In recent weeks, the U.S. Department of the Treasury has further expanded the scope of sanctions targeting Russia in response to its ongoing invasion of Ukraine and its purported annexation of the Kherson, Zaporizhzhya, Donetsk, and Luhansk regions of Ukraine. The U.S. Department of Commerce also has expanded export controls against Russia and Belarus. These measures are in addition to the new EU and UK sanctions and export controls announced last week and covered in our October 10 client alert.
On September 30, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) issued guidance that the United States is prepared to more aggressively use its existing authorities to impose sanctions against persons who provide material support to or for sanctioned persons or sanctionable activity, with a particular emphasis on entities and individuals in jurisdictions outside of Russia that provide political or economic support for Russia’s purported annexation of Ukrainian territory. This guidance was accompanied by a series of new designations to OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”), including a Chinese firm and an Armenian firm that were designated for having provided material support to a Russian firm that specializes in procuring foreign items for Russia’s defense industry.
On September 15, OFAC issued two new determinations: a determination pursuant to Executive Order (“E.O.”) 14024 and a determination pursuant to E.O. 14071. The first authorizes the imposition of property-blocking sanctions against persons determined to operate in, or to have operated in, the quantum computing sector of the Russian economy. The second prohibits U.S. persons, with limited exceptions, from providing quantum computing services to any person located in Russia.
On September 9, OFAC issued preliminary guidance concerning a ban on a broad range of services related to the maritime transportation of Russian-origin crude oil and petroleum products (collectively “seaborne Russian oil”). The ban will take effect on December 5, 2022 with respect to maritime transportation of Russian crude oil and on February 5, 2023 with respect to maritime transportation of Russian petroleum products. The ban will include an exception for the receipt of services by jurisdictions or actors that purchase seaborne Russian oil at or below a price cap to be established by a coalition of countries including members of the G7, the EU, and the United States.
Additionally, the Commerce Department’s Bureau of Industry and Security (“BIS”) amended the Export Administration Regulations (“EAR”) on September 15 to (i) expand the scope of the Russian industry sector export restrictions to cover additional items, including quantum computing and advanced manufacturing-related hardware, software, and technology, and to apply the industry sector export restrictions to Belarus; (ii) add dollar value exclusion thresholds to some earlier restrictions on luxury goods exports to Russia; and (iii) expand the scope of the military end-user and military-intelligence end-user rules to reach entities in third countries, with a particular focus on entities that support military or military-intelligence end users or end uses in Russia or Belarus. On September 30, following Russia’s announcement that it would annex the Donetsk, Luhansk, Kherson, and Zaporizhzhya regions of Ukraine, BIS added dozens of entities to its Entity List, which imposes BIS licensing requirements for the export, reexport, or transfer (in-country) to such entities of any goods, technology, and software that are subject to the EAR.
New U.S. Sanctions
Guidance on the Use of U.S. Sanctions to Target Persons Supporting Russia
In a new Frequently Asked Question (“FAQ”) 1091, OFAC states that the United States is “prepared to more aggressively” use its existing authorities to target for sanctions persons inside or outside of Russia that support Russia’s sham referenda, purported annexation, and continued occupation of the Kherson, Zaporizhzhya, Donetsk, and Luhansk regions of Ukraine. OFAC specifically notes it will use its sanctions authority to target persons “whose activities may constitute material assistance, sponsorship, financial, material, or technological support for, or goods or services to, or in support of (together “material support”), sanctioned persons or sanctionable activity,” particularly entities and persons that provide political or economic support for Russia’s illegal attempt to annex Ukrainian territory. Examples of activities that could be targeted for sanctions include those relating to:
- Providing material support for the organization of Russia’s sham referenda or annexation, as well as economic or other activity that seeks to legitimize Russia’s sham referenda or annexation;
- Providing material support to Russia’s military and defense industrial base, including significant transactions by entities in third countries that provide material support to Russia’s military, defense industrial base, and designated entities and persons operating in Russia’s defense industrial base;
- Providing material support to Russian entities or individuals subject to certain property-blocking sanctions; and
- Attempting to circumvent or evade U.S. sanctions on Russia and Belarus.
The FAQ advises that U.S. sanctions are not designed to target Ukraine or the Ukrainian people, including those living in areas occupied or purportedly annexed by Russia, nor are they intended to target certain humanitarian or other transactions, including those related to the export of food or medicine, the response to COVID-19, or telecommunications or internet services. The guidance also states that OFAC sanctions do not currently prohibit transactions related to the sale or transport of Russian-origin crude oil, petroleum products, or coal, other than their import into the United States. The FAQ also reiterates OFAC’s position that it will not impose sanctions on non-U.S. persons that engage in transactions generally authorized as to U.S. persons.
New SDN Designations
At the same time that it issued FAQ 1091, OFAC designated to the SDN List pursuant to E.O. 14024 several international companies and associated individuals that have supported Russia’s defense sector. Such designated persons include leaders of Radioavtomatika LLC, a Russian firm that specializes in procuring foreign items for Russia’s defense industry. Additionally, Sinno Electronics Co., Limited (a Chinese supplier) and Taco LLC (an Armenian supplier) were designated for having provided material support to Radioavtomatika LLC. (Sinno Electronics Co., Limited had been previously added to the BIS Entity List on June 28, 2022.)
OFAC also announced on September 30 the designation pursuant to E.O. 14024 of a number of individuals operating in the Russian financial sector, for facilitating the war in Ukraine. This includes two leaders of the Central Bank of the Russian Federation (“CBR”), Elvira Sakhipzadovna Nabiullina and Olga Nikolaevna Skorobogatova, who serve, respectively, as the Governor and the First Deputy Governor of the CBR, and Aleksandr Valentinovich Novak, a Russian Deputy Prime Minister.
Several Russian technology and defense firms were also designated on September 30 pursuant to E.O. 14024 for operating or having operated in the defense and related materiel sector and/or the technology sector of the Russian Federation economy, including Scientific-Technical Center for Electronic Warfare (also known as AO NTTs REB), Rotek Elpom, ZAO NTTs Modul, OOO Valtex-ST, and OAO Radioavionika.
Additionally, OFAC designated, pursuant to E.O. 14024, the Federation Council of the Federal Assembly of the Russian Federation (“Federation Council”) and 169 of its members, who had voted unanimously in February 2022 to approve Russian President Vladimir Putin’s request to send troops into Ukraine. OFAC had previously designated the Speaker of the Federation Council under the same authority, such that all 170 Federation Council members are now on the SDN List. OFAC also designated 109 members of the State Duma of the Federal Assembly of the Russian Federation, such that all members of the State Duma are now on 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. “U.S. persons” are U.S. legal 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.
Designation of Russian Quantum Computing Sector under E.O. 14024
On September 15, OFAC 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, or the Secretary of State in consultation with the Secretary of the Treasury, “determines operates or has operated in” “the quantum computing sector of the Russian Federation economy.”
OFAC FAQ 1086 defines the “quantum computing sector of the Russian Federation economy” to include:
- “[A]ctivities related to products and services in or involving the Russian Federation in research, development, manufacturing, assembling, maintenance, repair, sale, or supply of quantum computing, quantum computers, electronic assemblies thereof, or cryogenic refrigeration systems related to quantum computing;” and
- “[A]ny of the following services when related to quantum computing: infrastructure, web hosting or data processing services; custom computer programming services; computer systems integration design services; computer systems and data processing facilities management services; computing infrastructure, data processing services, web hosting services, and related services; repairing computer, computer peripherals, and communication equipment; other computer-related services; as well as the exportation, reexportation, sale, or supply, directly or indirectly, of quantum computing, quantum computers, electronic assemblies thereof, or cryogenic refrigeration systems related to quantum computing to or from the Russian Federation.”
The designation of the quantum computing sector follows the earlier designations under E.O. 14024 of the aerospace, electronics, marine, financial services, technology, defense and related materiel, accounting, trust and corporate formation, and management consulting services 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 to have operated in these sectors. See e.g., OFAC FAQs 1085, 1037.
Prohibition on the Provision of Quantum Computing Services to Any Person Located in Russia
On September 15, OFAC also issued a Determination Pursuant to Section 1(a)(ii) of Executive Order 14071 that prohibits “the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of quantum computing 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 October 15, 2022.
OFAC FAQ 1084 states that OFAC anticipates defining the relevant terms of this prohibition as follows:
- “Quantum Computing Services” includes “any of the following services when related to quantum computing, quantum computers, electronic assemblies thereof, or cryogenic refrigeration systems related to quantum computing: infrastructure, web hosting, or data processing services; custom computer programming services; computer systems integration design services; computer systems and data processing facilities management services; computing infrastructure, data processing services, web hosting services, and related services; repairing computer, computer peripherals, or communication equipment; other computer-related services; as well as services related to the exportation, reexportation, sale, or supply, directly or indirectly, of quantum computing, quantum computers, electronic assemblies thereof, or cryogenic refrigeration systems related to quantum computing to any person located in the Russian Federation.”
- “Person located in the Russian Federation” includes “persons in the Russian Federation, individuals ordinarily resident in the Russian Federation, and entities incorporated or organized under the laws of the Russian Federation or any jurisdiction within the Russian Federation.” See also OFAC FAQ 1058.
- “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.”
Preliminary Guidance on Maritime Transportation Services Ban to Effect a Price Cap on Seaborne Russian Oil
On September 9, OFAC issued preliminary guidance concerning a forthcoming ban on a broad range of services related to the maritime transportation of seaborne Russian oil. The ban will go into effect on December 5, 2022 with respect to such transportation of Russian-origin crude oil and on February 5, 2023 with respect to such transportation of Russian-origin petroleum products. The preliminary guidance indicates that a broad range of services related to such maritime transportation will be prohibited, with an exception for the receipt of services by jurisdictions or actors that purchase seaborne Russian oil at or below a price cap that is to be established by a coalition of countries including members of the G7, the EU, and the United States (the “price exception”). Based on the preliminary guidance OFAC has issued, we anticipate that prohibited services and activities likely will include shipping, financial services, insurance, brokering, trading, and refining in relation to seaborne Russian oil purchased above the price cap.
The preliminary guidance indicates that the price exception will rely on a recordkeeping and attestation process that allows each party in the supply chain of seaborne Russian oil to demonstrate or confirm that the product falls within the price exception. This recordkeeping and attestation process will be designed to create a safe harbor from liability for breach of sanctions in certain cases where service providers inadvertently deal in the purchase of seaborne Russian oil above the price cap in reasonable reliance on falsified records. The preliminary guidance also outlines possible red flags for price cap evasion and provides scenarios which would comply or not comply with the price cap.
The preliminary guidance contemplates enforcement actions brought against persons that make significant purchases of seaborne Russian oil above the price cap and knowingly rely on service providers subject to the maritime services policy, or persons that knowingly provide false information, documentation, or attestations to a service provider. The preliminary guidance also indicates that the United States and coalition members are expected to coordinate in enforcement of the price cap.
New U.S. Export Controls
Expansion of Industry Sector Controls and Amendments to Luxury Goods Restrictions
On September 15, BIS issued a new rule expanding to Belarus existing industry sector restrictions against Russia in EAR Section 746.5, and broadening the scope of those restrictions to encompass additional items that might be useful in advanced manufacturing and chemical and biological weapons programs. These items, which are set out in new Supplement No. 6 to Part 746 of the EAR and are designated EAR99, include discrete chemicals; certain drugs, such as fentanyl and its derivatives; biologics; related equipment; and quantum computing items. The new rule also expanded Supplement No. 4 to Part 746 in two respects, first by adding 57 new entries to the list of industrial items requiring licensing for export or reexport to or transfer within Russia or Belarus, and second by expanding the coverage of the supplement to include any modified or designed components, parts, accessories, and attachments for listed items (regardless of their classification), except for any part or minor component that is a fastener, washer, spacer, insulator, grommet, bushing, spring, wire, or solder.
The September 15 rule also added dollar value exclusion thresholds to certain items subject to the existing Russian “luxury goods” export controls in order to align with similar exclusions issued by allied countries. For example, for many luxury goods, the rule adds a $300 per unit wholesale price exclusion, while automobiles with a wholesale per unit value of $50,000 or less are now not subject to the luxury goods prohibition.
Expansion of Military End-User and Military-Intelligence End-User Controls
The new rule also broadened the military end-user and military-intelligence end-user controls targeting Russia and Belarus, among other countries. Specifically, BIS may now identify entities in third countries as Belarusian, Burmese, Cambodian, Chinese, Russian, or Venezuelan military end users (whereas previously the military end-user and military-intelligence end-user controls were limited to entities located in those specific countries). In recognition of the compliance challenges that companies could face as a result of this expansion of military end-user controls, including the Russia/Belarus military end-user foreign direct product rule, on a worldwide basis to Belarusian and Russian military end users located outside Belarus and Russia, BIS has expressly limited this expanded rule to only those entities identified on the Entity List with a footnote 3 designation, such that companies should be able to identify all Russian and Belarusian military end users located outside of Russia and Belarus by reviewing the Entity List. Similarly, any entities located outside of Burma, Cambodia, China, and Venezuela that have been identified by the Commerce Department’s End-User Review Committee as a Burmese, Cambodian, Chinese, or Venezuelan military end user will be identified on the Military End User (“MEU”) List in Supplement No. 7 to EAR Part 744, such that companies should be able to identify such military end users by reviewing the MEU List, which otherwise is not exhaustive.
BIS also has issued guidance in the form of an FAQ concerning this expansion of the military end-user rule, which cautions that the Department of Commerce is prepared to aggressively apply export controls imposed against Russia to entities in third countries that seek to provide material support for Russia’s and Belarus’s military and industrial sectors, including to replenish (“backfill”) technologies and other items prohibited for export to Russia. As part of this expansion of the military end-user rule, BIS also revised its Entity List to identify as Russian military end users six non-Russian entities that had been added to the list on June 30, 2022, on the ground that they support Russia’s war effort in Ukraine.
BIS’s September 15 rule also expanded the military-intelligence end-user controls to mirror the changes made to the military end-user rule, i.e., to reach Belarusian, Burmese, Cambodian, Chinese, Russian, and Venezuelan and other covered military-intelligence end users wherever located.
Expansion of Entity List “Is Informed” Provisions
The Deputy Assistant Secretary for Export Administration may now “provide specific notice that the export, reexport, or transfer (in-country) of specified items to an identified party requires a license because there is reasonable cause to believe, based on specific and articulable facts, that the entity has been involved, is involved, or poses a significant risk of being or becoming involved in activities that are contrary to the national security or foreign policy interests of the United States or that an entity is acting on behalf of such entity.” This authority will allow BIS to provide specific notice of parties that are not currently on the Entity List, but that are engaging in activities contrary to U.S. foreign policy or national security interests. Notably, this new authority is not limited to Russian or Belarusian parties.
Announcement of Additional Aircraft Flying into Russia in Violation of U.S. Export Controls
On September 26, BIS announced that it had updated its list of aircraft that have flown into Russia in apparent violation of the EAR to include an Iranian-owned and -operated aircraft providing cargo flight services on U.S.-origin aircraft to Russia. This followed earlier designations of another three Iranian cargo planes that were backfilling items to Russia to circumvent U.S. export controls. The BIS announcement states that there are now a total of 184 aircraft identified on the list for apparent violations of U.S. export controls. Actions taken by any person with regard to any of the listed aircraft, including, but not limited to, refueling, maintenance, repair, or the provision of spare parts or services, would violate General Prohibition Ten of the EAR (15 C.F.R. § 736.2(b)(10)).
Additions to the Entity List
On September 30, BIS added 57 entities in Russia and Crimea to the Entity List. BIS licensing is now generally required to export, reexport, or transfer in-country to these entities any goods, technology, and software subject to the EAR, subject to a policy of denial for all such items apart from food and medicine classified as EAR99, which will be reviewed on a case-by-case basis.
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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 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 ever-changing 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 and export control 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 practice.
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