Over the past several weeks, the U.S. has undertaken efforts to isolate Russia economically and diplomatically through the imposition of three Executive Orders (Understanding President Obama's March 6, 2014 Executive Order Issuing Sanctions Against Certain Parties in Ukraine and its Potential Impact to Your Business, Understanding President Obama's March 17, 2014 Executive Order Issuing Sanctions Against Certain Parties in Ukraine, European Union Sanctions, and their Potential Impact to Your Business, Understanding President Obama's March 20, 2014 Executive Order Blocking Property of Additional Persons Contributing to the Situation in Ukraine and its Potential Impact On Your Business ) sanctioning Ukrainian and Russian government officials, individuals, Russian industry sectors, and one Russian financial institution. These sanctions, administered by the Treasury Department's Office of Foreign Assets Control (OFAC), have received significant public attention and could expand to severely restrict trade or economic activity with Russia. In addition to OFAC, however, other U.S. agencies are already taking steps in this direction.
On March 27, 2014, the U.S. Commerce Department's Bureau of Industry and Security (BIS) released a notice on its website that beginning on March 1, 2014, it had issued directives freezing all applications from U.S. firms that want to sell potentially controlled products to Russia. BIS placed a hold on the issuance of licenses that would authorize the export or re-export of items to Russia. According to BIS, they will continue this practice until further notice.
Similarly, according to a report in Foreign Policy, on March 1, 2014, the U.S. State Department's Directorate of Defense Trade Controls (DDTC), also stopped authorizing exports of "defense articles and defense services to Russia" until further notice. DDTC has the power to approve or reject arms sales to Russia under a different licensing regime than that enforced by BIS. Most commercial products exported to Russia do not require approval from the U.S. government. But, certain products that could be used for either civilian or military purposes require approval from the BIS to be sold to anyone in Russia. Together, the BIS and DDTC restrictions limit the ability of U.S. companies to export general commercial items or military items to Russian interests. With both the DDTC and BIS restrictions, the U.S. is not revoking existing deals with the Russian military or Russian companies, just refusing to approve new ones.
DDTC's and BIS' actions do not make it illegal for Americans to do business with whole Russian sectors like banking or energy, but the U.S. Congress is expected to pass legislation in the near future that could codify and further expand U.S. sanctions already imposed by President Obama's Executive Orders. The U.S. Senate bill would codify sanctions that the U.S. already levied against some of Russian President Vladimir Putin's associates, government officials, and a major bank. Those sanctions freeze any assets that sanctioned individuals currently hold within U.S. jurisdiction. They prohibit Americans from doing business with those targeted. The Senate bill also includes a proposal from Senator John McCain (R-Ariz.), enabling the President to impose economic penalties on Russian government officials for corruption even within Russia's own borders.
The proposed House bill would also authorize sanctions, loan guarantees and millions in direct aid. It urges President Obama to greatly expand the number of Russian officials and other sanctioned parties for human rights violations. The legislation would compel the president to report to Congress on sanctioning a broad range of senior Russian officials. These two legislative versions must still be reconciled and submitted to President Obama for his signature but, as mentioned above, this process is expected to occur within the next few days.
Finally, the European Union is preparing to pass an additional package of trade, financial, and economic sanctions against Russia for its intervention in Crimea. The impact or extent of these sanctions is not yet known, but will likely target Russia's energy sector.
With the new licensing holds in place by DDTC and BIS, there may be a trend towards the substantial restriction of U.S. business with Russian entities. Similarly, the potential codification of sanctions by the U.S. Congress and increased sanctions by the EU would probably limit the ability to conduct any business with Russian entities either directly or indirectly. For companies, the general importance of a compliance system that enables confirmation of any newly listed sanctioned entities should be emphasized. It is fundamental for companies to review business relationships, contracts, purchase orders, and upcoming business travel to ensure that the company does not run afoul of the March 6, March 17, or March 20 Executive Orders, the existing EU sanctions and other export control restrictions. Conducting required due diligence prior to a transaction mitigates the risk of having assets seized or frozen or engaging in an unlicensed transaction.