US Sanctions on Russia
21 March 2022
Hong Kong sellers with supply chains extending into Russia from the US may need to take careful note of recent US sanctions applied against the country. In response to Russia’s recognition of the separatist Donetsk (DNR) and Luhansk (LNR) regions of Ukraine as independent republics, and the subsequent military aggression against Ukraine that it launched on 24 February 2022, the US has adopted a far-reaching package of sanctions severely restricting economic relations with the Russian government, and Russian entities and individuals. Meanwhile, the US has also adopted sanctions against Belarus for enabling Russia’s invasion of Ukraine.
As additional sanctions, actions, legislation, and other enforcement operations are expected as the war progresses, a summary of the most relevant recent sanctions developments is provided below.
Trade, Investment, and Financial Sanctions on the DNR and LNR Regions of Ukraine
Executive Order (EO) 14065 of 21 February 2022 prohibits the following activities in the DNR and LNR regions of Ukraine:
- new investment in the DNR and LNR regions of Ukraine by a US person wherever located;
- the importation into the US, directly or indirectly, of any goods, services, or technology from these regions;
- the exportation, re-exportation, sale, or supply, directly or indirectly, from the US, or by a US person wherever located, of any goods, services, or technology to these regions; and
- any approval, financing, facilitation, or guarantee by a US person wherever located of a transaction by a foreign person where the transaction by that foreign person would be prohibited if performed by a US person or within the US.
These prohibitions apply except to the extent provided by statutes, or in regulations, orders, directives, or licences that may be issued pursuant to this EO, and notwithstanding any contract entered into or licence or permit granted prior to 21 February 2022.
The EO also provides authority to impose sanctions on persons determined (1) to operate or have operated since 21 February 2022 in these regions; (2) to be or have been since 21 February 2022 a leader, official, senior executive officer, or member of the board of directors of an entity operating in these regions; (3) to be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to this EO; or (4) to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person whose property and interests in property are blocked pursuant to this EO.
The US Treasury Department’s Office of Foreign Assets Control (OFAC) has issued six general licences to ensure that humanitarian and other related activity in these regions can continue. These licences allow a short-term wind down of activities; exports to these regions of food, medicine, and medical devices; and the continued operation of telecommunications, mail, and Internet services.
Effective 24 February 2022, a final rule by the US Department of Commerce’s Bureau of Industry and Security (BIS) imposes the following requirements and policies specific to Russia and Russian end-users.
1. Foreign Direct Product Rules
A new foreign direct product rule (Russia FDP rule) for all of Russia establishes a control over foreign-produced items that are (1) the direct product of certain US-origin software or technology subject to the Export Administration Regulations (EAR) or (2) produced by certain plants or major components thereof that are themselves the direct product of certain US-origin software or technology subject to the EAR. This control applies when it is known that the foreign-produced item is destined to Russia or will be incorporated into or used in the production or development of any part, component, or equipment produced in or destined to Russia. The Russia FDP rule does not apply to foreign-produced items that would be designated as EAR99, which includes many consumer items.
A separate FDP rule for Russian military end-users (Russia-FDP MEU rule) that is more extensive than the Russia FDP rule applies to foreign-produced items that are (1) the direct product of any software or technology subject to the EAR that is on the Commerce Control List (CCL) or (2) produced by certain plants or major components thereof that are themselves the direct product of any US-origin software or technology on the CCL. Such items will be subject to the EAR and require a licence if an entity with a footnote 3 designation  on the Entity List is a party to the transaction, or if there is knowledge that the item will be incorporated into or used in the production or development of any part, component, or equipment produced, purchased, or ordered by any such entity. These restrictions apply to all items, including those designated as EAR99, with certain exceptions, and impose a licence requirement for footnote 3-designated Russian military end-users.
In an attempt to “recognise partner countries that have committed to putting in place substantially similar new export controls with regard to Russia and Belarus in their domestic laws”, countries may receive a full or partial exclusion to the FDP rules. As of 6 March 2022, exports, re-exports, and transfers (in-country) from the following countries were not subject to these FDP rules: Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, New Zealand, Poland, Portugal, Romania, Slovakia, Slovenia, South Korea, Spain, Sweden, and the UK. Although this initial list essentially comprises the close allies and partners of the US, the assumption is that more countries will be added should they adopt similar export controls.
2. Licence Requirements, Review Policy, and Exceptions
The final rule also adds new licence requirements for all export control classification numbers in categories 3-9 of the CCL. Some of these items, in 58 Export Control Classification Numbers (ECCNs) with unilateral controls, were not previously controlled to Russia and include microelectronics, telecommunications items, sensors, navigation equipment, avionics, marine equipment, and aircraft components.
Applications for the export, re-export, or transfer (in-country) of items that require a licence for Russia will be reviewed, with certain limited exceptions, under a policy of denial. Applications to be reviewed on a case-by-case basis are those related to safety of flight, maritime safety, humanitarian needs, government space co-operation, civil telecommunications infrastructure, government-to-government activities, and support of limited operations of partner country companies in Russia. Only certain sections of the following licence exceptions are available for exports to Russia:
- TMP (temporary imports, exports, re-exports, and transfers in country): items for use by the news media;
- GOV: certain government activities;
- TSU (technology and software unrestricted): software updates to civil end-users that are subsidiaries of, or joint ventures with, companies headquartered in the US or partner countries;
- BAG (baggage): baggage, excluding firearms and ammunition;
- AVS (aircraft, vessels, and spacecraft): aircraft flying into and out of Russia;
- ENC (encryption commodities, software, and technology): encryption items, but not if they are destined for Russian government end-users and Russian state-owned enterprises; and
- CCD (consumer communication devices): consumer communication devices, but not if they are destined for government end-users or certain individuals associated with the government.
3. Entity List and Military End-Use Controls
Entity List footnote 3 indicates that the Russia-MEU FDP rule applies to that entity; as a result, a licence is required to export, re-export, or transfer (in-country) all items subject to the EAR (including foreign-produced items under the Russia-MEU FDP rule) to these entities, with limited exceptions. Footnote 3 also applies to the Russian Ministry of Defence, including the armed forces of Russia, wherever located. Licence applications for footnote 3-designated entities will be reviewed under a policy of denial in all cases.
A total of 47 entities have been transferred from the MEU List to the Entity List and have been designated with footnote 3. In addition, BIS has added two new Russian MEUs to the Entity List with a footnote designation. Additional entities may be added in the future.
Restrictions on Russian military end-users and military end-uses now cover all items subject to the EAR with exceptions for (1) food and medicine designated as EAR99 and (2) items classified as ECCN 5A992.c or 5D992.c, so long as they are not for Russian government end-users or Russian state-owned enterprises.
4. More Stringent Export Restrictions Against Russian Oil Sector
Effective 3 March 2022, BIS is expanding the scope of the current sanctions against the Russian industry sector that were originally added to the EAR in August 2014 by restricting the export, re-export, and transfer (in-country) of additional items needed for oil refining.
Previously, this general prohibition applied to the export, re-export, or transfer (in-country) of certain items in situations where a person had “knowledge,” for purposes of the EAR, that the item would be used directly or indirectly in Russia's energy sector for exploration or production from deep-water, Arctic offshore, or shale projects in Russia that have the potential to produce oil or gas, or where a person was unable to determine whether the item would be used in such projects in Russia. The new rule expands the scope of the general prohibition by imposing an additional licence requirement for exports, re-exports, or transfers (in-country) of any item subject to the EAR listed in new supplement no. 4 to part 746 to and within Russia. Unlike the previous prohibition, the new prohibition does not include a “knowledge” requirement.
Various bills have also been introduced in the House and Senate (S. 3754, S. 3757, H.R. 6886, and H.R. 6939) to prohibit the importation of petroleum and petroleum products from Russia. In the most recent move, President Biden signed Executive Order 14066 of 8 March 2022 banning the import of Russian oil, liquefied natural gas and coal to the US and specifically prohibiting:
- The importation into the US of Russian crude oil, petroleum, petroleum fuels, oils and products of their distillation, liquefied natural gas, coal and coal products;
- New US investment in Russia’s energy sector by a US person, wherever located; and
- US persons, wherever located, from approving, financing, facilitating or guaranteeing foreign persons that are making investment to produce energy in Russia.
While the EO came into force as of 8 March 2022, the OFAC issued a general licence until 12:01 EDT on 22 April 2022 authorising all transactions prohibited by the EO that are ordinarily incident and necessary for the importation of crude oil; petroleum; petroleum fuels, oils and products of their distillation; liquefied natural gas; coal; and coal products of Russian origin pursuant to written contracts or written agreements entered prior to 8 March 2022. This general licence, however, does not authorise the signing of new contracts.
OFAC has also clarified that the EO does not prohibit such transactions as the unwinding of contracts or other business-related activities by US persons in order to comply with the import ban imposed under the EO. Similarly, the EO does not prohibit US persons from engaging in transactions to sell or re-direct shipments that were laden on or after 8 March 2022 and previously destined for the US.
5. Additions to Entity List
Effective 3 March 2022, BIS has added 91 entities to the Entity List under the designations of Belize, Estonia, Kazakhstan, Latvia, Malta, Russia, Singapore, Slovakia, Spain, and the UK. BIS states that these entities have been involved in, contributed to, or otherwise supported the Russian security services, military and defence sectors, and military and/or defence research and development efforts.
The Entity List is a list of entities which BIS has reasonable cause to believe have been involved, are involved, or pose a significant risk of being or becoming involved in activities that are contrary to the national security or foreign policy interests of the US. It specifies the licence requirements on each listed person and those licence requirements are independent of, and in addition to, licence requirements imposed elsewhere in the EAR. Depending on the item, a company may be required to obtain a licence to export to an organisation on the Entity List even if one is not otherwise required.
Additional entities across the globe could potentially be added in the future to the Entity List for Russia-related reasons.
6. Trade Sanctions on Belarus
The US has also adopted sanctions against Belarus for enabling Russia’s invasion of Ukraine. Effective 2 March 2022, BIS has imposed a policy of denial on sensitive items that support Belarus’s defence, aerospace, and maritime industries and has added Belarus to the two new FDP rules on Russia, which has resulted in a near total ban on exports of items to both Russian and Belarusian military end users. Moreover, two Belarussian entities (including the Ministry of Defence of the Republic of Belarus) have been added to the Entity List with a footnote 3 designation.
7. Removal of PNTR Treatment
Legislation introduced in the House of Representatives (H.R. 6835) on 25 February 2022 and in the Senate on 1 March 2022 (S. 3722) would withdraw permanent normal trade relations (PNTR) treatment from products of Russia, require an annual process for granting NTR to such products, and initiate a process to suspend Russia’s WTO membership. If PNTR treatment is withdrawn, US imports from Russia would face substantially higher import duties, effectively closing off the US market to many of those products.
In lockstep with its G7 allies and the EU, as part of a bid to ramp up economic pressure on the Kremlin, the US, subject to Congressional approval, revoked Russia’s PNTR or Most-Favoured Nation (MFN) status on 12 March 2022, rescinding many of the benefits that Russia enjoyed as a WTO member. Accordingly, Russian companies will no longer receive privileged treatment, notably preferred import tariffs in the US market. This, together with other bans on Russia’s exports (e.g., energy, metal, seafood, alcohol and diamonds) and imports (e.g., consumer luxury and other goods frequently purchased by Russian elites), if fully and widely implemented, could be another blow to the Russian economy.
1. Sanctions on Russia’s Central Bank and Russian Financial Institutions
Effective from 28 February 2022, Office of Foreign Assets Control (OFAC) Directive 4 under EO 14024 (the Russia-related Sovereign Transactions Directive) prohibits US persons from engaging in transactions with the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation. This action immediately froze any assets of Russia’s Central Bank held in the US or by US persons wherever located.
OFAC Directive 2 under EO 14024 (the Russia-Related Correspondent Account and Payable-Through Account (CAPTA) Directive) imposes correspondent and payable-through account sanctions on Public Joint Stock Company Sberbank of Russia, which holds about a third of all bank assets in Russia. Beginning on 26 March 2022, all US financial institutions must close any Sberbank correspondent or payable-through accounts to reject any future transactions involving Sberbank or its foreign financial institution subsidiaries. These sanctions apply to Sberbank and any foreign financial institutions that are 50% or more owned, directly or indirectly, by Sberbank. These entities have been added to OFAC’s List of Foreign Financial Institutions Subject to Correspondent Account or Payable-Through Account Sanctions (CAPTA List).
OFAC Directive 1A under EO 14024 (the Russia-related Sovereign Debt Directive) amends and supersedes OFAC Directive 1 to extend existing sovereign debt prohibitions to cover participation in the secondary market for bonds issued after 1 March 2022 by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation.
OFAC Directive 3 under EO 14024 (the Russia-related Entities Directive) prohibits beginning on 26 March 2022 transactions and dealings by US persons or persons within the US in new debt longer than 14 days maturity and new equity of Russian state-owned enterprises, entities that operate in the financial services sector of the Russian economy, and other entities determined to be subject to the prohibitions. This prohibition will initially apply to 13 entities.
OFAC issued on 2 March 2022 a new public guidance to “cut off avenues for potential sanctions evasion” by Russia’s Central Bank. The guidance makes clear that actions pursued on behalf of Russia’s Central Bank to act as its agent and help raise resources are prohibited. OFAC also advises that General License 8A does permit what are commonly known as “U-turn transactions,” where payments related to energy are processed through non-sanctioned, third-country financial institutions, enabling the continuation of transactions that support the flow of energy to the market.
According to the EO of 11 March 2022, the US, in coordination with its G7 allies and the EU, is working to suspend Russia’s membership of a number of leading multilateral financial institutions, including the International Monetary Fund, the World Bank and the European Bank for Reconstruction and Development as part of moves to block Russia’s access to financing and loans from these institutions, while restricting investment in any sector of the Russian economy by a US person, wherever located, as well as any approval, financing, facilitation, or guarantee of a transaction by a foreign person where the transaction would be prohibited by this section if performed by a US person or within the US. It also aims to block exportation, re-exportation, sale, or supply, directly or indirectly, from the US, or by a US person, wherever located, of US dollar-denominated banknotes to the Government of the Russian Federation or any person located in the Russian Federation.
2. Russian Harmful Foreign Activities Sanctions Regulations
OFAC has issued the Russian Harmful Foreign Activities Sanctions Regulations to implement EO 14024 of 15 April 2021. These regulations, which are effective as of 1 March 2022, include provisions on prohibited transactions, licences, authorisations, licensing policy, penalties, reports, and procedures.
EO 14024 cited the following as harmful foreign activities by the Russian government: efforts to undermine the conduct of free and fair democratic elections and democratic institutions in the US and its allies and partners, engaging in and facilitating malicious cyber-enabled activities against the US and its allies and partners, fostering and using transnational corruption to influence foreign governments, pursuing extraterritorial activities targeting dissidents or journalists, undermining security in countries and regions important to US national security, and violating well-established principles of international law, including respect for the territorial integrity of states.
According to OFAC, these regulations are being published in abbreviated form to provide immediate guidance to the public. OFAC intends to supplement this rule with a more comprehensive set of regulations that may include additional interpretive guidance and definitions, general licences, and other regulatory provisions.
Sanctions Targeting Businesses and Individuals
A number of Russian entities and individuals have been added to the Specially Designated Nationals and Blocked Persons List (SDN List). Generally speaking, entities and individuals included in the SDN List face comprehensive bans, blocking of assets, and restrictions on trade and financial transactions. Typical sanctions entail the blocking of all property and interests in property of the sanctioned entities/individuals as well as of any entities that are owned, directly or indirectly, 50% or more, individually or with other blocked persons, that are in the US or in the possession or control of US persons.
Unless authorised by a general or specific licence issued by OFAC or otherwise exempt, OFAC’s regulations generally prohibit all transactions by US persons or persons within or transiting the US that involve any property or interests in property of designated or otherwise blocked persons. The prohibitions include the making of any contribution or provision of funds, goods or services by, to or for the benefit of any blocked person, or the receipt of any contribution or provision of funds, goods or services from any such person.
Russian entities recently added to the SDN List include, among others: (1) VTB Bank Public Joint Stock Company, which holds nearly 20% of banking assets in Russia, as well as 20 of its subsidiaries; (2) State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (VEB); (3) Promsvyazbank Public Joint Stock Company (PSB); (4) Public Joint Stock Company Bank Financial Corporation Otkritie; (4) Open Joint Stock Company Sovcombank; (5) Joint Stock Commercial Bank Novikombank; and (6) Russian Direct Investment Fund. OFAC has issued general licences authorising certain transactions related to the wind-down of transactions involving VEB, as well as VEB’s servicing of sovereign debt.
The US has also imposed comprehensive sanctions targeting “powerful Russians in Putin’s inner circle” and financial sector elites. Russian persons recently added to the SDN List include Russian President Vladimir Putin, Russian Foreign Affairs Minister Sergey Lavrov, as well as various other Russian government officials and lawmakers and other individuals. As of 15 March 2022, 237 entities and individuals had been included in the SDN List pursuant to EO 14024. An additional 35 entities had been targeted for non-SDN sanctions pursuant to EO 14024. In all, approximately 908 Russia-based entities and individuals had been targeted by OFAC as of 15 March 2022 under all available legal authorities.
1. On Transportation
On 2 March 2022, the US Department of Transportation issued a directive suspending until further notice, existing, proposed, and prospective scheduled passenger and all-cargo operations of all foreign air carriers of the Russian Federation to and/or from the US. This suspension extends to all Russian foreign civil aircraft operators to navigate aircraft in the US. Any pre-approved charter operations were all deemed disapproved effective 2 March 2022.
2. New Interagency Enforcement Group
The US Department of Justice launched on 2 March 2022 the Task Force KleptoCapture, an inter-agency law enforcement task force dedicated to enforcing the sweeping sanctions, export restrictions, and economic counter-measures that the US has imposed along with allies and partners. The Task Force will ensure full enforcement of the sanctions so that Russia is effectively isolated from global markets and serious costs are imposed for the act of war, by targeting the crimes of Russian officials, government-aligned elites, and those who aid or conceal their unlawful conduct.
The Task Force will use cutting-edge investigative techniques – including data analytics, cryptocurrency tracing, foreign intelligence sources, and information from financial regulators and private sector partners – to identify sanctions evasion and related criminal misconduct. The group will be run out of the Office of the Deputy Attorney General and will make arrests and prosecutions when supported by facts.
Managing Sanctions Risk
Hong Kong sellers working with US persons in their supply chain doing business with Russia, Russian persons, and/or Russian entities, or having supply chains that extend to Russia, should immediately assess whether their operations are affected by the US sanctions.
Hong Kong sellers are advised to screen transaction partners through a private Restricted Party List (RPL) screening service or the web-based Consolidated Screening List, a list of parties for which the US government maintains restrictions on certain exports, re-exports or transfers of items. If the search is only for OFAC-administered economic sanctions (primarily the SDN List), OFAC’s web-based Sanctions List Search functionality can be used instead.
A Hong Kong company undertaking significant transactions or dealings with parties subject to US economic sanctions could itself become the subject of US sanctions so such transactions should be avoided. These types of designations are often referred to as “secondary sanctions”, applied to companies in third countries or territories that are not the primary focus of the controls effort but are seen as undermining the primary effort. A risk of secondary sanctions may be posed by dealings with sanctioned companies or individuals in Russia.
Hong Kong companies should also review and understand whether their traded items (commodities, software and technology) are subject to US jurisdiction. Foreign-made items that are not in the US or of US origin (e.g. produced, refurbished, assembled, or upgraded in the US) may still be subject to the EAR by nature of the de minimis or direct product rules. A non-US-made item, for example, is typically subject to the EAR only when more than 25% of its value consists of “controlled” US-origin content.
The new Russian FDP rule would impact any Hong Kong goods or major components thereof that are the direct product of certain US-origin software or technology subject to the EAR, or that are produced by certain plants that are themselves the direct product of certain US-origin software or technology subject to the EAR. This restriction would apply when it is known that the foreign-produced item is destined for Russia or will be incorporated into or used in the production or development of any part, component, or equipment produced in or destined for Russia. An even more extensive Russia-FDP MEU rule would apply to any dealings with Russian military end users. These same restrictions are also applicable to dealings with Belarus and Belarusian military end users.
Moreover, the ban on the importation into the US of Russian energy, alcohol, diamonds, seafood, as well as the impending withdrawal of Russia’s PNTR treatment and the ban on US exports of luxury products to Russia, is expected to have a dampening effect on any US-Russia trade that may flow through Hong Kong or be financed by Hong Kong entities.
It is worth stressing that many of the restrictions discussed above affect US persons wherever they are located, including US persons living and working in Hong Kong.
 The footnote 3 designation was established under the latest Russia sanctions rule and ensures that the public knows that these entities are subject to the severe restrictions on receiving items, technology, and software under the new Russia-Belarus MEU FDP.
- Eastern Europe
- North America