Russia/Ukraine Crisis: U.S. Announces Hundreds of New Designations

On February 23, 2024, the two-year anniversary of Russia’s invasion of Ukraine, and in response to the death of Russian opposition leader Alexei Navalny, the United States released an expansive list of new sanctions and export designations targeting Russia’s financial infrastructure, military-industrial complex, and third parties helping Russia circumvent U.S. sanctions and export controls, among others. In addition, the U.S. government published an advisory, Risks and Considerations for Doing Business in the Russian Federation and Russia-Occupied Territories of Ukraine, intended to emphasize the significant risks of conducting even lawful business with or in Russia.

While the United States has imposed extensive sanctions and other restrictions targeting Russia over the past two years, Friday’s designation of hundreds of individuals and entities is intended to demonstrate enduring resolve, and to signal that Russia will remain a jurisdiction subject to significant trade restrictions for years to come.

Sanctions Designations

In a press release announcing the new sanctions, the U.S. Department of the Treasury stated that the Office of Foreign Assets Control (“OFAC”) was “sanctioning almost 300 individuals and entities,” including “a major cog in Russia’s financial infrastructure; more than two dozen third-country sanctions evaders in Europe, East Asia, Central Asia, and the Middle East; and hundreds of entities in Russia’s military-industrial base and other key sectors.”¹

Financial Services Sanctions

Over the last two years, OFAC has imposed sanctions on many of Russia’s largest financial institutions, from the Central Bank of Russia to PJSC Sberbank to VTB Bank PJSC and many more. These sanctions have had significant impact, as they complicate U.S. persons’ ability to conduct transactions with even non-sanctioned Russian counterparties. Although the list of non-sanctioned financial institutions operating in Russia already was short, OFAC nevertheless imposed new sanctions targeting 21 entities operating in Russia’s financial sector.

First, OFAC imposed sanctions targeting National Payment Card System Joint Stock Company (“NSPK”), the state-owned entity that operates Russia’s National Payment System. OFAC determined that NSPK has helped Russia circumvent sanctions and emphasized that the designation was intended to counter Russian efforts to “reconstitute severed connections to the international financial system.”

Second, OFAC added nine financial institutions headquartered in Russia, five investment companies and firms, and six fintech companies (including developers of financial systems, cryptography tools, and software) to the List of Specially Designated Nationals (the “SDN List”), to further restrict Russia’s financial system.

Military-Industrial Base Sanctions

The largest category of new sanctions imposed by OFAC targets a wide range of parties that participate in Russia’s military-industrial base. OFAC observed that “[a]s Russia’s overheating war economy continues to cannibalize non-defense-related production at the expense of future economic prospects for the Russian people, an increasing number of entities across Russia are directly or indirectly contributing to Russia’s war machine,” which raises the prospect for more designations in the future.

Categories of entities designated to the SDN List include weapons producers, parties engaged in additive manufacturing (e.g., 3D printing), developers of machine tools and other manufacturing and metalworking equipment, developers of industrial chemicals (e.g., lubricants, coolants, etc.), semiconductor and electronic component manufacturers, parties engaged in industrial automation (including development of artificial intelligence), optics designers (e.g., thermal imaging technology), developers of navigational instruments, developers of military-industrial base information technology, energy storage developers and power suppliers, software developers, aerospace companies, manufacturing firms, logistics companies, engineering firms, and diamond exporters.

Shipping Sanctions

OFAC designated Joint Stock Company Sovcomflot (“Sovcomflot”), Russia’s state-owned shipping company and fleet operator, as well as 14 vessels owned by Sovcomflot, to the SDN List.  Sovcomflot also was targeted under Directive 3, issued pursuant to Executive Order 14024, which prohibits all transactions in, providing of financing for, and other dealings in new debt of longer than 14 days maturity or new equity issued by Sovcomflot after the sanctions effective date.  The purpose of these sanctions is to enforce the price cap on Russian oil and increase costs on Russia.  However, the immediate impact of these sanctions will be mitigated, to an extent, by general licenses issued by OFAC in connection with the designation (discussed below).

Sanctions Evaders

Over the past 12 months, OFAC has continued to evolve its Russia sanctions strategy by focusing sanctions on parties from third countries that help Russia to evade the extensive sanctions implemented by the United States and allied countries to date. On February 23, OFAC imposed new sanctions on:

• several technology suppliers based in the People’s Republic of China that OFAC determined were supplying critical technology to Russia;
• a finance network run by Liechtenstein-based Rheingold Edelmetall AG, which OFAC determined was collaborating with Russia-based metals companies to evade controls on that sector of the Russian economy;
• a freight forwarder, PJSC Transcontainer, that OFAC determined was contributing to Russian weapons trade;
• several Serbia-based technology exporters that OFAC determined were supplying goods and equipment to Russian electronics companies; and
• third-country manufacturers and logistics firms.

In addition, OFAC targeted a network through which OFAC believes Russia has obtained unmanned aerial vehicles (“UAVs”) from Iran, including Joint Stock Company Special Economic Zone of Industrial Production Alabuga.

General Licenses

In connection with the new designations, OFAC issued four general licenses, most of which focus on authorizing the wind-down of transactions with newly designated parties:

• Pursuant to General License No. 88A, parties have through 12:01 am EDT on April 8, 2024 to wind down transactions with 18 identified sanctions targets, including NSPK, Sovcomflot, and certain manufacturing firms, investment firms, and logistics providers.
• Pursuant to General License No. 89, parties have through 12:01 am EDT on April 8, 2024 to wind down transactions with eight of the Russian financial institutions that were separately targeted with sanctions.
• Pursuant to General License No. 90, parties have through 12:01 am EDT on April 8, 2024 to wind down dealings in debt or equity of six specified sanctions targets.
• Pursuant to General License No. 91A, parties have through 12:01 am EDT on May 23, 2024 to engage in vessel-related transactions (such as safe docking and anchoring, preservation of crew health and safety, or emergency repairs) of six specified entities, including Sovcomflot.
• Pursuant to General License No. 92, parties have through 12:01 am EDT on April 8, 2024 to deliver and offload cargo from vessels designated to the SDN List solely because of their connection to Sovcomflot.
• Pursuant to General License No. 93, transactions that are prohibited involving vessels that are blocked solely due to an ownership interest by Sovcomflot that are not separately designated to the SDN List are authorized.

Export Restrictions

The new sanctions imposed by OFAC were announced in coordination with actions by the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”).

Entity List Designations

BIS designated 93 entities under 95 entries (accounting for certain entities operating in multiple jurisdictions) to the Entity List, a designation that generally restricts the flow of goods or technology subject to the Export Administration Regulations (“EAR”) to targeted entities. Sixty-three (63) of the newly designated entities are based in Russia, 16 in Turkey, eight in China, four in the United Arab Emirates, two in the Kyrgyz Republic, and one each in India and South Korea. More than 50 of these entities also will be designated as Russian-Belarusian military end users, which carries additional, overlapping export restrictions.

Update to the Common High Priority Items List

Working with close U.S. allies—including the European Union, Japan, and the United Kingdom—BIS has identified “common high priority items,” as identified by six-digit Harmonized System (“HS”) codes, that Russia seeks to procure for its weapons programs. These items include both items that are controlled under the EAR and items that are classified as EAR99 but subject to industry-based export controls. The purpose of the Common High Priority Items List is to advise exporters of items that are at greatest risk of being diverted to Russia.

Advisory

In coordination with the U.S. Department of the Treasury and the U.S. Department of Commerce, the U.S. Department of State published an official Business Advisory titled Risks and Considerations for Doing Business in the Russian Federation and Russia-Occupied Territories of Ukraine (the “Advisory”).²

The Advisory reminds industry of the legal and reputational risks associated with doing business in Russia, including the expansive trade restrictions (including sanctions, export controls, and import prohibitions), concerns around corruption and money laundering, and concerns around human rights abuses (including child labor, sexual orientation and gender identity discrimination, and restrictions on freedom of expression).

Of note, the Advisory states that the U.S. government “assesses that doing business in the Russia Federation and in Russia-occupied territories of Ukraine poses serious legal, financial, and reputational risks” that cannot fully “be mitigated by rigorous due diligence.” For those companies that continue transacting in or with Russia, the Advisory recommends:

• Completing human rights-related diligence, in accordance with, inter alia, principles and guidelines set forth by the United Nations’ Guiding Principles on Business and Human Rights, the United Nations Development Programme’s Heightened Human Rights Due Diligence for Business in Conflict-Affected Contexts, the International Labor Organization’s Combatting Forced Labor: A Handbook for Employers and Business, the Office of the High Commissioner for Human Rights guide The Corporate Responsibility to Respect Human Rights, the Responsible Investment Association of Australasia’s Investor Toolkit on Human Rights & Armed Conflict: Managing human rights impacts and international humanitarian law implications before, during and after armed conflicts arise, and the U.S. Department of Labor’s web-based platformed Comply Chain.
• Completing sanctions- and export-related diligence, in accordance with, inter alia, principles and guidelines set forth by OFAC’s A Framework for OFAC Compliance Commitments, OFAC’s Guidance for Foreign Financial Institutions on OFAC Sanctions: Authorities Targeting Support to Russia’s Military-Industrial Base, and BIS’s Export Compliance Guidelines: The Elements of an Effective Export Compliance Program.
• Completing corruption- and bribery-related diligence, in accordance with the due diligence recommendations available in the FCPA Resource Guide published by the U.S. Department of Justice and the U.S. Securities and Exchange Commission.

The Advisory also observes that U.S. financial institutions are required under the Bank Secrecy Act to maintain effective anti-money laundering compliance programs, and that banks may specifically scrutinize transactions involving Russia.

While the Advisory stops short of articulating a formal U.S. Government position against conducting business in or with Russia, the Advisory incorporates some of the strongest language from the U.S. Government to date that companies that choose to continue to operate in, or transact with, Russia do so at their own (significant) legal and reputational peril.

Conclusion

On the second anniversary of Russia’s invasion of Ukraine, the U.S. Government announced hundreds of new sanctions and export restrictions that are intended to have both a symbolic impact and to further restrict opportunities for Russia to circumvent existing controls. Equally significant, through the Advisory, the U.S. Government issued a strong warning that the business environment in Russia is legally and morally fraught, emphasizing that robust due diligence is an indispensable—but not necessarily sufficient—step for companies that do continue to deal with Russia.