Legal Alerts/25 Feb 2022

New Sanctions Imposed on Russia by the EU and the US

Following the most recent developments in Ukraine with Russia’s military aggression, the EU and the US have swiftly announced new sanctions to be imposed on Russia that go well beyond those that were adopted earlier in terms of both volume and scope. Read our previous Legal Alert on the topic here for more information on the previous sanctions.

EU leaders reached a political agreement on the imposition of additional sanctions at the European Council on 24 February 2022. The detailed sanctions will be adopted later in the form of legal acts, presumably on Friday the 25 or on Saturday the 26. The United States, on the other hand, adopted additional sanctions on 24 February 2022 by having two different government entities impose further financial restrictions and export control measures.

The European Union

According to the remarks made by the Commission’s President von der Leyen after the European Council session held on 24 February 2022, the EU’s sanctions will consist of measures targeting the financial, energy and transport sectors, export controls, export financing, and visa policy.

The EU’s new measures comprise the following:

Financial sanctions that will target the Russian banking market as well as key state-owned companies, including defence industries;
Energy sector sanctions that will hit Russia’s oil industry, most likely consisting of export bans for relevant items and technologies;
Prohibition on the sale of aircrafts, spare parts and equipment to Russian airlines;
Restrictions on the sale of dual-use items.

The United States – OFAC

The US Treasury Department’s Office of Foreign Assets Control (OFAC) has imposed new financial sanctions pursuant to the authorisation it received in Executive Order 14024:

Assets held by four Russian financial institutions in the US have been frozen. This asset freeze, which affects VTB Bank, Otkritie, Sovcombank, and Novikombank, also extends to all subsidiaries and entities of which they own 50 % or more;
Additionally, Sperbank has been subjected to sanctions on correspondent and payable-through accounts. The relevant measures are specified in Directive 2, which the OFAC issued under Executive Order 14024 on 24 February. In summary, US financial institutions are prohibited from opening or maintaining a correspondent account or a payable-through account with Sperbank and from processing transactions involving Sberbank or any of its subsidiaries as identified in Annex 1 of the abovementioned Directive. These prohibitions will take effect on 26 March 2022; and
Russia-related debt and equity restrictions has been expanded to include 11 Russian entities. Transactions and dealings by US persons or within the US in new debt with a longer maturity than 14 days and new equity is prohibited from 26 March 2022 onwards. Directive 3, which was issued under Executive Order 14024 specifies the measures imposed on the 11 entities listed in its Annex 1.

In addition to the new sanctions, OFAC has issued eight general licenses authorising certain transactions to minimise the unintended consequences of new measures. OFAC has also added members of families with close ties to Putin as well as senior executives at state-owned banks to the Specially Designated Nationals list (the “SDN list”).

Concurrently, OFAC imposed sanctions (asset freezes and travel bans) on 24 Belarusian individuals and entities for their support for, and the facilitation of, the invasion. These measures were implemented pursuant to Executive Order 14038:

Two Belarusian state-owned banks were added to the SDN list (Belinvestbank and Bank Dadrabyt); and
Nine entities with connections to the Belarusian defence and security industries and seven individuals with connections to the Government of Belarus were added to the SDN list.

The United States – The US Commerce Department’s Bureau of Industry

The US Commerce Department’s Bureau of Industry imposed restrictions on the export of goods and technologies for Russian military end users as well as a Russia-wide ban on the supply of sensitive technologies to the Russian defence, aviation, and maritime sectors.

The Bureau of Industry implemented the following measures:

New license requirements for items whose exports to Russia were not previously subject to control , including microelectronics, telecommunications, sensors, navigation equipment, avionics, marine equipment, and aircraft components with a review policy of denial;
The scope of control for ‘military end use’ and ‘military end user’ was expanded to cover all items subject to the Export Administration Regulations (EAR) with limited exceptions; and
Two new Foreign Direct Product (FDP) Rules were adopted to establish control over foreign-produced items that are the direct product of US-origin items, software or technologies:
- A new FDP rule that covers all of Russia applies to (i) the direct products of certain US-origin software or technology subject to the EAR; or (ii) products manufactured by certain plants or major components thereof, which are themselves the direct product of certain US-origin software or technology subject to the EAR. This rule does not apply to low-technology consumer goods (EAR 99 items); and
- A new, more extensive FDP rule for Russian military end users. The rule applies to all items, including EAR 99 items with limited exceptions. This military end user FDP rule applies to entities specified with a footnote 3 designation on the Entity List maintained by the US Bureau of Industry and Security. Currently, 49 entities are subject to the military end user FDP rule.

Partner countries that have adopted substantially similar measures are not subject to the FDP Rules. Exports, reexports, and transfers from such countries, including the countries of the EU, are also not subject to the FDP rules.

What comes next?

This second round of sanctions especially target Russia’s financial sector and Russia’s access to critical technology. Sanctions in the banking sector will have an immediate effect, while export control restrictions will bite especially in the long run. It also seems that transatlantic coordination of the measures has been successful, which will, in turn, improve their efficacy.

We will continue to monitor the situation and provide timely updates on any further sanctions and how they could impact your business. Borenius lawyers are available to answer any questions you may have with regard to the situation in Ukraine.