- March 9, 2023
- Posted by: Florence
- Category: Uncategorized
At a Glance…
On February 24, G7 leaders announced new economic commitments intended to hold Russia accountable for its war against Ukraine. The commitments include (1) keeping Russia’s sovereign assets frozen until the conflict is resolved and Russia agrees to pay for Ukraine’s long-term reconstruction; (2) agreeing to endorse economic pressure mechanisms on Russia’s energy, extractive, financial, and defense and industrial sectors; and (3) establishing an Enforcement Coordination Mechanism to counter sanctions evasion efforts, which will be chaired by the United States in the first year.
The United States, European Union, and United Kingdom also announced a series of new sanctions against Russia.
Authors: Alexander Brandt; Leigh T. Hansson; Michael J. Lowell; Yves Melin; Manasi Venkatesh; James Willn; Lizbeth Rodriguez-Johnson; Paula A. Salamoun; Isabel Fressynet; Justin W. Angotti; Kirsten S. Lowell; Ozra O. Ajizadeh; Ray-Shio Ho; Tan Albayrak and Stephan B. Johansen
The United States took immediate steps to implement the new G7 commitments, including:
- Metals and Mining Sector Determination: The Office of Foreign Assets Control (OFAC) expanded its sanctions authority to Russia’s metals and mining sector. Under the new determination, OFAC will be able to add persons operating in this sector to the Specially Designated Nationals and Blocked Persson (SDN) List. The metals and mining sector includes “any act, process, or industry of extracting, at the surface or underground, ores, coal, precious stones, or any other minerals or geological materials in [Russia], or any act of procuring, processing, manufacturing, or refining such geological materials, or transporting them to, from, or within [Russia].” See FAQ 1115.
- Additions to the SDN List: OFAC added 22 individuals, 83 entities, and 22 vessels to the SDN List, including four entities operating in the Russian metals and mining sector; 30 third-country individuals and companies connected to Russia’s sanctions evasion efforts; and over a dozen Russian financial institutions, including Bank Zenit PJSC and Bank Saint-Petersburg PJSC.
- Additional sanctions by the U.S. State Department: The State Department also issued sanctions, including designating Energospecmontazh JSC (a/k/a ESM), Trest Rosspetsenergomontazh OOO (a/k/a Trest), and JSC State Research Center of the Russian Federation Troitsk Institute for Innovation and Fusion Research (a/k/a Troitsk Institute).
- Expanded Russian and Belarusian industry sector sanctions: The U.S. Bureau of Industry and Security (BIS) expanded the scope of the Russian and Belarusian industry sector sanctions by updating the list of items in Supplement Nos. 2, 4, and 6 to Part 746 of the Export Administration Regulations (EAR). The scope of Supplement No. 2 now includes any modified or designed “parts,” “components,” “accessories,” and “attachments” for the items identified, which aligns with the more expansive, existing language in Supplement No. 4. BIS added 322 industrial items to Supplement No. 4. BIS also made updates and clarifications to Supplement No. 6 that expanded controls over specified chemicals, resins, reagents, and materials. Both Supplement Nos. 2 and 4 now exclusively use HTS-6 Codes and HTS Descriptions, rather than Schedule B classifications, to identify the controlled items. This change aligns with the controls in place by other U.S. allies and partners.
- New Iran Foreign Direct Product (FDP) rule: BIS continues its efforts to target Russian activity involving Iran-supplied unmanned aerial vehicles by imposing new destination-based controls on Iran through an Iran FDP rule. The new controls impose export and reexport license requirements on a subset of EAR99 items, if destined to Iran, regardless of whether a U.S. person is involved in the transaction. The items are identified in new Supplement No. 7 to Part 746. Under existing rules, if a transaction is authorized by OFAC, separate authorization from BIS is generally not required. BIS acknowledged the potential for the Iran FDP rule to reach certain items that may be used in medical devices or communications devices authorized for export or reexport to Iran under the Iranian Transactions Sanctions Regulations. Accordingly, reexports and exports from abroad of foreign-produced items that would have otherwise met all of the terms and conditions of an OFAC general license if the transactions had been subject to OFAC license requirements are exempt from BIS license requirements.
- Expanded scope of the Russia/Belarus FDP rule: BIS also expanded the scope of the Russia/Belarus FDP rule to include items identified in the new Supplement No. 7 to Part 746.
- Expanded “luxury goods” sanctions: BIS expanded the scope of the “luxury goods” to better align with the controls already implemented by U.S. allies by adding over 276 items to Supplement No. 5 to Part 746.
- New Entity List additions: BIS added 86 entries to the Entity List. Seventy-six of the entities added were also designated Russian/Belarusian Military End Users.
- Tariff rate increases: President Biden signed proclamations raising tariffs on imports of Russian metal and metal products to 70% and other Russian products, including chemicals and minerals, to 35%. Additionally, Section 232 tariffs on Russian aluminum and derivative articles will increase to 200% beginning March 10, 2023. Beginning April 10, 2023, a 200% tariff will also be levied on aluminum and derivative articles where any amount of primary aluminum used in the manufacture of the articles is smelted in Russia or the articles are cast in Russia. As a result, country of origin determinations will be increasingly critical for imports that may incorporate Russian origin metal and other products.
BIS also revised Supplement No. 3 to Part 746 of the EAR to exclude Taiwan from certain controls on foreign-produced items under Section 746.8.
While the HTS-6 Codes now used in Supplement Nos. 2 and 4 are likely familiar to U.S. importers, U.S. exporters have a choice of declaring either a Schedule B code or the HTS-6 Code during the export clearance process as part of their Automated Export System (AES) filing responsibilities. Under the new rule, U.S. exporters who may have only tracked Schedule B classifications will now have to ensure that they are familiar with the HTS-6 Codes of any items they export to Belarus or Russia.
U.S. exporters will also need to carefully consider the relevance of the HTS descriptions in Supplement Nos. 2 and 4, which are only intended to assist exporters with AES filing responsibilities, but do not govern whether an item is identified in either supplement. This is a departure from the former rule under Supplement No. 4, which stated that only the items identified in the HTS Description column of this supplement are subject to the license requirement. BIS also indicated HTS codes will be easier to track for enforcement purposes.
Additionally, OFAC released four General Licenses:
- General License 8F authorizes energy-related transactions with Bank Zenit PJSC, Bank Saint-Petersburg PJSC, and certain previously designated banks (and any entity in which one of those banks directly or indirectly owns a 50% or greater interest) through May 16, 2023, at 12:01 a.m. (EDT);
- General License 13D authorizes U.S. persons and entities owned or controlled by U.S. persons to pay taxes, fees, or import duties, and purchase or receive permits, licenses, registrations, or certifications involving the Central Bank of the Russian Federation, the National Wealth Fund, and the Ministry of Finance through June 6, 2023, at 12:01 a.m. (EDT), provided the transactions are ordinarily incident and necessary to day-to-day operations in Russia.
- General License 60 authorizes all transactions ordinarily incident and necessary to the wind-down of transactions with nine newly sanctioned Russian banks (and any entity in which one of those banks directly or indirectly owns a 50% or greater interest) through May 25, 2023, at 12:01 a.m. (EDT); and
- General License 61 authorizes all transactions ordinarily incident and necessary to the divestment or transfer, or the facilitation of the divestment or transfer, of debt or equity in six of the newly designated Russian banks (and any entity in which one of those banks directly or indirectly owns a 50% or greater interest) through May 25, 2023, at 12:01 a.m. (EDT).
OFAC also released new frequently asked questions related to the sanctions. Of note, FAQ 1118 clarifies that General License 13D does not authorize the payment of a so-called “exit tax” involving the Central Bank of the Russian Federation or the Ministry of Finance. Instead, a license may be required when a divestment involves the payment of an “exit tax.”
On February 25, the EU also introduced further economic and individual sanctions against Russia in response to the war of aggression against Ukraine (referred to as the “tenth sanctions package”).
Marking one year of conflict, the EU adopted further restrictions against Russia, including an extension of the lists of restricted items under Annex VII, Annex XI, Annex XXIII, and Annex XXI and the lists of entities connected to Russia’s military and industrial complex (now including several Iranian entities), to whom tighter export restrictions apply. The new package extends the suspension of the broadcasting licenses, introduces new reporting obligations, and introduces sanctions against three additional Russian banks.
The EU has also extended the list of partner countries that have applied a set of export control measures equivalent to those of the EU, adding Australia, Canada, New Zealand, and Norway to the United States, Japan, the UK, and South Korea.
The batch of new measures introduced as part of the tenth sanctions package includes changes to Council Regulation (EU) 833/2014, which imposes sectoral sanctions against Russia, and Council Regulation (EU) 269/2014, imposing asset freezing measures against key entities and individuals in Russia’s economic, military, and political scenes.
- Restrictions on the import and export of goods to and from Russia
- Dual-use goods and technology (article 2) and firearms (article 2aa): In addition to an export ban against dual-use goods and technology, to minimize the risk of circumventing the ban, it is now also prohibited to transit via the territory of Russia dual-use items exported from the Union. Similarly, it is now prohibited to transit, via the territory of Russia, firearms, their parts and essential components, and ammunition.
- Goods that might contribute to Russian’s military and technological enhancement (article 2a): The tenth sanctions package extends the list of products subject to Annex VII to add, among others, rare earths and compounds, electronic integrated circuits (e.g., drones, missiles, helicopters), and thermographic cameras.
- Goods suited for the aviation or the space industry (article 3c): The tenth sanctions package introduces further export restrictions on goods and technology suited for use in the aviation or the space industry, as listed in Annex XI, to include turbojets (CN 8411.11 and 8411.12), turbopropellers (CN 8411.21 and 8411.22), and their parts (CN 8411.91). There is a wind-down period until March 27, 2023, for the execution of contracts concluded before February 26, 2023.
- Goods that generate significant revenues for Russia (article 3i): The new sanctions package introduced further import restrictions against Annex XXI items, including against petroleum jelly (CN 2712), petroleum coke (CN 2713), bitumen and asphalt (CN 2714), bituminous mastics (CN 2715), carbon (CN 2803), and synthetic rubber (CN 4002). There is a wind-down period until May 27, 2023, for the execution of contracts concluded before February 26, 2023.
- Restrictions on goods that could contribute to the enhancement of Russian industrial capacities (article 3k): The tenth sanctions package introduces further export restrictions against Annex XXIII items including against certain flat-rolled products of Chapter 72, certain machines and machine parts (e.g., earth moving machinery, boring machines for metals, machining centers), bulldozers, trailers, semi-trailers, rail locomotives, optical fibers, binoculars, direction finding compasses, and rangefinders. To avoid loopholes, the package also includes a ban against complete industrial plants (chapter 98). There is a wind-down period until March 27, 2023, for the execution of contracts concluded before February 26, 2022. By way of derogation, the competent authorities may authorize the sale, supply, transfer, or export of these goods if they are strictly necessary for the production of titanium goods required in the aeronautic industry for which no alternative supply is available.
- Goods detained in the Union (article 12e): To ensure legal certainty concerning the treatment of imports, the new package provides for the release of goods physically in the Union that have been presented to customs before the entry into force or applicability date of the import prohibitions imposed against them.
- Financial restrictions
- Reporting obligation (article 5a): Natural and legal persons, entities, and bodies must report the assets and reserves that they hold, control, or are a counterparty to at the Central Bank of Russia. To allow time to adapt, the new reporting requirements apply as of April 27, 2023.
- Post in governing bodies (article 5o and 5aa): It is prohibited as of March 27, 2023, to allow Russian nationals or natural persons residing in Russia to hold any posts in the governing bodies of the owners or operators of critical infrastructures, European critical infrastructures and critical entities, as defined in Directive (EU) 2022/2557 and Council Directive 2008/114/EC.
- Restrictions on services
- Aviation sector (article 3d): With this new package, the EU imposes an obligation for aircraft operators and non-scheduled flights between Russia and the Union, operated directly or via a third country, to provide all relevant information about the flight to their national competent authorities.
- Gas storage capacity (article 5p): It is now prohibited to provide “storage capacity” (meaning any combination of space, injectability, and deliverability) to a Russian national, a person residing in Russia, or a legal person, entity, or body established in Russia, and the legal person, entity, or body they owned, or natural or legal person that is acting on their behalf or at their direction. There is a wind-down period until March 27, 2023, for the execution of contracts concluded before February 26, 2023.
- Broadcasting services (article 2f): The new round of sanctions extends the suspension of the broadcasting licenses in the Union of Russian media outlets under the permanent control of the Russian leadership and the prohibition against broadcasting their content.
- Divestment and withdrawal from Russia (article 12b and article 5aa): The tenth sanctions package allows for the prohibitions on services (e.g., accounting, auditing, bookkeeping, tax consulting, architectural and engineering services, legal advisory, IT consultancy services) to be lifted until December 31, 2023, where such services are strictly necessary for the divestment from Russia or the wind-down of business activities in Russia.
In addition, the new sanctions package extends the possibility for national competent authorities to authorize transactions with entities subject to a transaction ban until December 31, 2023 (instead of June 30, 2023) if the transaction is necessary for the wind-down of a joint venture or similar legal arrangements concluded before March 16, 2022. It also extends the duration of the period (until December 31, 2023) in which the competent authority may authorize transactions that are necessary for Russian state-owned entities to divest and withdraw from Union companies.
To avoid a threat to maritime safety, the new package also provides for certain exemptions for Union operators to provide pilot services to vessels in innocent passage as defined by international law.
On February 23, the Office of Financial Sanctions Implementation (OFSI) announced new asset freeze measures against 92 individuals, entities, and banks, including Bank Saint-Petersburg PJSC, Bank Uralsib PJSC, Bank Zenit PJSC, and MTS Bank PJSC. See a full list of sanctioned individuals and entities.
Additionally, OFSI announced an intention to implement new G7 commitments, including:
- Expanded export controls: an export ban on every item Russia has been found using on the battlefield in Ukraine, including aircraft parts, radio equipment, and electronic components;
- New import bans: an import ban on 140 goods of Russian origin, including iron and steel products processed in third countries; and
- Broadening the geographic scope: in lockstep with the EU, the extension of measures against Crimea, Donetsk, and Luhansk to now include the non-government controlled areas of Kherson and Zaporizhzhia.
These measures have not yet been enacted into law.
This article was initially published by Reed Smith LLP – here.