The U.S. Treasury and Commerce Departments further expanded the scope of U.S. sanctions and export controls targeting Russia and Belarus on May 19, 2023, with new measures focusing on the construction, architecture, engineering, transportation, and manufacturing sectors of the Russian economy, additional reporting requirements for U.S. persons in possession or control of property of certain Russian government entities, and the designation for property-blocking sanctions of more than 300 individuals, entities, vessels, and aircraft, including those involved in procurement of sensitive technology and equipment for Russia, expanding Russia’s extractive capabilities, and persons operating in the Russian financial services sector.
In particular, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) has adopted the following new or updated sanctions measures targeting Russia:
- Published a determination pursuant to Executive Order (“E.O.”) 14024, and related Frequently Asked Question (“FAQ”) guidance, providing for the imposition of property-blocking sanctions against any persons determined to operate or to have operated in the architecture, engineering, construction, manufacturing, or transportation sectors of the Russian Federation;
- Published a determination pursuant to E.O. 14071, and related FAQ guidance, prohibiting, subject to limited exceptions, the exportation, reexportation, sale, or supply, directly or indirectly, from the United States or by a U.S. person, of architecture or engineering services to any person located in the Russian Federation;
- Amended Directive 4 under E.O. 14024 to include a reporting requirement for U.S. persons in possession or control of any property in which the Central Bank of the Russian Federation (“CBR”), the National Wealth Fund of the Russian Federation (“NWF”), or the Ministry of Finance of the Russian Federation (“MoF”) holds an interest, with such reports due to OFAC by June 18, 2023 and annually thereafter by June 30. In addition, OFAC issued General License 13E, which extends until August 17, 2023 the prior authorization of General License 13D (relating to certain administrative transactions, such as the payment of taxes and fees and the receipt of permits and certifications prohibited by Directive 4 because of the involvement of the CBR, NWF, or MoF); and
- Imposed comprehensive property-blocking sanctions against more than 300 entities, individuals, vessels, and aircraft from more than 20 different jurisdictions, including entities in Europe and Russia, for their involvement in certain Russia-related activities, by adding them to its List of Specially Designated Nationals and Blocked Persons (“SDN List”). Concurrently, OFAC issued three general licenses authorizing until August 17, 2023 transactions ordinarily incident and necessary to the wind down of transactions involving a small number of the newly designated entities—PJSC Polyus and five Russian research institutions and their blocked affiliates—and certain transactions related to debt or equity of, or derivative contracts involving, PJSC Polyus and its blocked affiliates, and also issued and amended several FAQs in relation to these designations and authorizations.
Also on May 19, the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) amended the Export Administration Regulations (“EAR”) to significantly expand the range of items subject to licensing requirements when destined for Russia or Belarus, with a particular focus on construction, manufacturing, and industrial inputs such as electronics, instruments, advanced fibers, and chemicals. Notably, the new rule also imposes licensing requirements on a number of medical products when destined for Russia or Belarus (or transfer within those countries). BIS also broadened the scope of the Russia/Belarus foreign direct product rule (“FDPR”) to cover items destined for Crimea and made certain clarifications and conforming changes to the EAR. Separately, the new rule expanded certain drone-related licensing controls that apply to Iran. BIS also added to its Entity List 71 entities, with a focus on entities identified by BIS as supporting Russia’s military and defense sectors. Further, BIS released a joint alert with the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) regarding evasion of Russia-related export controls.
Separately, the UK Government also has recently introduced new asset-freezing sanctions, and announced new trade restrictions—which have yet to be implemented—concerning the importation of Russian diamonds and Russian-origin copper, aluminum, and nickel.
The EU also announced a new package of Russia-related sanctions. The new package will focus on combating the circumvention of pre-existing restrictions and will likely include new asset-freezing designations and additional trade restrictions. The European Commission has prepared a draft of the proposed new regulations, which remain to be finalized and formally implemented.
New U.S. Sanctions
Designation of Russian Architecture, Engineering, Construction, Manufacturing, and Transportation Sectors under E.O. 14024
Section 1(a)(i) of E.O. 14024 provides for the imposition of property-blocking sanctions against any person determined to operate or have operated in specified sectors of the Russian Federation economy. OFAC has issued a new determination pursuant to Section 1(a)(i) of E.O. 14024, which expands the sectors covered by this provision to include the architecture, engineering, construction, manufacturing, and transportation sectors of the Russian Federation economy (in addition to various other sectors of the Russian economy that were already targeted under this authority, i.e., the metals and mining, accounting, aerospace, defense and related materiel, technology, electronics, financial services, management consulting, marine, quantum computing, and trust and corporate formation sectors).
Relatedly, OFAC has published FAQ 1126 which lists activities that it views as falling within the scope of these newly targeted sectors, as follows:
- The Architecture Sector “includes activities such as advising; pre-designing; designing; preparing sketches, reports, studies, assessments, site plans, working drawings, specifications, cost estimates, as-built drawings, or other materials; contract administration; site selection; and inspections concerning architectural and related matters involving the Russian Federation. Such activities may be related to the following types of projects, e.g.: residential, institutional, leisure, commercial, and industrial buildings and structures; recreational areas; transportation infrastructure; land subdivisions; urban planning; landscape architecture; and not necessarily relate to a new construction project. The term additionally includes any related activities, including the provision or receipt of goods, services, or technology to, from, or involving the architecture sector of the Russian Federation economy.”
- The Engineering Sector “includes activities such as advising; designing; recommending; consulting; constructing; installing, surveying; preparing studies, specifications, cost estimates, working drawings, process flow diagrams, arrangement drawings, or other materials; map making; planning; testing; analysis; and inspecting for engineering and related matters involving the Russian Federation. Such activities may be undertaken during any phase of an engineering project of any type and may not necessarily relate to a new construction or development project. The term additionally includes any related activities, including the provision or receipt of goods, services, or technology to, from, or involving the engineering sector of the Russian Federation economy.”
- The Construction Sector “includes activities such as the production, procurement, devising, framing, design, testing, financing, distribution, or transport involving the Russian Federation, of goods, services, or technology to fabricate, shape, alter, maintain, or form any buildings or structures, including the on-site development, assembly, or construction of residential, commercial, or institutional buildings, or of transportation infrastructure, in the Russian Federation; and any related activities, including the provision or receipt of goods, services, or technology to, from, or involving the construction sector of the Russian Federation economy.”
- The Manufacturing Sector “includes activities such as the creation, modification, repair, testing, or financing, of goods by manual labor or machinery involving the Russian Federation and any related activities, including the provision or receipt of goods, services, or technology to, from, or involving the manufacturing sector of the Russian Federation economy. Note that persons conducting or facilitating transactions that are exempt or authorized by OFAC—such as those related to the provision of agricultural commodities, food, medicine, or medical devices, or related to energy—will not be subject to sanctions under E.O. 14024.”
- The Transportation Sector “includes activities such as the production, manufacturing, testing, financing, distribution or transport to, from, or involving the Russian Federation of any mode of transport or any goods, services, or technology for the movement or conveyance of persons or property and the loading, unloading, or storage incidental to the movement of such persons or property; and any related activities, including the provision or receipt of goods, services, or technology to, from, or involving the transportation sector of the Russian Federation economy.”
Prohibition on the Provision of Architecture and Engineering Services to Persons in Russia under E.O. 14071
OFAC has published a determination pursuant to Section 1(a)(ii) of E.O. 14071, which prohibits the export, reexport, sale, or supply, from the United States or by a U.S. person, of architecture services or engineering services to any person located in the Russian Federation, subject to limited exceptions for the provision of such services: (1) to an entity located in the Russian Federation that is owned or controlled by a U.S. person; and (2) in connection with the wind down or divestiture of an entity located in the Russian Federation that is not owned or controlled by a Russian person. The structure of these new services prohibitions is consistent with the similar prohibitions previously imposed with respect to the provision of accounting, trust and corporate formation, management consulting, and quantum computing services to any persons located in the Russian Federation.
Additionally, OFAC has published FAQ 1128 which defines architecture and engineering services as follows:
- 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.”
- 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 additionally 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. OFAC intends to interpret this term consistent with UN CPC Codes 86721-86727, 86729, 86731-86733, 86739, 86751-86754, 86761-86764, and 86769.”
Maritime classification services are not subject to this new services prohibition, in accordance with the price cap policy for crude oil and petroleum products of the Russian Federation.
In relation to this determination, OFAC has updated three of its FAQs. Specifically, FAQ 1059 clarifies that, consistent with similar services prohibitions already in place, this new determination targeting architecture and engineering services does not prohibit U.S. persons from providing such services to persons located outside of the Russian Federation that are owned or controlled by persons located in the Russian Federation, provided that the provision of such services is not an indirect export of prohibited services to a person located in the Russian Federation, i.e., is not ultimately for the benefit of a person located in the Russian Federation. FAQ 1061 specifies that this determination does not necessarily prohibit U.S. persons from working as employees of entities located in the Russian Federation, provided that their employment does not cover services prohibited as part of this determination. Additionally, FAQ 1062 confirms that the prohibitions imposed by this determination apply to qualifying services provided by a U.S. subsidiary to a parent company located in the Russian Federation.
Amendments to Directive 4 under E.O. 14024 and Updated General License
Since February 28, 2022, Directive 4 under E.O. 14024 has prohibited, absent licensing or other authorization from OFAC, any transaction involving the CBR, NWF, or MoF, including any transfer of assets to such entities or any foreign exchange transaction for or on behalf of them. OFAC has now amended Directive 4 to require U.S. persons to report to OFAC any property in their possession or control in which any of the foregoing entities holds an interest “of any nature whatsoever.” In announcing this amendment, OFAC explained:
This reporting requirement is designed to provide additional information and fidelity on the Russian sovereign assets immobilized in U.S. jurisdiction. It is consistent with a similar measure recently adopted by the European Union and implements the G7 Leaders’ commitment today to take steps to fully map holdings of Russia’s sovereign assets that will remain immobilized in G7 jurisdictions until Russia pays for the damage it has caused to Ukraine.
Initial reports under this requirement must be submitted by June 18, 2023, and additional reports must be submitted annually thereafter by June 30 of each year. OFAC has also updated FAQ guidance to indicate that this reporting requirement is intended to identify assets of the foregoing Russian entities held by U.S. persons as of May 31, 2023, and is distinct from the reporting requirement already in place with respect to U.S. persons who reject transactions involving the foregoing entities.
These reports must include: (i) identifying information (i.e., name and address) for the person in possession or control of the property; (ii) the date the property came into the possession or control of such person; (iii) the entity or entities subject to Directive 4 having an interest in the property; (iv) a description of the property and its location in the United States or otherwise, including any relevant account types, account numbers, reference numbers, dates, or other information necessary to identify the property; (v) the actual, or if unknown, estimated value of the property in U.S. dollars as of May 31, 2023, for the initial report, and annually thereafter as of May 31; and (vi) a copy of the most recent relevant account statement or other documentation to support the estimated value of the property.
Additionally, OFAC has issued General License 13E, which extends through 12:01 a.m. eastern daylight time on August 17, 2023 the pre-existing authorization for U.S. persons, or entities owned or controlled, directly or indirectly, by a U.S. person, to pay taxes, fees, or import duties, and purchase or receive permits, licenses, registrations, or certifications, to the extent such transactions are prohibited by Directive 4 under E.O. 14024 (i.e., because they involve the CBR, NWF, or MoF), provided that such transactions are ordinarily incident and necessary to the day-to-day operations in the Russian Federation of such U.S. persons or entities. OFAC also updated FAQ guidance to re-affirm that General License 13E (like its predecessor, General License 13D) does not authorize U.S. persons to pay exit taxes imposed by the Russian government in connection with the divestment of assets in Russia, to the extent such tax payments would involve the CBR, NWF, or MoF, but rather that U.S. persons obligated to pay such exit taxes should seek a prior specific license from OFAC in order to do so. OFAC will consider such specific licensing requests on a case-by-case and expedited basis.
Designation of Additional Parties to the SDN List and Associated General Licenses
OFAC added more than 300 individuals, entities, vessels, and aircraft to its SDN List on May 19. These new designations include entities in more than 20 jurisdictions, including Estonia, Finland, Germany, the Netherlands, Poland, the UAE, and the UK. In its press release announcing these new designations, the U.S. Treasury Department emphasized that the focus of these designations was on parties involved in the circumvention or evasion of sanctions against Russia, the procurement by Russia of critical technology and equipment relevant to supplying the Russian military and defense-industrial base, the development of Russia’s future energy extraction capabilities, and the Russian financial services sector. For instance, OFAC has designated individuals and entities that focus on procuring sensitive technologies and equipment for Russia’s defense industry, including more than 30 companies that import, ship, or manufacture electronic components, semiconductors, and microelectronics to or in Russia. Further, OFAC has designated additional individuals and companies connected to Russia’s energy, financial services, metals and mining, and manufacturing sectors, as well as certain Russian educational and research institutions.
U.S. persons are broadly prohibited, except as authorized by OFAC, from transacting or dealing with SDNs and entities that SDNs own 50 percent or more, directly or indirectly, individually or in the aggregate with other SDNs. In addition, the property and property interests of SDNs and entities that they own 50 percent or more must be blocked, or frozen, when they come into the United States or the possession or control of a U.S. person. “U.S. persons” are U.S. legal entities and their non-U.S. branches; individual U.S. citizens and lawful permanent residents (“green-card” holders), no matter where located or employed; and persons present in the United States.
The new SDN designations targeting entities in the Russian metals/mining and energy sectors include Public Joint Stock Company Polyus (“PJSC Polyus”), which is one of the world’s largest gold producers, and Joint Stock Company Polimetall (“Polimetall AO”). With respect to PJSC Polyus, OFAC has issued General License 66 which authorizes through 12:01 a.m. eastern daylight time on August 17, 2023 transactions otherwise prohibited by E.O. 14024 that are ordinarily incident and necessary to the wind down of transactions involving PJSC Polyus or any entity in which it owns, directly or indirectly, a 50 percent or greater interest, provided that any payment to a blocked person must be made into a blocked account in accordance with the Russian Harmful Foreign Activities Sanctions Regulations (“RuHSR”). OFAC has also issued General License 67 which authorizes through 12:01 a.m. eastern daylight time on August 17, 2023, transactions that are: (i) ordinarily incident and necessary to the divestment or transfer, or the facilitation of the divestment or transfer, to a non-U.S. person of debt or equity of PJSC Polyus, or any entity in which PJSC Polyus owns, directly or indirectly, a 50 percent or greater interest, purchased prior to May 19, 2023 (“covered debt or equity”); (ii) ordinarily incident and necessary to facilitating, clearing, and settling trades of covered debt or equity that were placed prior to 4:00 p.m. eastern daylight time on May 19, 2023; or (iii) ordinarily incident and necessary to the wind down of derivative contracts entered into prior to 4:00 p.m. eastern daylight time on May 19, 2023, provided that any payments to a blocked person are made into a blocked account in accordance with the RuHSR.
With respect to the designation of Polimetall AO, OFAC has issued FAQ 1129 which clarifies that these blocking sanctions apply only to Polimetall AO and any entities in which it owns, directly or indirectly, a 50 percent or greater interest, and not to its parent company, Polymetal International PLC.
The new designations that target certain of Russia’s educational and research institutions include such institutions in the energy sphere, many of which work closely with Russia’s oil and gas industry to help develop new technologies and prepare students to work for Russian companies in these sectors. In relation to these designations, OFAC has issued General License 68 which authorizes through 12:01 a.m. eastern daylight time on July 18, 2023 transactions that are ordinarily incident and necessary to the wind down of transactions involving some, but not all, of the newly designated Russian universities and institutes, provided that any payment to a blocked person must be made into a blocked account in accordance with the RuHSR.
New U.S. Export Controls
Expansion of EAR99 Items Requiring BIS Licensing for Russia, Belarus, and Iran
On May 19, 2023, BIS issued a new rule that significantly expanded the range of otherwise non-sensitive EAR99 items subject to licensing requirements for export, reexport, or transfer (in-country) to or within Russia or Belarus, as well as certain items destined for Iran. The changes as to Russia and Belarus were made to further cut off Russia’s access to items of potential military application and to align the EAR’s controls more closely with those imposed by U.S. allies.
For items destined for Russia or Belarus, BIS expanded the list of items requiring licensing in Supplement Nos. 4 and 6 to EAR Part 746. With respect to Supplement No. 4, BIS added 1,224 new types of industrial items subject to licensing, including all of the remaining Harmonized Tariff Schedule (“HTS”) codes under three entire HTS chapters (Chapters 84, 85, and 90). Every HTS code under these three HTS chapters is now identified in Supplement No. 4, and therefore is subject to a licensing requirement when exported or reexported to, or transferred within, Russia or Belarus. In announcing this expansion, BIS observed that it should simplify compliance considerations for persons dealing in items with HTS codes in these three chapters, since such persons would no longer need to evaluate the specific HTS code applicable to their item, so long as they have confirmed that the item falls within one of Chapters 84, 85, or 90. These items include a variety of electronics, instruments, and advanced fibers for the reinforcement of composite materials such as carbon fibers.
Notably, the expansion of Supplement No. 4 also includes a large number of items related to medicine and medical devices, such as magnetic resonance imaging systems; ultrasonic scanning equipment; electrocardiographs and parts and accessories thereof; artificial joints and parts and accessories thereof; instruments and appliances for medical, surgical or veterinary sciences, and parts and accessories thereof; medical needles, catheters, and cannulae; and orthopedic or fracture appliances, and parts and components thereof. Applications for a license to export, reexport, or in-country transfer “items that are predominantly agricultural or medical in nature” as well as for “items that may be necessary for health and safety reasons" will be reviewed by BIS on a case-by-case basis.
With respect to Supplement No. 6 to Part 746, BIS added certain chemicals—lithium chloride, lithium chloride hydrate, lithium chloride monohydrate, and lithium carbonate—that BIS assesses may be useful for Russia’s industrial capabilities. BIS also revised subparagraph (f) of Supplement No. 6 to clarify that, consistent with its pre-existing interpretation, consumable items used with equipment controlled by that subsection are subject to the same restrictions as the equipment itself.
BIS also added one item, HTS code 854800, to the list of foreign-produced items in Supplement No. 7 to EAR Part 746 that require BIS licensing when destined to Russia, Belarus, or Iran. This HTS code was inadvertently omitted from BIS’s rule of February 24, 2023, which we detailed in a prior alert. This HTS code broadly covers “electrical parts of machinery or apparatus” not elsewhere specified or indicated. In announcing this change, BIS observed that this expansion is intended to further limit Iran’s ability to support Russia’s aggression against Ukraine by providing unmanned aerial vehicles.
Expansion of the Russia/Belarus Foreign Direct Product Rule and Supplement No. 7 to Cover Crimea
BIS also expanded the destination scope of the Russia/Belarus FDPR—now the Russia/Belarus/Temporarily occupied Crimea region of Ukraine FDPR—at EAR § 734.9(f) to cover Crimea. Consistent with the application of the Russia/Belarus FDPR to reexports and exports from abroad to Russia and Belarus, the revised rule includes an exclusion for reexports and exports from abroad to Crimea of items subject to the Russia/Belarus/Temporarily occupied Crimea region of Ukraine FDPR that are made from allied countries that have implemented similar controls, as identified in Supplement No. 3 to Part 746. These revisions also clarify that the licensing requirements for items identified in Supplement No. 7 to Part 746, which covers certain drone-related parts and components, extend to Crimea, in addition to Russia, Belarus, and Iran.
Clarifying and Conforming Changes to the EAR
BIS also implemented a number of clarifying changes to the EAR. For instance, the agency has clarified that items covered by Supplements Nos. 2, 4 and 6 generally do not need to be included as controlled U.S.-origin content for Russia and Belarus when conducting a de minimis analysis of non-U.S. products that will be reexported or exported from a country described in Supplement No. 3 to Part 746.
In addition, BIS added items controlled under Export Control Classification Number 5A991 to the existing licensing exclusions in sections 746.8 (Sanctions against Russia and Belarus) and 746.10 (‘Luxury goods’ sanctions against Russia and Belarus and Russian and Belarusian oligarchs and malign actors) of the EAR.
BIS also revised a number of HTS codes with cross-references and clarifying descriptions in Supplement Nos. 4 and 5. In light of the extensive changes to the various supplements to Part 746, these materials warrant a careful review.
Additions to the Entity List
In addition to these rule changes, BIS added 69 Russian entities to the Entity List and also designated those entities with a “footnote 3” designation as Russian or Belarusian military end users, thus subjecting them to a licensing requirement for all items subject to the EAR, including under the restrictive Russia/Belarus-Military End User FDPR. These entities operate primarily in the Russian defense and related industries such as aircraft repair and shipbuilding, as well as in the engineering and manufacturing sectors, and were targeted for providing support to the Russian military. BIS also added to the Entity List one entity in Armenia and one entity in Kyrgyzstan for preventing the successful accomplishment of an end-use check and posing a risk of diversion to Russia of items subject to the EAR.
BIS-FinCEN Guidance on Diversion and Evasion Attempts
In parallel with the May 19 rule, BIS issued a joint alert with FinCEN addressing Russia-related sanctions and export controls evasion “typologies,” HTS codes of particular risk and focus, and additional red flag guidance for identifying suspicious transactions.
The joint alert noted that use of third-party intermediaries and transshipment points in sympathetic jurisdictions is a particularly common tactic of illicit actors to evade Russia-related sanctions and export controls and to obscure the involvement of SDNs or Entity List parties. The joint alert further explained that the Russian government has employed procurement agents to operate covertly on its behalf, operating front companies and utilizing non-Russian bank accounts to indirectly route goods to Russia. Such agents may also engage in smaller-volume transactions across multiple firms to avoid the attention that a single large-volume transaction might draw.
Additionally, the alert identified nine high-priority items that cover critical U.S. components that Russia relies on for its weapons systems. Those items were identified by HTS codes 8542.31, 8542.32, 8542.33, 8542.39, 8517.62, 8526.91, 8532.21, 8532.24, and 8548.00 and cover a range of integrated circuits, transceiver modules, radio navigational modules, capacitors, and associated electrical parts. These items also appear in Supplement No. 7 to EAR Part 746. The alert recommended enhanced diligence around these items and specifically noted certain red flag scenarios that might raise diversion concerns: a company that, prior to February 24, 2022, never received any exports, or any exports of the high-priority items or that, after February 24, 2022, received a significant spike in exports of the high-priority items. Each of these scenarios, along with other traditional red flags such as a refusal to provide end-use or ownership data, warrants further diligence on the part of exporters prior to engaging in such a transaction.
Assessment of Russia Oil Price Cap
In a related development, the U.S. Treasury Department on May 18 issued a press release entitled “The Price Cap on Russian Oil: A Progress Report.” In the report, the Treasury Department reviews the objectives of the price cap policy, describes how the policy has been implemented, and presents evidence intended to demonstrate that the policy is working as intended. The report states:
The price cap policy is a novel tool of economic statecraft designed to achieve two seemingly contradictory goals: restricting Russia’s oil revenues while maintaining the supply of Russian oil. Meeting these goals would make it harder for Russia to fund its brutal war in Ukraine while keeping energy costs down for consumers and businesses around the world. Nearly six months after implementation, the price cap is achieving both goals. We will continue to monitor dynamics in the global oil market going forward and adjust as necessary in support of these goals.
The report appears to signal that the Treasury Department is satisfied with how the current policy is working and is not considering major changes to it (apart from potentially adjusting the price cap level in response to market conditions).
UK Sanctions Developments
Further asset freezing designations
On May 19, 2023, the UK imposed asset-freezing restrictions on 86 newly designated Russian parties (42 individuals and 44 entities). Included in the designations (which are outlined in full in the relevant Notice) are:
- 9 organizations connected to nuclear energy company, Rosatom;
- 13 members of the Gazprom Neft board of directors;
- 5 members of the Transneft board of directors;
- 8 companies connected to the Russian metals industry;
- 24 individuals / entities connected to the Russian transport sector;
- 20 individuals / entities active in the Russian defense sector (notably, the newly-designated entities in this category include the Russian conglomerate AFK Sistema, which is invested in a broad range of businesses outside of the defense sector); and
- 5 further Russian banks: DOM.RF, Rosbank, Tinkoff, Russian Regional Development Bank, and Metallinvestbank.
Future restrictions on Russian diamonds and metals
The UK also has announced its intention to further amend The Russia (Sanctions) (EU Exit) Regulations 2019 (the “UK-Russia Regulations”) to introduce bans on the import of Russian diamonds and Russian-origin copper, aluminum and nickel. At this stage no further detail has been provided concerning the precise scope of these measures, or when they will be introduced, though the announcement refers to the government's intention to bring the new measures into force “later this year.”
It is likely that the bans on imports of Russian-origin metals will be similar to those already imposed on iron and steel products, which relate to Russian-origin products imported from Russia or from elsewhere, and extend also to certain related services, such as the supply or delivery of restricted products, the provision of technical assistance, and financial or brokering services.
Circumvention risks and diligence expectations
On May 22, 2023, the UK Export Control Joint Unit (“ECJU”) issued a Notice concerning possible circumvention of UK trade sanctions and the need for those engaged in the export of goods subject to restrictions under the UK-Russia Regulations to be aware that “Russia will seek to procure restricted goods via other routes,” creating “risks around displacement of trade and diversion of goods to Russia.” The Notice highlights the importance of “strong due diligence” being conducted on even “established” counterparties and that such diligence must be repeated at regular intervals to ensure risks have not changed over time.
The Notice includes an “indicative” list of initial risk indicators in relation to customers, products, and jurisdictions, which include:
- Customers that are engaged in the supply of restricted goods, are physically located in countries adjacent to sanctioned countries, have entered into joint ventures with designated parties, have complex structures involving the use of intermediaries or third parties, or provide vague details about end users or end use of items;
- Products that are subject to export controls restrictions, described in vague terms in trade/financial documentation, or being shipped in a manner that is not consistent with normal geographic trade patterns, or transactions where there is any evidence or suspicion of fraudulent or inaccurate information having been provided; and
- Countries that are actively engaged in trade with sanctioned countries, or are not in the normal geographical trade patterns that would be expected in the regular course of business activity.
This Notice follows the publication by HM Treasury’s Office of Financial Sanctions Implementation (“OFSI”) in March 2023 of an update to its Enforcement Guidance, which indicates that in the event of a breach of the UK’s financial sanctions, OFSI will consider the degree and quality of research and due diligence conducted on the ownership and control of the relevant designated entity and sets out criteria that might be considered to indicate adequate diligence sufficient to constitute mitigation.
The OFSI guidance indicates that OFSI will consider appropriate due diligence to be “a mitigating factor where the ownership and control determination reached was made in good faith and was a reasonable conclusion to draw from such due diligence.” Conversely, OFSI will deem “a failure to carry out appropriate due diligence on the ownership and control of an entity, or the carrying out of any such due diligence in bad faith, as an aggravating factor.” It will be for any person against whom OFSI is considering taking enforcement action to establish that appropriate diligence has been undertaken, for example by showing evidence of:
- An examination of the formal ownership and control mechanisms of an entity to establish whether there is available evidence of ownership and control by a designated person;
- An examination of actual, or the potential for, influence or de facto control over an entity by a designated person;
- Open-source research on an entity and any persons with ownership of, or the ability to exercise control over, the entity, together with an examination of whether such persons are, or have links to, designated persons such that further investigation may be warranted;
- Direct contact with the entity and/or other relevant entities to probe into indirect or de facto control, including, where appropriate, seeking commitments by UK persons as to the role of any designated person or person with links to a designated person; and
- Regular checks and/or ongoing monitoring of the above where appropriate.
EU Sanctions Developments
On May 9, 2023, the President of the European Commission, Ursula von der Leyen, announced a new package of Russia-related sanctions. According to the Commission’s press statement, the proposed package—the 11th since the start of Russia’s full-scale invasion into Ukraine in February 2022—will focus on combating the circumvention of pre-existing restrictions. The Commission’s proposal includes the following measures (among others):
- Additional Export/Import Controls and Services Restrictions: The proposal contemplates various additions to the lists of products subject to export and/or import controls under European Council Regulation No. 833/2014.
- Intellectual Property Restrictions: The proposal also includes an explicit prohibition against transferring or granting access to intellectual property rights for use in Russia in relation to goods subject to export restrictions under Regulation 833/2014.
- Transit Ban: The Commission proposes to expand the existing transit ban to include additional technology products and aircraft parts. Items subject to these restrictions may not be transported to third countries via Russia.
- Third Country Restrictions: To address the EU’s concerns about the continued export of restricted goods to Russia via third countries, the Commission further proposes to introduce a new provision that would allow the EU to restrict the export of certain goods to designated third countries. It remains unclear which countries and products will be targeted for these restrictions.
- New asset-freezing designations: The Commission’s proposal contemplates new asset-freezing designations, including designations in relation to non-Russian entities that have been involved in the circumvention of EU sanctions. The proposal also includes an expansion of the legal authorities upon which the EU may impose asset-freezing sanctions, to broadly allow the EU to impose sanctions on parties who engage in acts that circumvent, or have the aim or result of frustrating, existing EU sanctions measures. The adoption of the new package requires the consent of all 27 EU Member States. A number of Member States have expressed concerns over certain of the proposed measures (in particular those targeting third countries and non-Russian entities), and it is therefore possible that aspects of the proposed new sanctions will be modified before the new package is implemented.