By: John Black
As U.S. trade sanctions on Russia continue to evolve and expand, they are beginning to have an increasingly significant impact on U.S. and non-U.S. exporters and financial institutions. As the rules expand, their complexity increases a bit. Nonetheless, the current rules remain focused on a small number of important Russian entities and on Russian military end uses and military end users. It’s high time for a summary of where the rules stand today.
As a result of the Russian invasion and military actions in Ukraine, the U.S. imposed its first round of trade sanctions against Russia in March 2014. As Russian military forces continue at least to stay in, if not be active in, Ukraine (depending on the state cease-fire at any given moment), the U.S. is continuing to expand its trade sanctions and export/reexport controls on Russia. Canada, the European Union and other countries that have export controls also have imposed ever-expanding sanctions and export controls on Russia—in some cases, these other countries have restrictions that are broader than the U.S. restrictions.
While the initial round of U.S. actions might not have had a significant impact on exporters and reexporters, each subsequent expansion of U.S. restrictions is gradually and significantly expanding the impact. At one level, the U.S. rules are complex, but before digging into the complex details (and in order to know if you should dig into the complex details), take a look at the following breakdown of current U.S. restrictions aimed at Russia.
1) General Focus on Russia Defense, Financial and Energy Sectors: The U.S., along with many other countries, is focusing its restrictions on the defense, financial and energy sectors in the Russian economy. The U.S. has put some significant Russian entities in these sections on special restricted parties lists.
2) Export/Reexport License Review Policy: The United States has a stricter license approval policy for Russia. In short, if you apply for a license for a listed party or for activities involving the Russian defense, energy and financial sectors, you should expect that there is a good chance it will not be approved. There certainly may be some cases where licenses will be approved, but those likely are the exceptions to the rule. License applications for other exports/reexports to other sectors of the Russian economy will be reviewed on a case-by-case basis, which means that certain applications that were routinely approved in the past may not be approved now.
3) It Starts with Russian Parties Added to Restricted Parties Lists: Both the Office of Foreign Assets Control and the Bureau of Industry and Security have added Russian entities that are primarily in the defense, energy and financial sectors to their respective restricted parties list. OFAC new rules are largely focused on its new list known as the Sectoral Sanctions Identification (SSI) List. BIS added Russian parties of concern to its Entities List.
While U.S. prohibited parties lists include a wide range of obscure persons, companies and entities around the world, the newly added Russian entities include leading Russia energy, defense and financial entities. This means that the odds of you dealing with a newly listed Russia entity are significantly higher than the odds of you dealing with an obscure terrorist entity located in remote areas of Yemen. If you are using a third party screening tool, such as mkdenial.com or a constantly updated internal prohibited parties list, you are already in a position to ensuring you are screening all known names of all known parties you do business with against the most up-to-date lists. That is the critical first step.
The critical second step is to go to the OFAC and BIS websites and look at the names of the newly listed parties to see if they are parties with which you have done business or you may soon do business. Share the lists of the new parties with other people in your organization that should know about the new listings. Compare the lists to what you are doing in Russia, especially in light of OFAC’s rule that its restrictions apply to entities that are not listed if one or more listed entities owns a combined 50% or more of the unlisted entity.
If you find out you are dealing (or might soon deal or have dealt) with a new listed party, you need to know what the new rules are for those parties.
4) OFAC Rules for the SSI Parties: The rules are not as simple as “you may not do business with a newly listed SSI.” Operating under several executive orders OFAC has issued directives that describe its new, limited restrictions on dealing with these parties. In short:
- SSI Financial Services Entities: You may not be involved in financing for debt longer than 30 days maturity or new equity to listed financial sector entities according to the July 16, 2014 amended Directive 1. You may not be involved in activities prohibited by the prior version of Directive 1 which had a 90 day rule.
- SSI Energy Entities: You may not be involved in financing for debt longer than 90 days maturity to listed energy sector entities according to the July 16, 2014 amended Directive 2. You may not be involved in activities prohibited by the prior Directive 2.In addition, Directive 4 says you may not export or reexport anything in support of exploration or production for deep water, Artic offshore, or shale projects that have the potential to produce oil in the Russian Federation when listed energy section entities are involved.
- SSI Defense and Related Materiel Entities: You may not provide financing for debt longer than 30 days maturity to listed defense and related material entities according to Directive 3.
As you see, the OFAC directives do not prohibit all exports or reexports. In some cases, a problem would involve making an otherwise legitimate export with a problematic 90 day payment term that would exceed the 30 day limit. In other cases, the comprehensive ban on exports and reexports to energy sector entities applies only when the activities involve deep water, Arctic offshore or shale projects.
5) BIS Rules for Parties on the Entities List: BIS rules for its newly listed entities depend on the entity. For many certain newly listed entities, all items subject to the EAR require an export/reexport license. For other newly listed items, such as Gazprom OAO, a license is required only when items are destined for deep water, Arctic offshore, or shale oil or gas exploration or production operations in Russia as described in 746.5. When you find a listed entity, the Entity List will give you the rules applicable to that entity.
6) BIS Controls on Certain Items to Certain Energy Activities: The EAR has new rules that prohibit the export, reexport or in-country transfer of items in ECCNs 0A988, 1C992, 3A229, 3A231, 6A991, 8A992 or 8D999, or items in the new Supplement No. 2 to 746 when those items are destined to either unknown end use or for use directly or indirectly related to the exploration or production of oil or gas in Russian deep water, Arctic offshore or shale formations. Supplement No. 2 to 746 uses Schedule B Numbers to identify the items it controls. Importantly, these new rules apply even when the items are not destined for a Russian energy entity on a BIS or OFAC list.
7) BIS Imposes Military End-Use Export/Reexport Controls on Russia: BIS now applies the long standing 744.21 China military end use rule to Russia. As with China, this rule requires a license for normally NLR items in ECCNs in Supplement No. 2 to 744 when destined for certain limited “military end use” activities as defined in 744.21. These uses include delivery to activities involving the production of military items, but do not include a complete ban on delivery to military entities, as it focuses on the nature of the end use, not on the end user.
BIS also created a military end user rule for Russia in 744.21 that does not apply to China. This rule is a complete ban on delivery of the Supp. 4 ECCNs to military end users in Russia, which include national armed services (army, navy, marine, air force or coast guard), as well as the national guard and national police, government intelligence or reconnaissance organizations, or any person or entity whose actions or functions are intended to support “military end uses” as defined in 744.21.
Finally, a license is required for Russia, like China, for all items controlled in 9X515 and 600 series ECCNs including the y. paragraphs that are No License Required for most other countries.
8) What Should You Do? The first thing you need to do is make sure you take a close and thorough look at the new rules to determine the extent to which you are involved in activities with the listed parties or subject to the new energy sector end use restrictions, the military end-use restrictions, or the military end user restrictions. Take immediate measures to comply with the current rules as they apply to your current activities. This includes non-traditional export compliance issues, such as looking at payment terms when dealing with OFAC listed entities.
Next, take a look at your current and near future activities in Russia to see which things you are doing that might be hit by future expansions of U.S. restrictions. I do not know what is next, but certain potential areas where we could see new restrictions come to mind. For example, you might want to consider what you would do if future restrictions would apply to one or more of the following that you are currently engaged in:
- Activities with currently unlisted parties in the defense, energy or financial sectors
- Non-military business with Russian entities who are engaged in both military and non-military activities
- Dealings with the Russian Government
- Russian energy activities that are not currently the targeted activities
- Russian entities that are not listed but are related to listed entities or are similar to listed entities
8) The Future of U.S. Sanctions and Export/Reexport Controls on Russia: It looks like Russia might be moving ahead of China on the list of U.S. export controls biggest concerns. I don’t know what is next or who is next, but I did give some ideas about potential areas where the U.S. could expand restrictions. Right now the U.S. and other countries seem to be ratcheting up trade sanctions as Russian forces continue to stay in, or be active in, Ukraine. If Russia does not change its actions, it is reasonable to expect the United States to continue to expand its sanctions and export/reexport controls on Russia. It is not likely that the United States will impose on Russia sanctions and export/reexport controls similar to U.S. rules for Cuba, Iran, North Korea, Sudan and Syria.
On the other hand, the United States very well could lift all of its sanctions and controls on Russia if Vladimir Putin and the leaders of the United States, Canada and the EU make amends and sit down around the campfire singing Kumbayah while President of the United States John Black plays accompaniment on guitar.