subject to U.S. jurisdiction under the EAR.  Previously, it was prohibited to export, reexport, or transfer (in-country) all other items subject to the EAR to military end users or for military end uses in Russia or Belarus absent a license from BIS, but there had been an exclusion for EAR99 food and medicine, which this new rule eliminates. BIS explained that it was taking this action because food and medicine may significantly contribute to the sustainment and reconstitution of Russian military forces engaged in combat in Ukraine. License applications for such exports, reexports, or transfers of EAR99 food and medicine will be reviewed by BIS on a case-by-case basis, with the exception of transactions involving Russia’s Foreign Intelligence Service (“SVR”), the Federal Security Service (“FSB”), and the Main Intelligence Directorate (“GRU”), which are subject to a licensing policy of denial. Licenses to supply any other items subject to the EAR to military end users or for military end uses in Russia or Belarus remain subject to a policy of denial.
• The rule also makes clear that the new license requirement does not apply to the export, reexport, or transfer (in-country) of food and medicine classified as EAR99 for the use and benefit of the Russian people, the people of the Crimea region of Ukraine, or the so-called Donetsk People's Republic (“DNR”) and Luhansk People's Republic (“LNR”) regions of Ukraine. It remains the case that such transactions do not generally require a license from BIS (and that such transactions involving U.S. persons are generally licensed by OFAC, subject to certain conditions).
• Clarification that License Exception TMP is available for the Crimea, LNR, and DNR regions of Ukraine for news media with respect to commodities necessary for news-gathering purposes (and software necessary to use such commodities).
• Revisions to clarify that a case-by-case review policy applies to applications for exports or reexports to or transfers of items subject to the EAR within the Crimea, LNR, and DNR regions of Ukraine that are (i) related to flight, maritime, civil nuclear safety, or humanitarian needs; (ii) support government space cooperation; (iii) support telecommunications infrastructure that are destined to entities that are owned only by U.S. companies and/or companies headquartered in certain allied countries identified in Country Groups A:5 and A:6 in Supp. No. 1 to EAR Part 740; and (iv) for government-to-government activities. This clarification aligns BIS licensing policy across Russia, Belarus, Crimea, LNR, and DNR.
• Updates to certain Schedule B numbers identifying items subject to licensing requirements as a result of the Russian Industry Sector Sanctions.

Public Release of BIS Charging Letters

Also included in BIS’ June 2, 2022 rule revising the EAR were changes to the public availability of documents in administrative enforcement proceedings to allow BIS to publicly release charging letters in enforcement actions upon filing with an Administrative Law Judge and prior to final administrative disposition. Pre-charging letters in BIS enforcement actions will continue to retain their current nonpublic status. BIS noted that this change is intended to more timely inform interested parties of ongoing enforcement efforts and to educate the exporting community on its controls.

The rule indicates that the change applies to enforcement cases involving Russia and Belarus, but is not limited to such cases.

New Entity List and SDN List Designations

Also on June 2, 2022, BIS issued a separate rule designating 71 additional Russian and Belarusian parties to the Entity List, which identifies parties subject to additional export controls licensing requirements. In particular, it is prohibited, absent a BIS license, to export, reexport, or transfer items subject to the EAR when these entities are a party to such a transaction. This includes non-sensitive commercial items classified as EAR99. License applications for such exports, reexports, and transfers are subject to a policy of denial in most circumstances. Sixty-six of those entities, including certain aircraft manufacturers, shipbuilders, and electronics manufacturers, are identified as military end users that are subject to the expansive Russia/Belarus military end user foreign direct product rule. Under this rule, which was adopted earlier this year and was discussed in our prior client alerts, it is prohibited absent a license from BIS (which would be subject to a policy of denial in most circumstances) to export, reexport, or transfer (in-country) any items produced outside of the United States that are the direct product of  technology or software subject to the EAR and identified on the EAR’s Commerce Control List, or produced by plants or equipment that are themselves the direct product of such technology or software of U.S. origin, if (1) such an entity listed on the Entity List is a party to the transaction, or (2) the foreign-produced item will be incorporated into, or used in the production or development of, any part, component, or equipment produced, purchased, or ordered by such an entity.

That same day, OFAC designated a number of additional companies, individuals, and vessels with ties to Russian President Vladimir Putin or other oligarchs to its List of Specially Designated Nationals and Blocked Persons (“SDN List”), including certain prominent yacht manufacturers and executives of previously designated Russian entities, as well as the prominent Russian steel and mining company PJSC Severstal and its principal owner Alexey Mordashov. U.S. persons are broadly prohibited, except as authorized by OFAC, from transacting or dealing with SDNs and entities that SDNs own 50 percent 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 percent or more must be blocked, or frozen, when it comes into the United States or the possession or control of a U.S. person. “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. Non-U.S. persons also may have exposure if they engage in certain transactions with Russian SDNs and entities owned 50 percent or more by such SDNs.

New General Licenses and Revisions to Previous General Licenses

OFAC has issued and revised a number of general licenses since our last client alert of May 13:

• General License 13A extends through September 29, 2022 the authorization to pay taxes, fees, or import duties, and purchase or receive permits, licenses, registrations, or certifications where such transactions involve the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation, and are ordinarily incident and necessary to the day-to-day operations in the Russian Federation of U.S. persons or non-U.S. entities owned or controlled by U.S. persons, subject to certain restrictions. The scope of the revised general license tracks the original general license, other than the clarification that the authorization extends to qualifying payments and transactions that are ordinarily incident and necessary to the day-to-day operations of entities owned or controlled, directly or indirectly, by U.S. persons, which was not previously addressed. 
• General License 25B replaces an authorization for certain transactions related to telecommunications and certain internet-based communications and excludes transactions involving Limited Liability Company Algoritm from the scope of the authorization (supplementing a previous exclusion for SDNs Joint Stock Company Channel One Russia, Joint Stock Company NTV Broadcasting Company, and Television Station Russia-1).
• General License 36 and General License 37 provide authorization for certain wind-down transactions involving newly designated SDNs PJSC Severstal and Nord Gold PLC through August 30, 2022 and June 30, 2022, respectively.
• General License 38 authorizes all transactions ordinarily incident and necessary to the processing of pension payments to U.S. persons that are prohibited by Executive Order 14024, provided that the only involvement of blocked persons is the processing of funds by financial institutions blocked pursuant to that executive order.

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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 and export controls.