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 Expanded Export Controls and Entity List Designations
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.
- Russian and Belarusian Export Restrictions.
The new rule builds on the substantial controls already in place on exports to Russia to include additional key inputs for Russia’s energy sector, industrial and commercial base and chemical/biological and defense industries. New U.S. measures include:
- Export Ban on EAR99 Industrial Items by HTS.
Items listed in chapters 84, 85 and 90 of the U.S. Harmonized Tariff Schedule (HTS) are now banned for export, reexport and transfer to or within Russia and Belarus pursuant to EAR Part 746 Supp. No. 4, which consists of EAR99 items. These HTS Chapters comprehensively cover machines, engines, boilers, reactors, industrial process equipment, electronics equipment, electrical devices, machine tooling and test, inspection and instrumentation equipment.
- Permission for 5A991 Communications Items to U.S. and Allied Companies. Restrictions on Russia and Belarus under EAR Section 746.8 (Sanctions against Russia and Belarus) and EAR Section 746.10 (‘Luxury goods’ sanctions) were liberalized to allow exports, reexports and transfers of mass market communications equipment in ECCN 5A991 to certain affiliates of U.S. and allied country (EAR Country Groups A:5 or A:6) companies. BIS added ECCN 5A991 equipment to an existing exclusion that allowed for shipments of ECCN 5A992 and 5D992 encryption items to U.S. and allied country companies in Russia and Belarus because ECCN 5A991 communications-related equipment is used for similar purposes as those items.
- Licensing Policy for Russia Exits. BIS has emphasized and clarified its licensing policy for reexports and in-country transfers of controlled assets in the context of companies exiting Russia, reorganizing this policy along with the other case-by-case approval policies in the EAR Russia controls. As BIS previously announced, license applications for the disposition of items by companies not headquartered in Country Group D:1, D:5, E:1 or E:2 in Supplement No. 1 to Part 740 of the EAR that are curtailing or closing all operations in Russia or Belarus will be reviewed for case-by-case approval, with consideration of potential benefit to the Russian government or military.
- Licensing Flexibility for Asset Divestitures.
BIS is providing more flexibility where a license to exit Russia or Belarus already has been obtained, and then new items are added to an EAR Section 746 list of restricted EAR99 goods. This relief appears under EAR Section 750.7, with a new paragraph (c)(1)(xi) regarding non-material changes to BIS licenses. In short, a replacement license is not required to cover newly restricted items, provided that they will not exceed the shipping tolerance or the number of units authorized under the original license, and the license pertains to selling off subsidiary business interests or investments involving items subject to the EAR.
- Foreign Direct Product Rule (FDPR) Expansion.
The FDPR applies U.S. export jurisdiction to foreign-made items that are based on or produced with certain controlled software, technology or equipment that are themselves subject to the EAR. In § 734.9(f), a new BIS rule extends the destination scope of the far-reaching FDPR for Russia/Belarus to reexports to the temporarily occupied Crimea region of Ukraine, with corresponding updates to the Crimea and Russia/Belarus trade controls at § 746.6 and 746.8.
- 71 Entities Added to BIS Entity List. BIS added 69 entities in Russia to the Entity List. One entity from Armenia and one from Kyrgyzstan were also added the Entity List for posing a risk of diverting items subject to the EAR to Russia and preventing successful end-use checks. This means that any exports, reexports or in-country transfers of items subject to the EAR to these entities are generally prohibited without a license from BIS, requests for which will generally be denied.
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.
New Services Bans, Blocking Sanctions and Reporting Requirements
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.
Engineering & Architecture Service Bans
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.
- Engineering services include assistance, advisory, consultative, design and recommendation services concerning engineering matters or during any phase of an engineering project. Engineering design services may be for: the construction of foundations and building structures (i.e., structural engineering); mechanical and electrical installations for buildings; the construction of civil engineering works; industrial processes and production; or other engineering designs, such as those for acoustics, vibration, traffic control systems or prototype development for new products. The term also includes geotechnical, groundwater and corrosion engineering services; integrated engineering services, such as those for transportation infrastructure or other projects; engineering-related scientific and technical consulting services, including geological, geophysical, geochemical, surface or subsurface surveying and map-making services; testing and analysis services of chemical, biological and physical properties of materials or of integrated mechanical and electrical systems; and technical inspection services. See OFAC FAQ 1128.
- Architecture services include advisory services; pre-design services; design services, including schematic design, design development and final design; contract administration services; combined architectural design and contract administration services, including post-construction services; and all other services requiring the expertise of architects. The prohibition applies to such services as they relate to residential, institutional, leisure, commercial and industrial buildings and structures; recreational areas; transportation infrastructure; land subdivisions; and not necessarily related to a new construction project. The term also includes urban planning services (i.e., land use, site selection and servicing of land for systemic, coordinated urban development) and landscape architectural services. OFAC intends to interpret this term consistent with UN Central Product Classification (CPC) Codes 86711-86704, 86719 and 86741-86742. See OFAC FAQ 1128.
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:
- any service to an entity located in the Russian Federation that is owned or controlled, directly or indirectly, by a U.S. person; and
- any service in connection with the wind-down or divestiture of an entity located in the Russian Federation that is not owned or controlled, directly or indirectly, by a Russian person.
Additional Sanctions 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:
- GL 66, which authorizes the wind-down of transactions involving Public Joint Stock Company Polyus through August 17, 2023.
- GL 67, which authorizes certain transactions related to debt or equity of, or derivative contracts involving Public Joint Stock Company Polyus through August 17, 2023.
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
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.