Russia vs. everyone else

“Unprecedented.”

“Significant.”

“Profound.”

“Powerful.”

“The mother of all sanctions.”

Those are just some of the words being used to describe the comprehensive and sweeping sanctions imposed against Russia by the United States and other allied nations around the world.  February 2022 saw the U.S. and our allies make approximately 1,000 additions and changes to its sanctions and export control policies – a truly unprecedented number.  On February 24, the day of the invasion, pursuant to Executive Order (EO) 14024, the White House authorized sanctions against Russia that are designed to “impose severe economic costs that will have both immediate and long-term effects on the Russian economy and financial system.”

Are the sanctions working?

While Russia stands accused of war crimes, including the use of thermobaric weapons, the sanctions are meant to deal significant blows to the Russian financial system, economy and people.  But are they working?  One day after the invasion, the benchmark Russian MOEX index fell 33% — the fifth worst day in its history, erasing $189 billion in shareholder value.  The market was closed for a month and resumed limited trading this week.

Some other indicators of the sanction’s effects include:

• The Russian ruble has lost about 40 percent of its value against the U.S. dollar so far this year. (Russia has threatened to pay debts to “unfriendly countries” in rubles vs. dollars, essentially admitting that its currency is now worth less.)
• Some economists predict Russia’s GDP will shrink 15% this year alone.
• Parts of Russia’s auto industry are shut-down due to lack of parts. There are also various reports about Russian consumers stockpiling or finding shortages of basic goods like sugar, paper, medicine and electronics.

The long-term effect of all this remains to be seen.  However, many experts predict that the invasion of Ukraine will set the Russian economy back 15 or even 30 years.

The latest updates from Treasury and Commerce

With so many changes in such a short amount of time, it’s difficult to keep up with the restrictions imposed against Russia.  Here’s a current rundown of the measures in place by the U.S. Department of the Treasury and the Department of Commerce.  As always, we recommend relying on the source regulations themselves as your company navigates these rules.

U.S. Department of Treasury – Office of Foreign Assets Control (OFAC)

• Russia’s financial institutions – this includes many of Russia’s largest banks and financial institutions. Further these sanctions can also include subsidiaries of these organizations.
  • Central Bank of Russia
  • Swift Payment Platform
• Expansion of activities involving debit and equity
• Sanctions on Russian elites including families who are close to Putin and financial sector elites
• Embargo on Crimea region and Donestk and Luhask (Covered Areas)

These sanctions are vast and wide. OFAC, however, has issued limited and specific general licenses authorizing certain transactions involving medical commodities and the COVID pandemic activities, certain debt or equity, wind down transactions involving certain block parties.

The above sanctions are designed to limit Russia’s ability to finance further invasion efforts.

U.S. Department of Commerce – Bureau of Industry and Security (BIS)

BIS has issued a final rule “Implementation of Sanctions Against Russia Under the Export Administration Regulations (EAR)” implementing new license requirements and licensing policy to protect U.S. national security and foreign policy interests.

• New EAR Controls: Involves Categories 3-9 and 58 different ECCNs.  These items had not been previously controlled to Russia and include microelectronics, telecommunications, sensor, navigation equipment, avionics, marine equipment, and aircraft components.  These controls are designed to impact Russia’s ability to purchase these goods which they cannot manufacturer on their own.
• Policy of Denial for License Applications: A policy of denial is exactly what it states, but BIS has noted that there will be certain limited exceptions that will be reviewed on a case-by-case basis and be related to safety of flight, maritime safety, humanitarian needs, space cooperation, and a few limited other exceptions.  This policy applies to all exports, reexports to or transfers within Russia.
• Expansion of Military End Use and Military End User Controls: Previously controls were limited to items on the CCL, but it is now expanded to include all items subject to the EAR which includes EAR99 items.  There are some limited exceptions including food and medicine designated as EAR99 and certain mass market items classified in 5A992 and 5D992. In addition, the entities that had been on the Military End User List are now on the Entity List.
• Limited use of License Exceptions
• Foreign Direct Product (FDP) Rule – Two new FDPs relating to all of Russia and another for military end users. This also includes parties that are on the Entity List. This is an extremely complicated area of export controls. Specifically, this rule controls the export, reexport or transfer of certain foreign produced items (including processes and services) produced directly by the use of U.S. origin technology or software.
• Prohibition of luxury goods to Russia

BIS has also provided a fact sheet that summarizes these export controls. Remember that these sanctions and export controls were designed with and in conjunction with our allies to provide a united front.

Now what?  Navigating the new landscape

Global companies or any U.S. Person dealing with Russia must take action to ensure they are doing everything possible to comply with these sanctions. The United States and its allied countries are closely scrutinizing any relationships with Russia.  Penalties will be applied.  As a result, many companies have decided to pause all activities with Russia and/or Belarus.  It is also worth noting:

• Russian countermeasures may affect imports into Russia and Russian banks are not allowing payment to U.S., U.K. and EU parties.
• Many countries are limiting imports of petroleum, diamonds, alcohol, etc.
• S. allies including NATO, Australia, Japan, New Zealand and South Korea have also implemented similar sanctions in line with the U.S.
• Further, as a result of Belarus’s support and facilitation of Russian forces in the invasion of Ukraine, OFAC sanctioned 24 Belarusian individuals and entities with more expected to come.

Below is some general guidance on how to proceed:

1. From a corporate standpoint, assess your risk associated with transactions with Russia.
2. Pause any shipments to or from Russia, Ukraine or Belarus.
3. Pause any acceptance of purchase orders to or from Russia or Ukraine.
4. Review the sanctions and export controls until you fully understand the scope of the sanctions and export controls. This includes:

• Screening of all parties you are working with including financial institutions to determine if they are sanctioned or subject to controls on Restricted Parties List. Remember that even if an entity is NOT in and of themselves sanctioned, they can be a sanctioned entity if they are 50% or more owned by a sanctioned entity or entities.
• Knowing the end use of your item.
• Knowing the classification (USML or ECCN) of your item.

5. Once you have all this information, then and only then are you in a position to make any decisions as to whether the transaction is permissible.

As this situation continues, it is important to understand that the U.S. and its allies may not be done with sanctions and controls.  The conflict only appears to be escalating, and all transactions with Russia will, no doubt, be looked at closely.

If you have questions or need help, schedule a no charge consultation with one of our sanctions experts today.