Latest Sanctions Narrow Path To Legal Dealings In Russia

In this article for Law360, Mario Mancuso, Sanjay Mullick and Carrie Schroll examine new export controls and sanctions in response to Russia’s purported annexation of Ukrainian Regions.

On Sept. 26 and Sept. 30, the U.S. and the United Kingdom announced new sanctions and export controls in response to Russia's purported annexation of the Kherson, Zaporizhzhia, Donetsk and Luhansk regions of Ukraine. On Oct. 6, the European Union also announced that it had agreed to its eighth package of sanctions.

The actions demonstrate the U.S., U.K. and EU's continued willingness to impose strong sanctions on Russia in response to its aggression in Ukraine, even in the face of heightened energy needs as winter approaches.

Though Russia still is not a comprehensively sanctioned country with which generally all commercial dealings would be prohibited, as more persons are designated on restricted party lists and as countries further limit the goods and services that can be provided to Russia, the risks associated with continued dealings in Russia escalate and the path to ongoing legal dealings narrows.

Robust and evolving compliance programs are fundamental to ensure compliance with the rapidly changing restrictions.

The View From Washington

In September, the tides shifted against Russia in its invasion of Ukraine, with Ukraine retaking many key cities and Russian troops fleeing across the border. In response, Russian President Vladimir Putin has taken a number of actions to try to save face, including conducting referenda in the annexed regions to have them officially join Russia, which the U.S., EU and U.K. authorities have publicly called a "sham."

The referenda are similar to Russia's actions in the 2014 annexation of Crimea, which resulted in a U.S. embargo of the region. With ongoing Russian aggression, thus far the West continues to show a willingness to answer it with a heightened and highly coordinated response, and more sanctions may be forthcoming.

U.S. Sanctions and Export Controls

The U.S. response predominantly consisted of designating more persons as "specially designated nationals and blocked persons," with whom U.S. persons can no longer engage in dealings, which includes parties outside Russia.[1] The new designees include:

• Persons and entities supporting Radioavtomatika, the primary Russian defense procurement firm;

• Armenian company Taco LLC, Belorussian company Open Joint Stock Company Svetlogorsk Khimvolokno, and Chinese company Sinno Electronics Co., Ltd. — each suppliers of the Russian military-industrial complex;

• Russian technology and defense firms supporting the defense and material sectors;

• Russian financial leadership, including Elvira Sakhipzadovna Nabiullina and Olga Nikolaevna Skorobogatova, the Russian Central Bank's governor and deputy governor, respectively; and

• Multiple family members of top government officials as well as hundreds of members of the Russian Federation Council and Duma.

Beyond the current designations, the U.S. Department of the Treasury's Office of Foreign Assets Control issued a frequently asked questions document,[2] stating its intent to designate any persons, including those outside of Russia, who provide political or economic support for the "illegal attempt to annex Ukrainian sovereign territory."

Activities that could lead to designation include (1) providing material support to organize the "sham referenda or annexation"; (2) providing material support to the Russian military and defense industrial base; (3) attempting to evade sanctions on Russia or Belarus; or (4) providing material support to blocked Russian entities or individuals.

Examples of the above include providing material financial or technological support for the organization of the sham referenda or annexation, or for economic activity that seeks to legitimize it. This FAQ represents one of the clearer signals from OFAC that it intends to use "secondary sanctions" to crack down on non-Russian persons who continue to support Russia post-invasion.

The Sept. 30 sanctions come on the heels of two determinations on Sept. 15 under executive order no. 14024 expanding OFAC's authority to allow imposition of sanctions on those operating in the Russian quantum computing sector, and prohibiting U.S. persons from providing quantum computing services to Russia.

OFAC continues to restrict provision of certain services on a broad basis while also imposing narrower sanctions through specially designated national designations.

In addition to OFAC's actions, the U.S. Department of State imposed visa restrictions on more than 900 individuals acting within the annexed regions, and the U.S. Department of Commerce's Bureau of Industry and Security added 57 entities to the list for violating export controls related to Russia.

The bureau also issued a frequently asked questions document,[3] explaining that its military end user controls have been expanded to allow it to designate entities in third countries that support military end uses in Russia or Belarus as Russian and Belarusian military end users on the entity list — to whom U.S. technology cannot be provided — and apply the Russian/Belarusian Military End User Foreign Direct Product rule to them.

Generally, it is still not prohibited to export or reexport to Russia items not identified under a specific classification number on the commerce control list — instead, these items are designated under the number "EAR99" — absent prohibited end users or end uses, but the list of restricted parties continues to grow.

In addition, BIS and OFAC are prioritizing enforcement of existing sanctions and export controls, as seen in the recent indictment of oligarch Oleg Deripaska for circumvention of the restrictions.

UK Sanctions and Export Controls

Similar to the U.S., the U.K. added dozens of new individuals and entities to its consolidated sanctions list,[4] including:

• Officials and collaborators seen as responsible for the referenda in the annexed regions;

• Financial leaders, including Elvira Nabiullina,[5] the governor of the Russian Central Bank, and board members of Gazprombank, Sberbank and Sovcombank;

• IMA Consulting, a Russian public relations agency, and Goznak, a Russian security documents company, that allegedly participated in the referenda; and

• Several oligarchs and elites close to the Putin regime.

The U.K. is also banning the export of nearly 700 goods to Russia that it found were critical to the manufacturing sector.

Furthermore, the U.K. is imposing new restrictions on providing certain professional services to Russia, adding to prior restrictions related to accounting services. Of note, the U.K. is banning the export of IT consultancy services, including designing software applications or other IT systems.

The U.K. is also banning the export of other service categories, including engineering, architectural, advertising, auditing and certain transactional legal advisory services. It remains to be seen how these particular categories of services will be defined, but the scope appears broad, and will further limit U.K. companies' avenues for continued dealings in Russia.

EU Sanctions and Export Controls

Likewise, the EU agreed to its eighth package of sanctions in response to the annexation, principal features of which include:

• Listing more parties as sanctioned persons, specifically individuals and entities involved in the referenda and annexation, high-ranking officials working in the defense sector, and companies supporting the Russian armed forces;

• Import bans on Russian appliances, ceramics, certain chemical products, footwear, nongold jewelry, leather, machinery, plastics, finished and semifinished steel products, textiles and vehicles;

• Additional export controls, particularly on aviation items, specific electronic components, certain chemical substances, as well as on coal;

• Further restrictions on the export of certain categories of services, including architecture and engineering services, crypto assets custody services, IT consultancy and legal advisory; and

• Provisions related to the price cap on oil previously announced by the G7, which in the coming months will permit European operators to transport, and support the transportation of, Russian oil to third countries, only if the oil price remains within the cap.

Of interest, the sanctions package includes a ban on EU nationals sitting on the boards of certain Russian-state owned enterprises, which responds to criticism that former prominent EU public officials had taken high-profile positions with major Russian companies in key sectors such as energy.

Notably, the package also includes authorization to designate non-Russian persons for circumventing sanctions and for facilitating their circumvention. This could be a prelude to tougher sanctions enforcement by the EU, when soon it begins to administer the oil price cap.

What Is Still Unrestricted

Though the recent actions increase the number of parties with whom U.S. persons are prohibited from dealing, Russia is still not a comprehensively sanctioned country with which generally all commercial dealings would be prohibited. The focus to date has been on Russia's energy sector and military industrial complex and supply chain, with other more benign industries still unsanctioned.

The U.S. also has not designated the entire Russian government as specially designated nationals, or prohibited all dealings with all Russian banks, as a handful are still only subject to prohibitions on issuing credit and debt.

Regarding services, the U.S. has not yet expanded the prohibitions to broader areas such as information technology services more generally, and many types of services can still be provided to non-specially designated nationals.

In the area of export controls, U.S. persons can still export otherwise nonsensitive items designated "EAR99," which places a priority on companies knowing the classification of their products, to ensure they stay within these guardrails.

And with respect to imports, the bans focus on luxury goods and, forthcoming, on crude oil and petroleum, such that U.S. persons can import most items.  While the door is open for the U.S. to close the door on additional types of dealings in Russia that are currently available, there is some amount of white space for continued dealings, though at heightened risk

Takeaways

For any U.S., EU or U.K. entities that maintain dealings in, or related to, Russia, heightened due diligence on counterparties will be essential, as large numbers of entities and individuals have been designated as sanctioned persons, making it important to pressure test whether they have a nexus to Russia, whether direct or indirect.

OFAC has put non-U.S. persons on notice that it intends to use secondary sanctions to target Russia's supporters and BIS has shown a similar willingness to designate non-U.S. and non-Russian entities, escalating risk for non-U.S. entities that continue significant Russia business.

Businesses should closely review whether any existing activity in Russia could fall within the new categories of banned services and consider whether exit strategies are needed.

Any ongoing dealings in Russia expose companies to significant risk of violating sanctions and export controls, particularly as the scope of restrictions continues to frequently change, necessitating that compliance programs similarly stay in step by being adaptive and dynamic.

More sanctions likely will be forthcoming, with restrictions related to the price cap on purchases of Russian origin crude oil and petroleum products that the G7 announced on Sept. 2 anticipated, and prohibitions on providing related maritime transportation services coming in a few months.

 

Mario Mancuso, Sanjay Mullick and Carrie Schroll are partners at Kirkland & Ellis LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] https://home.treasury.gov/news/press-releases/jy0981.

[2] https://home.treasury.gov/policy-issues/financial-sanctions/faqs/1091.

[3] https://www.bis.doc.gov/index.php/documents/about-bis/3145-2022-09-30-bis-faq-third-country-application-of-controls/file.

[4] https://www.gov.uk/government/news/uk-sanctions-collaborators-of-russias-illegal-sham-referendums.

[5] https://www.gov.uk/government/news/sanctions-in-response-to-putins-illegal-annexation-of-ukrainian-regions.