In response to Russia's invasion of Ukraine, the U.S. and its allies have incrementally ramped up repercussions against Russia, with sizeable, targeted sanctions against the institutions and individuals most responsible for the country's aggressive actions towards Ukraine.   The new trade controls are expansive and nuanced, but we provide in this alert our top takeaways for businesses to manage the increased legal and regulatory risks pertaining to business in Russia, Belarus and Ukraine. 

Summary of New Trade Controls

Although "the devil is in the details," the U.S. sanctions and trade controls recently imposed (primarily through the Treasury's Office of Foreign Assets Control (OFAC)) are summarized below. 

  • New SDNs designations. A significant number of individuals and entities have been designated by OFAC as "specially designated nationals" (SDNs). U.S. persons are prohibited from engaging in any transfer, transaction, export, import, withdrawal, or other dealings with SDNs and are required  to block (i.e., freeze) assets that come within their control.  This expanded list of SDNs includes Vladimir Putin himself, many of his "inner circle" oligarchs, top Russian (and Belarusian) banks, Russian media outlets, Nord Stream 2 AG and related affiliates and individuals of each. In addition, an entity owned 50% or more in the aggregate by SDNs is also deemed to be an SDN. Additional controls are expected from the State and Commerce Departments on Russian weapon development and production companies and other military supporters.
  • CAPTA prohibitions. U.S. financial institutions are prohibited from: (i) opening or maintaining a correspondent account or payable-through account for or on behalf of the impacted CAPTA entities and (ii) processing transactions involving those entities. U.S. financial institutions must reject (as opposed to "block") any such prohibited transactions. This sanction aims to prevent Sberbank from transacting in U.S. dollars.  Other activities with CAPTA entities are permitted unless sanctioned elsewhere.
  • New Debt/Equity. U.S. persons and/or anyone in the United States are prohibited from all transactions in, provision of financing for, and other dealings in new debt with a maturity of greater than 14 days or new equity that involve certain top Russian financial institutions and organizations.
  • SWIFT and "Golden Passports." Per pledges by the EU, France, Germany, Italy, the UK, Canada, and the United States, specific Russian banks will be removed from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) platform and will be unable to use the messaging system in order to facilitate international purchases and sales. These countries have also agreed to clamp down on the ability for Russian elites to gain citizenship and obtain access to a country's financial systems through investing a substantial amount of money or by purchasing property in that country.
  • Sovereign Transactions. U.S. persons are prohibited from any transaction with the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation, including any transfer of assets to such entities or any foreign exchange transaction for or on behalf of such entities. The aim of this sanction is prevent major Russian banks from leaning on their foreign funds to prop up the ruble currency.  This significantly expands the prior bans on U.S. persons participating in markets for primary and secondary bonds issued by these institutions to raise funds. 
  • Localized embargo. Similar to the restrictions imposed on the Crimea region of Ukraine several years ago after Russian occupation, U.S. persons are now prohibited from importing from or exporting to the so-called Donetsk People's Republic (DNR) or Luhansk People's Republic (LNR), as well as making new investments in those regions.  U.S. persons are required to block assets of anyone operating in LNR/DNR or supporting entities operating there.
  • Export Controls. In coordination with the OFAC sanctions, the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce imposed stringent export controls on both Russia and Belarus, which aim to prevent the advancement of both Russia's and Belarus's industrial base, primarily targeting their defense, aerospace, and maritime sectors. These restrictions, initially imposed only on Russia, were soon extended to Belarus due to its substantial assistance to Russia's invasion of Ukraine. The new export controls will significantly increase the licensing burden for anyone exporting to Russia or Belarus. Specifically, with very narrow exemptions, all items covered in Categories 3-9 of the Commerce Control List will require a license and BIS will review any such license applications under a "policy of denial." Further, all exports destined for Russian or Belarusian military end uses or to military end users, even items designated as "EAR99," will require export licenses.  Of particular note, BIS is implementing two new foreign direct product rules that will cast a wide net and expand U.S. jurisdiction to many items made outside of the United States with U.S.-origin software or technology.  Most recently, BIS added export restrictions for specific items needed for Russian oil refining, a notable move, as the new sanctions have generally spared the "oil and gas" sector.
  • Airspace Ban. The United States is closing off American air space to all Russian flights.  This includes aircraft certified, operated, registered or controlled by any person connected with Russia.

Given the breadth of the sanctions and the potential "pain" to American consumers and businesses, the Biden administration provided many "general licenses" to allow certain types of transactions to continue, such as wind down periods for current business relationships and a carve out for certain transactions "related to energy."  Many are narrowly scoped and time limited, so the details of a general license must be carefully reviewed before relying on it.

Top Takeaways

In light of the fluid and multifaceted trade controls described above, U.S. companies should consider the below seven tips to manage the evolving regulatory landscape: 

  1. Screen (or re-screen) existing business partners and relationships concerning Russia, Belarus or Ukraine, and institute prompt transactional safeguards as necessary.
  2. Assess the implications of any pending or upcoming payments (including accounts receivable) from customers that bank with Russian financial institutions.
  3. Vet the entities and individuals in a transaction involving the sanctioned areas, including counterparties, financial institutions and end uses/users.
  4. Ensure that products exported, re-exported or transferred (within the same country) to Russia, Belarus, LNR or DNR are correctly classified to ensure new prohibitions and licensing requirements are satisfied.
  5. Review applicability (and effective dates) of the new General Licenses.
  6. Consider obligations under non-U.S. trade controls implemented by American allies.
  7. Closely monitor developments and updates in this dynamic geopolitical situation and resulting regulatory landscape.

Although much attention must appropriately be given to the legal and business issues arising from the ongoing situation in Ukraine, we must not lose sight of the human tragedy occurring in Ukraine, and we hope for a quick and civilized end to the conflict.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.