New U.S., EU, and UK Sanctions and Export Controls Targeting Russia

New U.S., EU, and UK Sanctions and Export Controls Targeting Russia

February 28, 2024, Covington Alert

The U.S., EU, and UK released a range of new sanctions and export control measures last week, marking the second anniversary of Russia's February 2022 invasion of Ukraine and responding to the death of Russian opposition leader Aleksey Navalny in a Russian prison camp.

In the United States, the Treasury, State, and Commerce Departments further expanded the scope of U.S. sanctions and export controls targeting Russia, with new measures announced on February 23, 2024. The Treasury and State Departments designated more than 500 individuals, entities, and vessels for property-blocking sanctions and the Commerce Department added more than 90 entities to the Entity List for enhanced export control restrictions. These parties were targeted for their connection with the death of Navalny, their involvement in the procurement of sensitive technology and equipment in support of Russia's military, operating in the Russian energy, marine, and financial services sectors, providing support to Russia's industrial and defense sectors, and/or attempting to evade U.S. export controls and sanctions.

More specifically, the U.S. Treasury Department's Office of Foreign Assets Control ("OFAC"), in conjunction with the U.S. Department of State ("State") has adopted the following new or updated sanctions measures targeting Russia:

• Imposed comprehensive property-blocking sanctions against more than 500 additional entities, individuals, and vessels for their involvement in certain Russia-related activities, by adding them to OFAC's List of Specially Designated Nationals and Blocked Persons ("SDN List"), including JSC Sovcomflot ("Sovcomflot"), Russia's largest state-owned shipping company and fleet operator.
• Issued new general licenses authorizing:
  • Until April 8, 2024, transactions ordinarily incident and necessary to the wind down of transactions, and certain transactions related to debt or equity of, or derivative contracts involving, a small number of the newly designated entities.
  • Until May 23, 2024, certain health, safety, and environmental transactions involving certain blocked entities and vessels.
  • Until April 8, 2024, transactions ordinarily incident and necessary to the delivery and offloading of cargo from vessels designated to the SDN List solely because they are owned by Sovcomflot (or entities owned 50 percent or more by Sovcomflot), provided that the cargo was loaded prior to February 23, 2024.
  • Transactions involving any vessel that is not identified on the SDN List but that is blocked solely due to ownership by Sovcomflot (or any entity owned 50 percent or more by Sovcomflot).
• Issued new Frequently Asked Question ("FAQ") guidance related to Executive Order ("E.O.") 14068, which prohibits the importation into the United States of certain non-industrial diamonds of Russian Federation origin.

State also announced that it is taking steps to impose visa restrictions on those involved in the transfer and deportation of Ukrainian children.

Also on February 23, the U.S. Commerce Department's Bureau of Industry and Security ("BIS") added 93 entities to the Entity List for their activities in support of Russia's defense-industrial sector and war effort, including a number of entities located in allied and partner countries. Additionally, BIS announced the addition of five new "common high priority items" (designated by six-digit Harmonized System (HS) Codes) to highlight certain machine tools that are of key importance to Russia's war efforts and therefore pose a higher risk of illegal diversion to Russia.

Several U.S. government agencies, including OFAC and BIS, also released a new joint advisory titled "Risks and Considerations for Doing Business in the Russian Federation and Russia-Occupied Territories of Ukraine" to provide industry information on the state of the Russian market and the key risks for businesses and individuals still operating in Russia. Separately, BIS issued a new communique emphasizing its commitment to continued export control cooperation with the EU, UK, and Japan and noting that as the war in Ukraine has progressed, this export control partnership has continued to grow stronger and more sophisticated, including in the sharing of enforcement information and best practices to prevent and deter Russian evasion.

In the EU, on February 23, 2024, the Council of the European Union adopted its 13th package of sanctions against Russia. The package focuses on further limiting Russia's access to certain technologies (including technology used in relation to drones), and on designating additional companies and individuals for asset-freezing sanctions (including certain non-Russian entities involved in business activities in sensitive sectors of the Russian economy). Among other new measures, the EU also issued a range of new guidance in relation to various restrictions in the EU Russia sanctions regulation and also added-in lockstep with the U.S. and the UK-new items to the list of common high priority items.

The UK has also introduced a further round of asset-freezing designations targeting individuals and entities involved in the manufacture and supply of military goods to Russia or operating in the Russian energy, diamond, and metals sectors, which impose new restrictions on Turkish, Chinese, Belarusian, Swiss, and UAE-based entities, in addition to Russian persons and entities. The UK has also added items to its list of high priority items consistent with changes introduced by the U.S. and the EU and has published in the course of the past week a new UK Sanctions Strategy paper and guidance on the UK's approach to financial sanctions licensing.

New U.S. Sanctions

Designation of Additional Parties to the SDN List and Issuance of Associated General Licenses

In coordination with the Department of State, OFAC added more than 500 individuals, entities, and vessels to its SDN List on February 23. In its press releaseannouncing these new designations, the U.S. Treasury Department emphasized that the focus of these designations was on Russia's core financial infrastructure, parties involved in the circumvention or evasion of sanctions against Russia, and parties helping Russia procure critical technology and equipment relevant to supplying the Russian military and defense-industrial base. The press release issued by State additionally highlighted designations focused on Russia's energy and mining sectors; private military companies; individuals involved in the death of Aleksey Navalny; and individuals involved in the forced transfer, deportation, and re-education of Ukrainian children.

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.

Notable designations within some of Russia's major sectors include the following:

• Financial: JSC National Payment Card System ("NSPK"), an entity owned by the Central Bank of Russia which operates Russia's Mir National Payment System. The designations also include nine regional financial institutions, five investment and venture capital funds, and six financial technology companies.
• Energy: Various entities involved in the Arctic LNG 2 Project and the separate Ust-Luga LNG Terminal, including the operator of the LNG project at Ust-Luga (OOO Ruskhimalyans); entities involved in the financing and construction of liquefied natural gas tankers needed for the Arctic LNG 2 Project; and other parties involved in future Russian energy projects.
• Metals and Mining: PJSC Pipe Metallurgical Company, Russia's largest pipe producer, which has supplied piping for the U.S.-designated Nord Stream 2 AG, the project implementation company for the Nord Stream 2 pipeline project.
• Marine and Transportation: Sovcomflot, Russia's largest state-owned shipping company and fleet operator, along with 14 crude oil tankers in which Sovcomflot has an interest.

New designations targeting parties that have facilitated, orchestrated, engaged in, or otherwise supported the transfer of critical technology and equipment to Russia's military-industrial base include a total of 26 third-country entities and individuals in 11 countries, including the People's Republic of China ("PRC"), Serbia, the UAE, and Liechtenstein. Such parties include PJSC Transcontainer, a Russia-based freight forwarder involved in weapons shipments, and Diegelmann Illicit Finance Work, a transnational money laundering network facilitating the illicit movement of Russian-origin precious metals. OFAC also has designated parties and entities associated with the Alabuga UAV Procurement Network, a Russian-Iranian network that has helped facilitate Russia's acquisition of unmanned aerial vehicles ("UAVs").

OFAC has additionally designated new entities engaged in weapons production; additive manufacturing; advanced manufacturing and metalworking; the production of lubricants, coolants, and industrial chemicals; semiconductor and electronics manufacturing; industrial automation; optics; navigation; military-industrial base information technology; energy storage and power supply for military-industrial base equipment; military-industrial base software; Russia's aerospace sector; and a Russian entity engaged in the export of diamonds and other precious metals.

With respect to these new designations, OFAC has issued General License 88A and General License 89, each of which authorizes through 12:01 a.m. eastern daylight time on April 8, 2024, transactions otherwise prohibited by E.O. 14024 that are ordinarily incident and necessary to the wind down of transactions involving certain entities designated on February 23, 2024, and any entity in which they own, 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"). General License 89, which is specific to financial institutions, additionally authorizes U.S. persons to reject, rather than block, and return to the originator, originating financial institution, or their successor-in-interest all transactions prohibited by E.O. 14024 that are ordinarily incident and necessary to the processing of funds involving any blocked financial institution listed in General License 89 and serving as an originating, intermediary, or beneficiary financial institution, through 12:01 a.m. eastern daylight time on April 8, 2024.

OFAC has also issued General License 90, which authorizes through 12:01 a.m. eastern daylight time on April 8, 2024, transactions that are: (a) 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 certain entities designated on February 23, 2024, including any entity in which they own, directly or indirectly, a 50 percent or greater interest ("Covered Debt or Equity"); (b) 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 standard time on February 23, 2024; or (c) ordinarily incident and necessary to the wind down of derivative contracts entered into prior to 4:00 p.m. eastern standard time on February 23, 2024 and (i) include a blocked entity described in paragraph (a) of this general license as a counterparty or (ii) are linked to Covered Debt or Equity, 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 certain blocked vessels, OFAC has issued General License 91A, which authorizes through 12:01 a.m. eastern daylight time on May 23, 2024, transactions that: (i) involve the safe docking and anchoring in port of any vessels in which any blocked entity listed in the general license has a property interest; (ii) are ordinarily incident and necessary to the preservation of the health or safety of the crew of any such blocked vessels; or (iii) are ordinarily incident and necessary to emergency repairs of any such blocked vessels or environmental mitigation or protection activities relating to any such blocked vessels. This general license does not authorize entry into new contracts involving the blocked vessels, offloading of cargo from the blocked vessels (except as ordinarily incident and necessary to address vessel emergencies), or any transaction related to the sale of Russian origin crude oil or petroleum products.

Concurrent with the designation of Sovcomflot, OFAC issued General License 92, which authorizes through 11:59 p.m. eastern daylight time on April 8, 2024, transactions that are ordinarily incident and necessary to the delivery and offloading of cargo from any vessel identified on the SDN List that is blocked solely due to a property interest of Sovcomflot, or any entity in which Sovcomflot owns, directly or indirectly, a 50 percent or greater interest, provided that the cargo was loaded prior to February 23, 2024. OFAC also issued General License 93, which authorizes transactions involving any vessel that is blocked solely due to a property interest of Sovcomflot or any entity in which Sovcomflot owns, directly or indirectly, a 50 percent or greater interest, provided that such vessel is not designated on the SDN List.

New FAQ Guidance on the Diamonds and Diamond Jewelry Determinations

OFAC has published three new FAQs with respect to the Diamonds Determination and Diamond Jewelry Determination that it issued pursuant to E.O. 14068 on February 8, 2024.

The Diamonds Determination prohibits the importation and entry into the United States of certain diamonds that were mined, extracted, produced, or manufactured wholly or in part in the Russian Federation, including non-industrial diamonds with a weight of 1.0 carat or greater (effective March 1, 2024) and non-industrial diamonds with a weight of 0.5 carats or greater (effective September 1, 2024), even if substantially transformed outside Russia into other products. As an example, FAQ 1165 clarifies that the prohibition would apply to a non-industrial diamond that is mined in Russia but then undergoes manufacturing operations such as being cut, faceted, or polished in a third country, if its weight in carats at the time of importation meets the criteria above.

Additionally, under the Diamond Jewelry Determination, Russian-origin diamond jewelry and unsorted diamonds are prohibited from importation and entry into the United States. As an example, FAQ 1166 explains that the prohibition applies to the importation into the United States of diamond bracelets that have been manufactured in the Russian Federation, regardless of where the diamonds originated.

OFAC also published FAQ 1164 which further describes the different import prohibitions with respect to diamonds and diamond jewelry.

New U.S. Export Controls

New Entity List Designations

In parallel with OFAC's actions, BIS added 93 entities under 95 entries (due to some entities operating in multiple countries) to the Entity List for operating in or for supporting Russia's defense-industrial sector and war effort. Of the 93 newly designated entities, 63 are based in Russia, seven in the PRC, 15 in Turkey, one in both Turkey and China (accounting for two separate Entity List entries for the two locations of the same entity), three in the UAE, two in the Kyrgyz Republic, one in South Korea, and one in both India and the UAE (again, accounting for two separate Entity List entries for the two locations of the same entity). All items subject to the U.S. Export Administration Regulations ("EAR"), including even non-sensitive EAR99 items, generally require authorization under the EAR for export, reexport, or transfer to Entity List parties, or if such listed entities are parties to a transaction involving an item subject to the EAR.

Fifty-one of the 93 entities, including five entities outside of Russia, also were designated with a "Footnote 3" designation as Russian-Belarusian military end users, which indicates they are subject to the military end user restrictions at EAR § 744.21 and the Russia/Belarus-Military End User Foreign Direct Product Rule ("FDPR") at EAR § 734.9(g). The military end user controls at EAR § 744.21 impose a license requirement for the export, reexport, or transfer to a Russian/Belarussian military end user of any item subject to the EAR (including EAR99 items). The Russia/Belarus-Military End User FDPR at EAR § 734.9(g) provides that items produced outside the United States are subject to the EAR if they are: (1) the direct product of software or technology subject to the EAR and specified in any Export Control Classification Number ("ECCN") in product groups D or E in any categories of the EAR's Commerce Control List ("CCL"), or produced by plants or major components of plants that are themselves the direct product of U.S.-origin technology or software specified in any ECCN in product groups D or E in any categories of the CCL; and (2) the exporter, reexporter, or transferor has knowledge that any of these end users is a party to the transaction or 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 an Entity List Footnote 3 entity, as discussed in our client alert of March 6, 2022.

The five entities outside of Russia receiving a Footnote 3 designation are all located in the PRC and were added to the Entity List based on information that they significantly contribute to Russia's military and/or defense-industrial base by facilitating the diversion of controlled microelectronics to Russia's military and intelligence authorities.

Update to Common High Priority Items List

In conjunction with its multilateral partners in the EU, Japan, and the UK, BIS had previously identified by six-digit HS Codes 45 "common high priority items" that Russia seeks to procure for its weapons programs. Although these are not the only items that present Russia diversion risk, they represent those items that the United States and its partners had identified as being of greatest significance, and therefore also a particular focus of enforcement efforts.

In its action last week, BIS increased the common high priority items on the list from 45 to 50 to highlight additional types of items that pose a heightened risk of illegal diversion to Russia. The five new high priority items are Computer Numerically Controlled ("CNC") machine tools and parts and accessories described in the newly created Tier 4.B of the Common High Priority List.

Release of New U.S. Government Business Advisory

The Department of Commerce, in conjunction with the Departments of Treasury, State, and Labor, also published a new business advisory titled "Risks and Considerations for Doing Business in the Russian Federation and Russia-Occupied Territories of Ukraine."

The Advisory identifies exposure to sanctions and export control targets as a leading risk for businesses and individuals operating in the Russian market. Specifically, the Advisory warns that those remaining either directly or indirectly in the Russian market must understand the risk of their activities and emphasizes that OFAC's regulations generally prohibit all transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or otherwise blocked persons. Further, it cautions that persons (including non-U.S. persons acting outside the United States) who are engaged in certain transactions with blocked persons may themselves be exposed to future designations. The Advisory also highlights and summarizes the series of stringent export controls BIS has imposed on Russia and advises businesses and individuals to carefully assess the high level of risk attached to transactions in Russia.

Lastly, the Advisory emphasizes the importance of conducting thorough due diligence to reduce the risk of sanctions and export controls violations and points to various previously published guidance from OFAC and BIS as key resources for industry.

The EU's 13th Package of Sanctions Targeting Russia

On February 23, 2024, the Council of the European Union adopted a new package of economic sanctions against Russia. This new package primarily focuses on new asset-freezing designations and a limited set of new export restrictions.

Asset-Freezing Designations

Council Implementing Regulation (EU) 2024/753 designates additional individuals and entities to the EU asset-freezing list. The new designations primarily target the Russian military sector but also include entities-and owners and senior managers of companies-operating in other sectors of the Russian economy, such as the logistics, IT, and oil and gas sectors. The new designations also include entities that have been involved in parallel imports of prohibited goods to Russia as well as entities operating in third countries (e.g., Belarus, North Korea) that have provided support to the Russian military.

Sectoral Sanctions

In addition to the asset-freezing sanctions, Council Regulation (EU) 2024/745, which amends Council Regulation (EU) No 833/2014 ("Regulation 833"), introduces a number of changes to existing trade restrictions in relation to Russia:

• Additional Export Restrictions: The regulation adds additional items to Annex VII to Regulation 833 (which lists "goods and technology which might contribute to Russia's military and technological enhancement, or the development of the defense and security sector"), Annex XXIII to Regulation 833 (which lists "goods which could contribute to the enhancement of Russian industrial capacities"), including for example certain types of electrical transformers and certain components for the development and production of unmanned aerial vehicles.

The regulation furthermore adds new entities to the list of designated entities in Annex IV of Regulation 833 that are subject to enhanced export controls regarding dual-use and Annex VII items. The export of the controlled items (or associated services) to these entities always requires a specific export license, which will only be granted under narrowly defined circumstances. Notably the new designations also include non-Russian entities, including companies registered in China, Kazakhstan, India, Serbia, Thailand, Sri Lanka, and Turkey. According to the EU, these entities have been involved in the circumvention of trade restrictions.

• Iron and Steel Import Restrictions: The EU added the UK to the list of partner countries in relation to the third country iron and steel import restrictions, which prohibit the import of certain iron and steel products processed in a third country using Russian origin iron and steel products. To verify compliance with these restrictions, the EU requires importers of iron and steel products to provide evidence of the country of origin of the iron and steel inputs used for the processing at the moment of importation into the EU. These evidentiary requirements do not apply to the iron and steel imports from partner countries, which according to the EU impose similar restrictions on Russian iron and steel. In addition to the UK, the list of partner countries currently includes Norway and Switzerland.

New EU Guidance on Existing Measures and New Additions to the List of Common High Priority Items

Since the adoption of the EU's 12th package of Russia sanctions, the European Commission made several updates to its FAQs on the implementation of Regulations 833 and 269/2014 (available here), including in relation to the new restrictions against the provision of ERP software to Russia (Article 5n of Regulation 833) and the new requirements on implementing contractual clauses prohibiting the reexport of restricted items to Russia (Article 12g of Regulation 833) (see our latest alertfor additional details on these restrictions).

Furthermore, as outlined above, the European Union, in cooperation with the U.S. and other allies published an updated common list of "high priority items", which now includes certain CNC machine tools (available here).

New UK Sanctions Designations and Guidance

Further UK Asset-freezing Designations

On February 22, 2024, the UK designated for asset-freezing sanctions an additional 21 individuals and 29 entities under the UK-Russia Regulations and two further entities under the UK-Belarus Regulations. The new designations target individuals and entities involved in the manufacture and supply of military goods to Russia and those operating in the Russian energy, diamond, and metals sectors. Notably, the new designations extend beyond Russian entities to impose UK asset-freezing restrictions on certain Turkish, Chinese, Belarusian, Swiss, and UAE-based entities that have been identified as being involved with the foregoing sectors of the Russian economy.

The new designations include the following (among others):

• Updates to the UK Common High Priority Items List
• Arctic LNG 2 LLC, an entity involved in a large-scale LNG production project, and six directors of its parent company, Novatek;
• Fractal Marine (of the UAE), Active Shipping (of Turkey) and Beks Ship Management and Trading JSC (of Turkey), all of which are alleged to have been operating in the Russian energy sector;
• Niels Troost, a Swiss oil trade trader and his Swiss company Paramount Energy & Commodities SA;
• Three Chinese entities, two of which are alleged to have been engaged in the supply to Russia of restricted electronics (Finder Technology LTD and JUHANG Aviation Technology (Shenzhen) Co., Limited) and one that has been producing engines for drones used by the Russian military (Beijing Micropilot Flight Control Systems Co., LTD); and
• Pavel Marinychev, the new CEO of Alrosa, a large state-owned Russian diamond producer.

On the same date, the UK also designated under its human rights sanctions regime six Russian prison officers responsible for the management of the penal colony at which Aleksey Navalny died.

Updates to the UK Common High Priority Items List

Consistent with the changes to the equivalent U.S. and EU lists noted above, the UK has also updated its Russia Sanctions Common High Priority Items List to include five additional codes under Tier 4B relating to CNC machine tools for use in the manufacture of complex high precision metal components.

New UK Sanctions Guidance

On February 22, 2024, the UK published a UK Sanctions Strategy paper titled "Deter, Disrupt and Demonstrate - the UK sanctions in a contested world" (the "UK Strategy Paper"), which seeks to explain the UK Government's approach to financial sanctions and export controls. The UK Strategy Paper refers to the following forthcoming UK sanctions developments:

• As noted in our previous alert, the UK's new export controls enforcement authority, the Office of Trade Sanctions Implementation ("OTSI"), will become operational in 2024. OTSI will have the power to levy civil monetary penalties for breaches of UK trade sanctions and will refer "more serious breaches" to HM Revenue and Customs for criminal enforcement or other UK enforcement authorities (including the Police or the Serious Fraud Office, as appropriate).
• New legislation will be introduced in 2024 to prevent persons designated for UK sanctions (across all UK sanctions regimes) from acting as directors of UK companies.
• New legislation will be brought forward "when parliamentary time allows" to introduce a "tailored humanitarian exception" across the UK's various financial sanctions regimes, consistent with the commitments set out in the UK Government's White Paper on International Development published in November 2023.

On February 27, 2024, the UK published guidance setting out the policy principles that HM Treasury's Office of Financial Sanctions Implementation ("OFSI") applies to license applications relating to designated individuals under UK financial sanctions. The guidance sets forth 16 principles that will be applied by OFSI's caseworkers when considering UK financial sanctions license applications.

Notably, the licensing guidance states with respect to the question of ownership and control determinations, "OFSI will generally not make ownership and control determinations on behalf of applicants unless it is necessary to do so to issue a licence. It is incumbent upon applicants to demonstrate (with reference to clear facts and to the relevant legal tests in the specific legislation) how a company is owned or controlled and is therefore subject to sanctions…" but also goes on to note that in cases where there is uncertainty as to ownership or control, where there may be "respectable arguments" indicative of possible ownership or control, that "OFSI has a preference for issuing a licence (as opposed to issuing a negative ownership and control determination for the purpose of refusing a licence)."

The guidance is clear, however, that while the principles will "help guide OFSI's decision-making, they are not absolute" and OFSI will continue to consider all license applications on a case-by-case basis and reserves the right to depart from the principles in "exceptional circumstances."

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We are closely monitoring developments concerning the U.S., UK, and EU sanctions against Russia, and will issue further updates in the event of material developments. In the meantime, we would be happy to address any questions you may have.

Covington's International Trade Controls team-which includes lawyers in the firm's offices in the United States, London, and Frankfurt-regularly advises clients across business sectors, and is well-placed to provide support in connection with the evolving Russia sanctions and export controls. Our trade controls lawyers also work regularly with Covington's Global Public Policy team-consisting of over 120 former diplomats and policymakers in the United States, Europe, the Middle East, Latin America, Africa, and Asia-many of whom have had substantial government experience in sanctions and export controls matters, and who regularly advise our clients on emerging sanctions policy matters and related engagements with government stakeholders. Moreover, as the Ukraine crisis continues to unfold, Covington is exceptionally well-positioned to assist clients in navigating their most complex challenges, drawing on the multidisciplinary capabilities of additional practices in areas such as international arbitration and disputes, cybersecurity, anti-money laundering, insurance, and corporate restructuring.

If you have any questions concerning the material discussed in this client alert, please contact the members of our International Trade Controls practice.

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