On May 19, 2023, the Biden administration announced another major round of U.S. sanctions and export controls against Russia and Belarus in response to the ongoing war in Ukraine, in coordination with the G7 Leaders’ Summit in Japan. This latest round consists of new measures imposed by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS), U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and U.S. Department of State (State).
The new measures include hundreds of new sanctions and export ban designations on parties in Russia and other countries, an expansion of export restrictions on a broad range of industrial goods destined to Russia and Belarus, a prohibition on the provision of engineering and architecture services to Russia, a requirement to report holdings of Russian sovereign assets to OFAC, additional flexibility for companies seeking export authorization to divest restricted assets in Russia and additional permission for U.S. and other allied country companies to transfer certain communications equipment in Russia and Belarus.
BIS released two rules that impose an export ban on an array of additional items in alignment with restrictions adopted by allies and added 71 entities to the Export Administration Regulations (EAR) Entity List, primarily for supporting Russia’s military and defense sectors. BIS also released a new joint alert with Treasury’s Financial Crimes Enforcement Network (FinCEN) detailing evasion tactics and red flags to assist financial institutions in identifying and preventing attempts to circumvent export controls on Russia and Belarus.
The 69 Russian entities are also subject to footnote 3 designations as Russian or Belarusian “military end users” pursuant to EAR Section 744.21. When designated under footnote 3, entities are subject to the Russia/Belarus-Military End User FDPR in EAR Section 734.9(g), which goes further than the standard Russia/Belarus FDPR, to reach EAR99 items when there is knowledge that an item is intended for one of these entities.
OFAC and State together released a new round of enhanced sanctions, focusing on targeting circumvention and evasion, military-industrial supply chains and future energy revenues. These measures included a new engineering and architecture services ban, additional asset blocking designations, an expanded list of industries that may be targeted by OFAC in the future, new OFAC reporting requirements on Russian sovereign assets and the extension of an OFAC General License (GL) allowing for the payment of certain taxes and fees.
Pursuant to Section 1(a)(ii) EO 14071, OFAC issued a prohibition on the export, reexport, sale or supply, directly or indirectly, from the United States, or by a U.S. person of “architecture services” or “engineering services” to any person located in the Russian Federation, effective June 18, 2023.
These services bans are similar in concept to the accounting, corporate and consulting services and quantum computing bans already in effect. Like those, these bans exclude the following:
OFAC Designations
OFAC announced new and updated designations to its List of Specially Designated Nationals (SDN List), including 104 entities and 22 individuals in more than 20 countries or jurisdictions. OFAC’s new designations target training grounds for Russia’s future energy specialists, Russian research institutes where new energy extraction technologies are developed, Russian companies that facilitate drilling and mining operations and firms that attract and advise on investment in Russia’s energy industry. OFAC issued Russia-related GL 68 authorizing the wind-down of transactions involving certain universities and institutes impacted by the recent designations.
Notably, OFAC designated Russian gold mining company Public Joint Stock Company Polyus (PJCS Polyus) as an SDN, and issued the following GLs:
In FAQ 1129, OFAC clarified that the designation of Russia-based Polimetall AO only applies blocking sanctions to that entity and any entities in which that entity owns, directly or indirectly, a 50% or greater interest. The blocking sanctions do not apply to the entity’s ultimate parent company, Jersey-based Polymetal International PLC or other entities in which the non-sanctioned parent company holds a 50% or greater interest.
State Department Designations
State imposed blocking sanctions on individuals and entities involved in sanctions evasion and circumvention, maintaining Russia’s capacity to wage its war in Ukraine, and supporting Russia’s future energy revenue sources. The State Department designated or identified as blocked property almost 200 individuals, entities, vessels and aircraft.
The designations included 18 entities involved in expanding Russia’s future energy production and export capacity across a range of industries where Russia has strategic dependencies. These measures are designed to degrade Russia’s future energy production and export capacity while maintaining current energy supplies to global markets.
Expanding the List of Industries to Be Targeted by OFAC
OFAC issued a determination under Section 1(a)(i) of Executive Order (E.O.) 14024 allowing the agency to impose blocking sanctions on parties involved in the architecture, engineering, construction, manufacturing and transportation sectors of the Russian economy. The determination is warning that the U.S. government will focus future rounds of SDN designations on these sectors of the Russian economy.
Reporting Requirement for Russian Government Property
OFAC amended Directive 4 under E.O. 14024, which already restricts transactions involving the Russian Central Bank, the National Wealth Fund and Ministry of Finance, to require U.S. persons to submit annual reports to OFAC detailing any property in their possession or control in which one of those entities has an interest. OFAC defines the concept of an interest in property broadly to include equity, bonds, debt instruments, contracts, goods, real estate, IP and receivables, among other types of property rights.
The reports will allow the United States to survey and map holdings of Russian sovereign assets.
The first annual report is due by June 18, 2023.
Extension of General License Allowing Certain Ordinary Source Payments
OFAC issued GL 13E, extending the expiration date of the GL to August 17, 2023. GL 13E, like its prior iterations, authorizes certain administrative transactions to the extent otherwise prohibited by Directive 4 of Executive Order 14024, including payment of taxes, fees or import duties, and the purchase of or receipt of permits, licenses, registrations or certifications that are necessary and ordinarily incident to a U.S. person’s day-to-day operations in Russia. Note that the payment of an exit tax assessment by the Government of Russia for divestitures of businesses is not authorized by this GL and requires specific authorization from OFAC. See FAQ 1118 (updated on May 19, 2023).
Companies with continuing operations, sales or other touchpoints to Russia likely will be impacted by this significant expansion of U.S. sanctions and export controls. Even if not operating in Russia, companies should ensure that their trade compliance programs include due diligence protocols that can address heightened risks, including within supply chains abroad that may touch Russia and dealings outside of Russia with companies that may have sanctioned ownership. The U.S. government and its allies have repeatedly warned of schemes to divert U.S. allied country goods, software and technology to Russia through non-sanctioned intermediaries.
Dynamic screening of third parties that incorporates beneficial ownership data and evaluation of available public source information and market intelligence can be effective tools to prevent inadvertent dealings with entities owned by sanctioned parties or that present a high risk of diversion. Companies involved in engineering or architecture services should also ensure that those services are not being diverted by a customer in a third country to a Russian affiliate or used indirectly for the benefit of a project in Russia.
Although the U.S. government has not yet implemented a full trade embargo against Russia or Belarus, the tightening of controls signals that the United States is closing in on nearly all industrial goods and remains focused on enforcement of diversion and circumvention efforts.
*Gregory Rohling is a Senior Trade Analyst and not licensed to practice law.