Recent Developments in U.S. and EU Sanctions and Export Controls Against Russia

Recent Developments in U.S. and EU Sanctions and Export Controls Against Russia

July 25, 2022, Covington Alert

In recent weeks, as Russia’s war against Ukraine has continued to cause turmoil around the world, the U.S. government has implemented additional sanctions and export control restrictions targeting Russia and has continued to provide guidance on previously imposed sanctions and export control restrictions.

In particular, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) has recently issued a number of new and revised general licenses, including issuing on July 14, 2022 an expanded general license and accompanying guidance related to certain agricultural and medical activities involving Russia. OFAC also announced on June 28, 2022, significant new property-blocking sanctions targeting nearly 100 Russian individuals and entities, notably including Russia’s state-owned military-industrial conglomerate, State Corporation Rostec. At the same time, the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) has continued to add entities from a number of countries to the Entity List for supporting Russia’s war effort, thereby broadly restricting their access to items subject to the Export Administration Regulations (“EAR”).

While U.S. trade control agencies continue to target Russia under existing authorities, we are also tracking the movement in Congress of key legislation that could further increase risk for companies doing business in Russia. This legislation includes an amendment to the version of the National Defense Authorization Act for Fiscal Year 2023 that passed the U.S. House of Representatives earlier this month, the effect of which would be to prohibit contracting by the U.S. government with companies that continue to do business in Russia.

Separately, on July 21, 2022, the European Union introduced a seventh package of sanctions measures targeting Russia, which focus primarily on amending and expanding existing restrictions in order to strengthen and align EU sanctions more closely with those of its allies. Significant measures introduced as part of the package include the introduction of an import ban on Russian gold and the designation under EU asset freezing sanctions of Sberbank.

This alert summarizes these and other new Russia-related developments. Our separate alert of July 21, 2022, summarizes significant new sanctions measures relating to Russia implemented by the UK government. 

Expanded General License Relating to Agriculture, Medicine, and Medical Devices

On July 14, 2022, OFAC issued General License 6B, which replaces General License 6A and  expands in certain respects the scope of authorized transactions involving agricultural and medical items and related activities that would otherwise be prohibited by the Russian Harmful Foreign Activities Sanctions Regulations (“RuHSR”) administered by OFAC.

The prior General License 6A authorized transactions otherwise prohibited by the RuHSR that were “ordinarily incident and necessary to” the exportation or reexportation of agricultural commodities, medicine, medical devices, replacement parts and components for medical devices, or software updates for medical devices to, from, or transiting Russia. It also authorized transactions ordinarily incident and necessary to the prevention, diagnosis, and treatment of COVID-19, as well as ongoing clinical trials and other medical research activities that had been in effect prior to March 24, 2022.

The revised General License 6B appears to expand the scope of authorized transactions, permitting transactions otherwise prohibited by the RuHSR that are “related to” (1) the production, manufacturing, sale, or transport of agricultural commodities, agricultural equipment, medicine, medical devices, replacement parts and components for medical devices, or software updates for medical devices; (2) the prevention, diagnosis, and treatment of COVID-19; and (3) ongoing clinical trials and other medical research activities.    

The shift in language from “transactions . . . ordinarily incident and necessary to” to “transactions . . . related to,” as well as the expansion of covered activities beyond the “exportation or reexportation” of agricultural and medical items, signals OFAC’s intention to cover a broad scope of agricultural and medical activities in Russia with General License 6B. In addition, this expanded scope is reflected in the inclusion in the authorization of activities related to agricultural equipment (which was not covered in General License 6A) and the removal of the requirement that authorized activities with respect to clinical trials and other medical research relate to such activities as were in effect prior to March 24, 2022. As explained by OFAC in a July 14 “Food Security Fact Sheet,” this “broad general license” reflects that “[a]gricultural and medical trade are not targets of the sanctions imposed by the United States on Russia for its atrocities in Ukraine.” In this regard, some agricultural and medical activities in Russia simply would not be prohibited under U.S. sanctions, and thus would not require reliance on General License 6B. However, the general license provides authorization to engage in the authorized categories of activities even if they would be otherwise prohibited by the RuHSR, such as because the activities involve a blocked party with whom transactions are prohibited by the RuHSR.

Still, General License 6B contains a number of restrictions that limit its scope. It specifically excludes from the scope of its authorization the opening or maintaining of correspondent or payable-through accounts for or on behalf of entities subject to Directive 2 under Executive Order 14024; transactions involving debiting U.S. accounts of the Russian Federation’s Central Bank, National Wealth Fund, or Ministry of Finance; and transactions prohibited by Executive Orders 14066, 14068, and 14071. While prior General License 6A also did not authorize many of these same transactions, it had not expressly stated that it did not authorize transactions prohibited by Executive Order 14071.  

Accordingly, and potentially in contrast with General License 6A, General License 6B does not appear to authorize “new investment” by U.S. persons in Russia prohibited by Executive Order 14071, even to the extent such new investment is “related to” covered activities. Likewise, General License 6B does not appear on its face to overcome the prohibition imposed pursuant to Executive Order 14071 and a subsequent Determination issued by OFAC on U.S. persons providing accounting, trust and corporate formation, and management consulting services to persons located in Russia, even where such services are provided in connection with otherwise-authorized transactions involving agricultural or medical items. (Note, however, that this prohibition on accounting, trust and corporate formation, and management consulting services 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.) Given OFAC’s stated intent of issuing a “broad general license,” it remains to be seen whether these restrictions were intentional and whether OFAC will address such transactions in future guidance or in a further amendment to the general license. Our client alert of June 21, 2022, discusses in more detail the parameters and scope of these new investment and services prohibitions.

Food Security Fact Sheet

As noted, on July 14, 2022, OFAC published a Food Security Fact Sheet: Russia Sanctions and Agricultural Trade (the “Fact Sheet”). The Fact Sheet emphasizes the broad scope of authorized transactions under General License 6B and affirms that U.S. sanctions do not prohibit the export of agricultural commodities (including fertilizers), medicine, or medical devices from, to, transiting, or otherwise related to Russia. It also clarifies that U.S. sanctions do not prohibit U.S. financial institutions from processing transactions related to such activities, including those authorized by General License 6B, nor do they prohibit the provision of insurance or reinsurance services related to the transportation or shipment of agricultural and medical items to Russia. Moreover, the Fact Sheet confirms that the United States has not imposed general sanctions on the export of agricultural equipment and spare parts to Russia, though BIS maintains separate export control restrictions that exporters of any such items would need to separately consider.

The Fact Sheet also clarifies that non-U.S. persons are not exposed to secondary sanctions risk if they import items subject to Executive Order 14068 (prohibiting the import into the United States of, inter alia, Russian-origin fish, seafood, and preparations thereof, alcoholic beverages, and non-industrial diamonds) into non-U.S. jurisdictions, provided the import does not involve a sanctioned person or an otherwise prohibited transaction. Moreover, non-U.S. financial institutions may engage in or facilitate transactions that would be authorized for U.S. persons under General License 6B without exposing themselves to secondary sanctions risk.

The Fact Sheet also addresses the scope of permissible transactions with JSC Russian Agricultural Bank and the Port of Novorossiysk, noting that neither is subject to U.S. property-blocking sanctions through listing on OFAC’s List of Specially Designated Nationals and Blocked Persons (the “SDN List”), but cautioning that JSC Russian Agricultural Bank is still subject to certain more targeted debt and equity restrictions pursuant to Directive 3 under Executive Order 14024 and Directive 1 under Executive Order 13662.

New SDN List Designations

On June 28, 2022, OFAC designated 70 entities and 29 individuals to the SDN List pursuant to Executive Order 14024 and Executive Order 14065.

Significantly, these new designations included State Corporation Rostec, a state-owned military-industrial conglomerate with holdings in the automotive, defense, aviation, and metals sectors. Certain Rostec holdings already were designated to the SDN List, and Rostec itself was previously designated for more targeted restrictions on dealings in certain of its new debt pursuant to Directive 3 under Executive Order 13662 following Russia’s 2014 invasion of Ukraine. Rostec also appears on the State Department’s “Section 231 List” of entities active in the Russian defense/intelligence sectors; any persons knowingly engaging in significant transactions with such entities are potentially exposed to U.S. sanctions.

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, and such blocking action must be reported to OFAC. “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 to sanctions if they engage in certain transactions with Russian SDNs and entities owned 50% or more by such SDNs.

Other New and Revised General Licenses

In addition to General License 6B, OFAC has issued and revised a number of general licenses beyond those covered in our previous client alerts, including most recently our client alert of June 6, 2022. The licenses are subject to various terms, conditions and exceptions, and do not authorize activities that are otherwise prohibited by U.S. sanctions laws and regulations (beyond the Russia-related sanctions). Notable recent and recently amended general licenses are as follows:

• General License 8C replaces General License 8B and extends to 12:01 a.m. EST on December 5, 2022, the authorization for certain transactions related to energy involving the blocked banks VEB, Bank Otkritie, Sovcombank, Sberbank, VTB, or Alfa-Bank; any entity in which one or more of these blocked entities own, directly or indirectly, a 50% or greater interest; or the Central Bank of the Russian Federation.
• General License 25C replaces an authorization for certain transactions related to telecommunications and certain internet-based communications and excludes from the authorization’s scope transactions involving an expanded list of blocked entities, including JSC Channel One Russia, Television Station Russia-1, JSC NTV Broadcasting Company, Limited Liability Company Algoritm, New Eastern Outlook, or Oriental Review.
• General License 30A extends to 12:01 a.m. EST on December 16, 2022, the authorization for the wind-down of certain transactions involving the blocked entity SEFE Securing Energy for Europe GmbH (f/k/a Gazprom Germania GmbH).
• General License 39 authorizes the wind-down of certain transactions involving State Corporation Rostec (or any entity blocked not earlier than June 28, 2022, in which State Corporation Rostec owns, directly or indirectly, a 50% or greater interest) through 12:01 a.m. EDT on August 11, 2022. As discussed above, OFAC recently designated Rostec for property-blocking sanctions on the SDN List.
• General License 40 authorizes transactions ordinarily incident and necessary to the provision, exportation, or reexportation of goods, technology, or services to ensure the safety of civil aviation involving 17 blocked entities identified in the Annex to General License 40, as well as any entities in which the identified blocked entities own, directly or indirectly, individually or in the aggregate, a 50% or greater interest. The general license is limited to transactions involving aircraft registered solely outside Russia and operated solely for civil aviation purposes, among other restrictions.
• General License 41 authorizes certain transactions related to agricultural equipment involving the blocked entities Nefaz Publicly Traded Company or PJSC Tutaev Motor Plant, as well as any entities in which the identified blocked entities own, directly or indirectly, individually or in the aggregate, a 50% or greater interest, through 12:01 a.m. EST on December 22, 2022.
• General License 43 authorizes, through 12:01 a.m. EDT on August 31, 2022, certain transactions ordinarily incident and necessary to the divestment or transfer of debt or equity of the blocked entities PJSC Severstal or Nord Gold PLC (or any entity in which Severstal or Nord Gold owns, directly or indirectly, individually or in the aggregate, a 50% or greater interest) purchased prior to June 2, 2022, or that are ordinarily incident and necessary to the wind down of certain derivative contracts entered into prior to June 2, 2022, and involving these entities.
• General License 44 authorizes certain transactions ordinarily incident and necessary to the provision from the United States, or by a U.S. person, of tax preparation or filing services to any individual who is a U.S. person located in Russia.
• General License 45 authorizes, through 12:01 a.m. EDT on October 20, 2022, transactions ordinarily incident and necessary to the wind down of financial contracts or other agreements entered into on or before June 6, 2022, and that involve, or are linked to, debt or equity issued by a Russian entity that are otherwise prohibited by Section 1(a)(i) of Executive Order 14071 (prohibiting “new investment” in Russia by U.S. persons).
• General License 46 authorizes certain transactions related to an auction process announced by the EMEA Credit Derivatives Determination Committee to settle credit derivative transactions with a reference entity of “the Russian Federation” that are otherwise prohibited by Section 1(a)(i) of Executive Order 14071.

Ban on Imports of Russian-Origin Gold

On June 28, 2022, OFAC published a Determination that the prohibitions of Section 1(a)(i) of Executive Order 14068 apply to gold of Russian origin. This effectively prohibits the import into the United States of Russian-origin gold unless licensed or otherwise authorized by OFAC, though it does not apply to Russian-origin gold that was located outside of Russia prior to June 28, 2022.

New U.S. Export Controls Developments

New Entity List Designations

On June 28, 2022, the Commerce Department’s BIS issued a rule designating six parties from China, Lithuania, Russia, the United Kingdom, Uzbekistan, and Vietnam to the Entity List for providing support to Russia’s military and/or defense industrial base, as part of a broader group of 36 entities added to the Entity List. Specifically, BIS determined these entities had previously supplied items to Russian entities of concern and continued to contract to supply Russian parties after Russia’s invasion of Ukraine. BIS also issued a press release publicly identifying two Chinese entities previously added to the Entity List that BIS has since determined have engaged in similar conduct in support of Russia’s military and/or defense industrial base.

The Entity List identifies parties subject to additional export control licensing requirements. In particular, it is prohibited, absent a BIS license, for both U.S. persons and non-U.S. persons 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. With respect to the six entities designated for providing support to Russia’s military and/or defense industrial base, license applications for such exports, reexports, and transfers are subject to a policy of denial in most circumstances. No license exceptions are available for exports, reexports, or transfers to or involving these entities.

FinCEN and BIS Joint Alert

Also on June 28, 2022, BIS and the Financial Crimes Enforcement Network (“FinCEN”) issued a joint alert advising financial institutions and others to be vigilant against efforts to evade export controls imposed on Russia and Belarus following Russia’s invasion of Ukraine. The alert summarizes recent BIS actions targeting Russia, as well as a number of “commodities of concern” due to their potential diversion to and end use by Russia or Belarus to further their military or defense capabilities. Such items include aircraft parts and equipment, GPS systems, oil field equipment, and sonar systems, among others. The alert further identifies 22 transactional and behavioral “red flags” that may be relevant to financial institutions and others in determining whether certain transactions are intended to evade U.S. export controls. The alert additionally reminds financial institutions of their obligation under the Bank Secrecy Act to file suspicious activity reports (“SARs”) if they know, suspect, or have reason to suspect a transaction involves, inter alia, the use of the financial institution to facilitate criminal activity, including sanctions or export control evasion. The alert also states that financial institutions may wish to consider reporting suspected export control evasion activity directly to BIS.  

New U.S. Legislative Developments

As previously highlighted in our client alert of April 11, 2022, numerous legislative proposals have been put forward by various members of Congress to strengthen U.S. sanctions on Russia. One such proposal was H.R. 7185, the “Federal Contracting for Peace and Security Act,” sponsored by Rep. Carolyn Maloney (D-NY), which aimed to prohibit contracting by the U.S. government with companies that continue to do business in Russia.

On July 13, 2022, a version of the Federal Contracting for Peace and Security Act was offered as an amendment to the National Defense Authorization Act for Fiscal Year 2023 (“NDAA”) by Rep. Maloney (the “Maloney Amendment”). The Maloney Amendment was part of a larger package of amendments to the NDAA that was adopted by a vote of 330-99, and the NDAA as amended passed the House of Representatives on July 14, 2022, by a vote of 329-101.

Based on the text of the amendment submitted to the House Rules Committee, the Maloney Amendment prohibits, during the “covered period,” all executive agencies from entering into, extending, or renewing a “covered contract” with a company that conducts “business operations” in territory internationally recognized as the Russian Federation.

The Maloney Amendment defines “business operations” to include “engaging in commerce in any form, including acquiring, developing, selling, leasing, or operating equipment, facilities, personnel, products, services, personal property, real property, or any other apparatus of business or commerce.” A “covered contract” is considered “a prime contract entered into by an executive agency with a company conducting business operations in territory internationally recognized as the Russian Federation during the covered period.” In turn, the “covered period” begins 90 days after the enactment of the NDAA and ends either on a date determined by the Secretary of State by which Russia has taken steps “to restore the safety, sovereignty, and condition of” Ukraine, or ten years after the date of enactment, whichever is sooner. The Maloney Amendment contains several exceptions and exemptions, including exceptions for “humanitarian” activities, actions taken for the benefit of Ukraine, and actions taken in order to cease conducting business in Russia. The Office of Management and Budget, in consultation with the General Services Administration and the Department of Defense, is directed by the Maloney Amendment to issue regulations within 60 days of the date of enactment prescribing how executive agencies are to implement the restrictions of the Maloney Amendment.

The U.S. Senate is expected to bring its version of the NDAA to the floor for consideration later this year—most likely in September 2022. Presently, there is no comparable counterpart to the Maloney Amendment in the Senate version of the NDAA, and it remains to be seen whether similar language will be offered as an amendment to the bill on the Senate floor. In any event, inclusion of the Maloney Amendment in the House-passed NDAA at a minimum guarantees that the provision will be an issue to be addressed in the House-Senate conference committee on the NDAA, which will take place following Senate passage of its version of the bill. The conference committee may decide to drop the provision, retain it, or retain it with revisions. There is little doubt that the NDAA will be enacted into law before the end of this year.  

EU Introduces Seventh Sanctions Package

On July 21, 2022, the EU introduced a seventh package of sanctions measures relating to Russia, described as a “maintenance and alignment” package intended to “tighten existing economic sanctions” and “strengthen their effectiveness.” The measures that comprise the new sanctions package are set out across three EU Regulations, which amend existing Council Regulations 833/2014 and 269/2014.

The measures included in the package:

• Introduce a new prohibition on the purchase, import, or transfer of Russian-origin gold (including certain gold jewelry) where such gold originates in, or has been exported from, Russia;
• Expand the list of items subject to export controls and associated services restrictions as listed at Annex VII to Regulation 833/2014;
• Extend existing bans on port access for Russian ships to include locks;
• Extend the existing ban on accepting deposits from Russian persons to include deposits from legal persons, entities, and other bodies established in third countries but majority-owned by Russian nationals or natural persons residing in Russia;
• Introduce a requirement for the acceptance of deposits from Russian-affiliated parties for purposes of non-prohibited cross-border trade to be subject to prior authorization by Member State competent authorities; and
• Amend existing trade restrictions on aviation goods and technology to allow related provision of technical assistance to Russia as required to safeguard technical industrial standard-setting work of the International Civil Aviation Organisation.

The package also introduces various other amendments to the exemption and licensing provisions of the regulations, some of which create new or broaden existing exemptions or licensing standards, and others that narrow pre-existing provisions. Among those changes are included the following:

• Pre-existing exemptions for cyber-security and information security services associated with restricted items have been narrowed and subject to prior licensing requirements;
• Exemptions and licensing provisions for humanitarian and medical-related services have been extended;
• A derogation from asset-freezing restrictions has been introduced allowing interested parties to apply for licenses to authorize the winding down of transactions relating to Sberbank; and
• A pre-existing wind-down authorization for dealings with sanctioned state-owned entities (set forth in Article 5aa and Annex XIX to Regulation (EU) 833/2014) has been extended to December 31, 2022.

The package also includes a further round of asset-freezing designations, most notably including the major Russian bank, Sberbank.

Finally, the package amends the reporting requirements on designated persons to require those with assets located in Member States to report such assets to competent authorities and to comply with the verification of any such reporting.

*           *           *

We are closely monitoring developments concerning the U.S., United Kingdom, and European Union sanctions and export controls targeting 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 is well-placed to provide support in connection with the evolving Russia sanctions and export controls.

Our trade controls lawyers also work closely with Covington's Global Public Policy team which consists of over 120 former diplomats and policymakers in the United States, Europe, the Middle East, Latin America, Africa, and Asia. Many of the members of the Public Policy team have had substantial government experience in sanctions and export controls matters, and regularly advise our clients on emerging trade controls policy matters and related engagements with government stakeholders.

If you have any questions concerning the material discussed in this client alert, please contact the members of our International Trade Controls team.