Yesterday, the U.S. Office of Foreign Assets Control (OFAC) added Public Joint Stock Company Alrosa (Alrosa) to the List of Specially Designated Nationals (SDN List), subjecting the company and its majority-owned subsidiaries to full U.S. blocking sanctions.  According to OFAC, Alrosa is the world’s largest diamond mining company and is responsible for 90 percent of Russia’s diamond mining capacity.

The move effectively cuts off Alrosa from U.S. commerce and requires U.S. persons holding property in which Alrosa has an interest to formally “block” or freeze that property and report it to OFAC.  OFAC issued a temporary general license allowing U.S. persons to engage in all transactions ordinarily incident and necessary to the wind down of transactions involving Alrosa and its owned entities until 12:01 am May 7, 2022.  OFAC also updated three existing general licenses authorizing U.S. persons to engage in certain limited transactions involving Alrosa debt and equity, Alrosa derivative contracts, and the wind down of Alrosa USA, Inc.

Absent authorization under a general license or a specific license issued by OFAC, any transactions with Alrosa that have a direct or indirect nexus with the United States or U.S. persons risk violating the sanctions and significant transactions by non-U.S. companies involving Alrosa could trigger secondary sanctions penalties.  U.S. and non-U.S. companies that deal in Russian-origin diamonds need to carefully review these new sanctions.

As part of yesterday’s action, the United States also expanded existing sanctions on United Shipbuilding Corporation (USC), a major Russian shipbuilder.

Yesterday, the Commerce Department’s Bureau of Industry and Security (“BIS”) issued temporary denial orders (“TDOs” or “orders”) on three Russian airlines – Aeroflot, Azur Air, and UTair – effectively cutting them off from U.S. exports, U.S.-origin items, and items manufactured abroad that are subject to the Export Administration Regulations (EAR).  The orders represent the agency’s first enforcement action for violations of the expansive export controls recently imposed on Russia

Background

On February 24, 2022, BIS imposed a license requirement for the export, reexport, and transfer (in-country) of aircraft and parts subject to the EAR to Russia.  On March 2, 2022, BIS modified license exception Aircraft, Vessels, and Spacecraft (AVS) to exclude aircraft registered in, owned, or controlled by, or under charter or lease by Russia or a national of Russia from the scope of the license exception.  As a result of those actions, aircraft subject to the EAR operated by Russian airlines required a license from BIS to be transferred to Russia.

Despite the new license requirement, all three airlines continued to fly international routes to and from Russia using aircraft subject to the EAR without first obtaining a license from BIS.  These flights were unlicensed exports to Russia, and violated the EAR.  The airlines also violated General Prohibition Ten (GP10) of the EAR by continuing to operate, fly, and maintain aircraft after the initial export violations occurred.  GP10 is a broad provision that prohibits U.S. and non-U.S. persons from selling, transferring, exporting, reexporting, financing, ordering, buying, removing, concealing, storing, using, loaning, disposing of, transporting, forwarding, or otherwise servicing any item subject to the EAR if that you know that a violation of the EAR has occurred, is about to occur, or is intended to occur in connection with the item.  BIS issued a warning to the public on March 18, 2022 that servicing identified aircraft that had been flown to Russia in violation of the EAR would constitute a separate, new violation of its regulations.

The TDOs are harsh and far-reaching civil penalties that are designed to cut off the penalized companies from items subject to the EAR.  Among other things, the TDOs broadly prohibit U.S. and non-U.S. persons from engaging in business dealings related to items subject to the EAR involving the penalized companies.  The orders will remain in force for 180 days and may be renewed.

Companies in the aviation sector will need to carefully review any dealings with the penalized airlines to ensure compliance with these significant new restrictions.  Copies of the TDOs are available here, here, and here.

Today, by overwhelming margins, Congress passed two pieces of legislation to further punish Russia for its invasion of Ukraine. The bipartisan bills suspend Permanent Normal Trade Relations (PNTR) with Russia and Belarus and codify President Biden’s recent Executive Order banning Russian energy imports. The bills now head to the President’s desk and are expected to be signed into law in the coming days.

H.R. 7108, the Suspending Normal Trade Relations with Russia and Belarus Act, passed the Senate by a vote of 100-0 and the House by a vote of 420-3. Among other things, the bill denies Russia and Belarus access to Most Favored Nation (MFN) tariff status, effective one-day after enactment. Russia and Belarus will join Cuba and North Korea as the only nations that do not have PNTR status with the United States. Early last month, in coordination with international allies, President Biden announced his support for revocation of PNTR with Russia – a move that required Congressional action.

While the United States imports a relatively small volume of goods from Russia, the move is expected to significantly raise the cost of certain key materials that U.S. manufacturers frequently source from Russia. For example, the duty rates on imports of unwrought nickel and nickel waste and scrap will increase from duty free to $0.066/kg. Russia is also a source of primary and unwrought aluminum for U.S. manufacturers. The current, general duty rate for these products is either free or less than 3 percent, but will increase to 10.5 to 25 percent. Similar increases will occur with respect to imports of Russian titanium castings and mill products, with duty rates jumping from between 5.5 and 15 percent to 45 percent post-revocation.

Additionally, H.R. 7108 grants the President the authority to further increase tariffs on imports from the two nations after consulting with Congress. That authority expires January 1, 2024.

The bill also directs the United States Trade Representative (USTR) to use “the voice and influence of the United States” at the World Trade Organization (WTO) to: (1) condemn Russia’s aggression in Ukraine; (2) encourage other WTO members to suspend trade concessions to Russia and Belarus; (3) consider further steps to suspend Russia’s participation at the WTO; and (4) work to halt Belarus’s WTO accession process.

Finally, H.R. 7108 permanently reauthorizes the Global Magnitsky Human Rights and Accountability Act, which was set to sunset in December 2022. The law authorizes sanctions on individuals responsible for human rights abuses and corruption.

H.R. 6968, the Ending Importation of Russian Oil Act, passed the Senate by a vote of 100-0 and the House by a vote of 413-9. The bill prohibits imports of Russian energy products – specifically, all products under Chapter 27 of the Harmonized Tariff Schedule – in a manner consistent with President Biden’s March 8 Executive Order.

Under the respective bills, subject to certain conditions and Congressional disapproval, the President is granted the authority to return normal tariff treatment and resume imports of Russian energy products.

Today, the United States imposed broad new sanctions on Russia in response to the continuing conflict in Ukraine.  The new measures include full blocking sanctions on Sberbank and Alfa-Bank, two of the largest banks in Russia, a ban on new investment on any sector of the Russian economy, and blocking sanctions on additional Russian elites.  A new Executive Order issued by President Biden authorizes the U.S. Office of Foreign Assets Control (OFAC) to impose a ban on the provision of certain services to Russia in the future, and the White House announced that OFAC would impose additional blocking sanctions on a raft of Russian state-owned enterprises tomorrow.

The European Union announced yesterday that it would impose a fifth round of sanctions on Russia in response to the ongoing war and attacks on the civilian population of Ukraine.  The package will contain six elements, including a ban on coal imports, additional sanctions on Russian banks, port and transportation sanctions, export bans on sensitive items, import bans on wood, cement, seafood, and liquor, among other items, and a government procurement ban.  We will prepare a more detailed summary once the EU publishes the full measures.

Sanctions on Sberbank and Alfa-Bank

Today, OFAC imposed full blocking sanctions on Sberbank and Alfa-Bank by adding the banks to its List of Specially Designated Nationals (SDN List), effectively barring U.S. persons from conducting business, directly or indirectly, with the banks.  Previously, Sberbank was subject to targeted sanctions that prohibited U.S. financial institutions from maintaining correspondent accounts for Sberbank or processing transactions involving the bank, while Alfa-Bank was subject to more limited debt and equity sanctions.  The move is a significant escalation of U.S. financial sanctions on Russia, fully blocking the largest public and private banks in the country.

OFAC issued three new general licenses and updated three existing general licenses authorizing limited transactions with the banks for temporary periods.  The new general licenses authorize transactions that are ordinarily incident and necessary to the wind down of Sberbank CIB USA, Inc. until June 7, 2022; transactions ordinarily incident and necessary to the wind down of transactions involving Sberbank until April 13, 2022, other than those that are prohibited by Directive 2 to E.O. 14024; and transactions ordinarily incident and necessary to the wind down of transactions involving Alfa-Bank until May 6, 2022.  Existing general licenses authorizing transactions related to energy, the wind down of certain debt and equity, and certain derivative contracts were updated to include Alfa-Bank.

In a statement accompanying the new sanctions, OFAC clarified that Alfa-Bank (Ukraine) is a distinct entity from Alfa-Bank, and that Alfa-Bank (Ukraine) is not subject to U.S. sanctions.

Investment Ban

President Biden’s new E.O. imposes a ban on new investment in the Russian Federation by a U.S. person, wherever located.  The E.O. does not define the scope of what constitutes a “new investment” in Russia, but prior OFAC guidance on the recently imposed energy investment ban construed the term broadly to be “a commitment or contribution of funds or other assets for, or a loan or other extension of credit to, new energy sector activities (not including maintenance or repair)” in Russia.  We expect OFAC to publish additional guidance on the intended scope of the investment ban under the new E.O.

Authority to Ban the Export of Services to Russia

Today’s E.O. also provides OFAC with authority to impose new restrictions on the export, reexport, sale, or supply of services from the United States or by U.S. persons to Russia in the future.  While the provision does not immediately impose new trading restrictions, it does allow OFAC to identify categories of services that will be prohibited or restricted in the future.  OFAC and the Commerce Department have imposed bans on the import and export of goods to and from Russia, but have not yet specifically targeted categories of services.

Russian Officials and Family Members

OFAC sanctioned 25 Russian officials and their family members, including President Putin’s daughters, former President and Prime Minister of Russia Dmitry Medvedev, and members of Russia’s Security Council by adding the individuals to the SDN List today.

Humanitarian Transactions

The White House reiterated its position today that sanctions are not intended to apply to essential humanitarian activities, including the provision of food, agricultural commodities, medicine and medical devices, telecommunications, and access to the internet, and directed agencies to issue appropriate exemptions and carve outs to ensure that these activities can continue.  Companies that provide these essential goods and services may find that practical challenges, including obtaining cooperation from banks and logistics providers, remains challenging for legally permissible business, even where exemptions or licenses are provided.

Today, the United Kingdom announced its next package of sanctions on Russia.

The measures, elements of which were implemented today, are aimed at reducing dependency on Russian energy, and further degrading Russia’s economy and capabilities.  In today’s action, the UK expanded its financial sanctions to subject Sberbank, the Credit Bank of Moscow, and Russian oligarchs to asset freeze restrictions.  Further actions, including a ban on outbound investment from the United Kingdom to Russia, are expected.

The UK imposed asset freeze sanctions on the following prominent Russian oligarchs involved in key industries such as energy, fertilizers, and diamonds:

  • Ivanov, Sergei Sergeivich, President of Alrosa, a prominent diamond producer;
  • Rotenberg, Boris Borisovich, the son of a co-owner of SGM, Russia’s largest gas pipeline producer;
  • Akimov, Andrey Igorevich, CEO of Gazprombank, one of Russia’s largest banks;
  • Dyukov, Alexander Valeryevich, CEO of GazpromNeft, a prominent state-owned oil producer in Russia;
  • Kogogin, Sergey Anatolyevich, director of Kamaz, a truck and bus manufacturer utilized by Russian military;
  • Guryev, Andrey Grigoryevich, close associate of Putin and founder of PhosAgro, a fertilizer company;
  • Mikhelson, Leonid Viktorovich, founder and CEO of Novatek, leading natural gas producer;
  • Kantor, Viatcheslav, the largest shareholder to Acron, a fertilizer company.

All accounts, and other funds or economic resources, and any funds owned or controlled by designated individuals and entities in the UK must be frozen and UK persons must refrain from dealing with frozen funds or assets unless authorized.  As with U.S. blocking restrictions, reporting and anti-circumvention requirements apply.

That said, the UK issued and amended temporary general licenses permitting certain dealings with the Credit Bank of Moscow and Sberbank, respectively.  Under those general licenses, persons subject to UK jurisdiction may wind down transactions involving the Credit Bank of Moscow, including closing out of any positions, and any other activity reasonably necessary to effect such authorized wind down activities.   The license regarding transactions with the Credit Bank of Moscow expires on May 6, 2022.  Moreover, subject to conditions, U.K. credit or financial institutions are authorized to process Sterling-denominated payments involving Sberbank for purposes of making crude oil, petroleum products, and gas available in the United Kingdom.  The authorization expires on June 24, 2022.

On Friday, the Commerce Department’s Bureau of Industry and Security (BIS) added 120 parties operating in the Russian and Belarusian aerospace, maritime, and defense sectors to the Entity List.  BIS designated the parties for attempting to procure items subject to the Export Administration Regulations (EAR) for the Russian and Belarusian militaries and for their military modernization efforts in Russia.  The addition of the parties to the Entity List means that no goods, software, or technology (technical knowhow) subject to the EAR may be exported, reexported, or transferred to the designated entities without a license from BIS, which is very unlikely to be granted.  The restrictions apply to all items on the EAR’s Commerce Control List (CCL), as well as less sensitive EAR99 items.

BIS designated 95 of the parties as “military end users” under Footnote 3 of the Entity List, subjecting the entities to the expansive Russian/Belarusian Military End User foreign-direct product rules (MEU FDPRs).  The MEU FDPRs extend the jurisdictional reach of the EAR to control items that are the direct product of any software or technology subject to the EAR that is on the CCL or that are produced by certain plants or major components of plants that are themselves the direct product of any U.S.-origin software or technology on the CCL.  Exports, reexports, and transfers of such items are prohibited without a license if an entity with a footnote 3 designation is a party to the transaction, or if there is knowledge that the item will be incorporated into or used in the production or development of any part, component, or equipment produced, purchased, or ordered by a footnote 3 entity.

The designations are effective Friday, April 1, 2022, with expected publication of the Final Rule on April 7, 2022.

Last week, President Biden invoked the Defense Production Act (“DPA”) to expand domestic production of certain critical minerals involved in the manufacture of large capacity batteries.  The five minerals specifically identified in the President’s memorandum are lithium, nickel, cobalt, graphite, and manganese.

The DPA allows the President to expedite and expand the supply of materials and services from the U.S. industrial base needed to promote the national defense, and explicitly grants authority to address mining and the production of minerals essential to national security. While the DPA permits the President to directly purchase minerals, reports indicate that the administration instead plans to fund mineral surveys and expand or modernize existing facilities.  Indeed, the directive tasks the U.S. secretary of defense with conducting feasibility studies for new projects, increasing production of by-products and co-products as well as waste reclamation at existing mines, and upgrading and expanding existing facilities.

President Biden’s memorandum is a continuation of the administration’s policy of establishing more resilient, diverse and secure supply chains in the United States.  The administration’s policy is discussed in detail in recently released reports on six critical industrial sectors, and in 100-day supply chain reviews.

The Presidential directive also comes shortly after U.S. Trade Representative Katherine Tai’s testimony before the House Ways and Means Committee, in which Ambassador Tai signaled a shift in strategy for curbing anti-competitive Chinese trade practices.  In particular, Ambassador Tai noted that existing tools have failed, and rather than imposing new trade penalties on China, a shift to a form of industrial policy of expanding U.S. production in critical sectors, including key mineral mining and processing, may be appropriate.

Critical minerals – and their importance to America’s industrial bases – have long been a thorn in U.S.-China trade relations.  Currently, China is the largest source of mineral commodities for the United States and many critical minerals used in manufacturing are produced exclusively by Chinese companies. In 2021, the United States was 100 percent import-reliant for 17 mineral commodities and at least 50 percent import-reliant for 30 others.  With the Administration directing resources toward shoring up and building out domestic capacities for the five identified minerals, companies in those industries or that rely on such minerals should keep watch of opportunities for growth.

Today, the United States imposed sanctions on Russian technology companies and a network of companies involved in procuring goods for the Russian Intelligence Services.  The Treasury Department also issued a determination authorizing the Office of Foreign Assets Control (OFAC) to impose sanctions on companies and individuals that it determines operate in the aerospace, electronics, or marine sectors of the Russian economy.

New Specially Designated Nationals

OFAC designated additional 21 entities and 13 individuals as Specially Designated Nationals (SDNs) as part of today’s action.  Most notably, OFAC imposed sanctions on JSC Mikron today, Russia’s largest chipmaker and exporter of more than 50 percent of Russia’s microelectronics.  Other sanctioned companies include AO NII-Vektor, T-Platforms, and the Molecular Electronics Research institute.

In addition, OFAC imposed sanctions on OOO Serniya Engineering and its surrounding procurement network for their role in obfuscating Russian military and intelligence activities and supporting Russia’s defense sector.  Other governments, including the European Union, Japan, and the United Kingdom recently imposed similar sanctions.

Expanded Sanctions Authority

Pursuant to section 1(a)(i) of E.O. 14024, the Treasury Department expanded its sanctions authority to include aerospace, marine, and electronic sectors of the Russian economy.  The action does not automatically impose sanctions on all actors operating in these sectors.  Instead, the action allows OFAC to add companies and individuals that operate or have operated in the Russian aerospace, marine, and electronic sectors to the SDN List in the future.

Other Sanctions Measures from the United Kingdom

Separately, the United Kingdom imposed new sanctions today on Russian media companies, Rossiya Segodnya and TV-Novosti, and related individuals.

 

Today, the United Kingdom expanded sanctions on Russia by imposing asset freeze restrictions on 59 Russian and six Belarusian actors.  The measures target key strategic industries in Russia, and include large banks, defense companies, and Russian elites.

Of note, the following Russian banks and companies have been added to the U.K.’s consolidated asset freeze list:

  • Alfa-Bank JSC
  • Gazprombank
  • Russian Agricultural Bank
  • Alrosa
  • Kronshtadt
  • Wagner
  • Russian Railways
  • Russian Venture Company

Moreover, the United Kingdom imposed asset freeze and travel sanctions on many Russian elites and oligarchs, including:

  • Oleg Tinkov, founder of Tinkoff Bank;
  • Herman Gref, CEO of Sberbank;
  • Oleg E Aksyutin, Deputry Chairman of Gazprom PJSC;
  • Didier Casimiro, the First Vice President of Rosneft;
  • Zeljko Runje, Deputy Chairman and First Vice President for Oil, Gas, and Offshore Business Development of Rosneft;
  • Galina Danilchenko, named mayor of Melitopol;
  • Eugene Markovich Shvidler, a billionaire oligarch.

With respect to Belarus, the United Kingdom sanctioned the following entities:

  • Bank Dabrabyt Joint Stock Company
  • CJSC Belbizneslizing
  • Industrial-Commercial Private Unitary Enterprise Minotor-Service
  • JSC Transaviaexport Airlines
  • Limited Liability Company Belinvest-Engineering
  • OJSC KB Radar-Managing Company Holding Radar System

All accounts, and other funds or economic resources, and any funds owned or controlled by designated individuals and entities in the UK must be frozen and UK persons must refrain from dealing with frozen funds or assets unless authorized.  As with U.S. blocking restrictions, reporting and anti-circumvention requirements apply.

The UK issued two general licenses (INT/2022/1424276 and INT/2022/1424277) authorizing the wind down of certain transactions involving Alfa Bank JSC,  GazPromBank,  Rosselkhozbank,  SMP Bank,  Ural Bank for Reconstruction and Development, and Bank Dabrabyt Joint Stock Company through April 23, 2022.

The UK also clarified that existing general license INT/2022/1381276 authorizes the provision of financial services to wind down certain transactions entered into prior to March 1, 2022 with entities owned, controlled, or acting on behalf of Russia’s Central Bank, National Wealth Fund, or Russian Ministry of Finance.

 

In coordination with G7 countries and the European Union, the United States imposed additional sanctions on Russia today, targeting Russian defense and aerospace companies, the Russian Duma, and the CEO of Sberbank, among others.  The White House also announced that the United States, G7, and EU are launching an anti-evasion initiative to coordinate responses to measures intended to undercut Western sanctions on Russia.

The Office of Foreign Assets Control (OFAC) published new guidance today warning that gold transactions involving Russia could trigger U.S. sanctions penalties and separately issued new and amended Russia-related general licenses.

New Sanctions Measures

OFAC added 48 Russian defense and aerospace companies to its List of Specially Designated Nationals (SDN List) today, effectively cutting off those firms’ access to U.S. technology, goods, and services.  Designated defense companies include Tactical Missiles Corporation JSC, JSC NPO High Precision Systems, NPK Tekhmash OAO, JSC Russian Helicopters, Joint Stock Company Kronshtadt, and related entities.

OFAC also added the following persons to the SDN List:

  • Herman Oskarovich Gref, the CEO of Sberbank;
  • Persons affiliated with Gennady Timchenko;
  • The State Duma of the Federal Assembly of the Russian Federation, and 328 of its members; and
  • 17 board members of Sovcombank.
Anti-Evasion Initiative 

The White House announced the creation of a new anti-evasion initiative with other G7 countries and the European Union today that is designed to share information about and coordinate Western government responses to measures designed to undercut or circumvent sanctions on Russia.  The United States also pledged to adopt sanctions similar to those imposed by the G7 and other partners, which are more extensive in certain respects than current U.S. measures.

Gold Guidance

OFAC’s new guidance warns participants in the gold market, including persons that process or facilitate gold-related transactions, to be vigilant against attempts to circumvent Russia-related sanctions measures.  OFAC’s guidance, which is provided in a new FAQ, reminds market participants that the U.S. may impose sanctions on non-U.S. parties that are involved in sanctions circumvention, engage in gold-related transactions involving Russia, or materially assist, sponsor, or provide support for sanctioned Russian parties.  The guidance also reminds U.S. and non-U.S. persons that they face civil and criminal U.S. penalties for violations of Russia sanctions measures involving gold-related transactions.

General Licenses

Today, OFAC amended two existing general licenses and issued two new general licenses related to Russia.  The amended general licenses authorize certain pre-existing clinical trials and other medical research, and extend the wind down general license for certain imports of Russian origin fish and seafood until 12:01 am on June 23, 2022.  The new general licenses authorize certain dealings with third-country diplomatic or consular missions in Russia and authorize certain activities related to journalism in Crimea and the separatist Donetsk People’s Republic (DNR) or Luhansk People’s Republic (LNR) regions of Ukraine.