Russia Business: Recently Imposed Sanctions

Written by: John E. Parkerson, Jr., Esq. and Ivo Kaitschick*

Preface: Due to the recent Russian invasion of Ukraine, a multitude of new sanctions have been imposed — most of them on Russia, some on Belarus. In addition to sector or geographically-based sanctions, both the U.S. and the EU have been adding people and entities to their targeted sanctions list. Changes to sanctions applicable to Russia are frequent, and a comprehensive overview is beyond the scope of this piece. Instead, our goal is to alert you to some of the more recent developments.

By the U.S.:

1. Targeted persons and entities.

In the U.S., the Specially Designated Nationals and Blocked Persons list (“SDN List”) is maintained and continuously updated by the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). U.S. individuals and entities conducting international business should consult the SDN List regularly in order to ensure compliance with the OFAC prohibitions. A full list of sanctioned persons and entities can also be found here by entering RUSSIA-EO14024 or BELARUS in the program tab. If any individuals are sanctioned under Executive Order (“EO”) 14065 (see immediately below), they may also be found on OFAC’s SDN List under a program which will feature that EO number in its title.

2. Sectoral or geographic-based sanctions.

Questions often arise concerning whether certain business activities that may at first glance appear to be sanctioned are nevertheless allowed under one of the exceptions of a recently-issued General License. In those situations, it is especially imperative to consult with an attorney who has sanctions expertise before conducting any business that a company might assume is permitted under one of the General License exceptions. Some of the more significant Russia/Belarus-related sanctions enacted during the past couple of weeks follow.

EO 14065, published on February 21, prohibits activities in the so-called Donetsk People’s Republic and Luhansk People’s Republic and could be expanded to other regions in the future. Specifically, U.S. citizens may not invest there; goods, services or technology from those regions may not be imported into the U.S. or sold from the U.S. into those regions; and a U.S. citizen may not approve, finance or facilitate any transaction by a foreign person, if the U.S. person was prohibited from performing it. Exempt from these prohibitions are transactions related to the export of food or medicine; the response to Covid-19; activities of some NGOs; as well as personal remittances, telecommunications, internet services, and mail. There is a transitional period until March 23, 2022, during which any investments or other operations or contracts from before February 21 can be transferred to any non U.S. citizen, or wound down by fulfilling operations or contracts in conflict with the sanctions up to that point.

On February 23, Directive 1(a) under EO 14024 added to the already existing prohibition for U.S. institutions of dealing with the Central Bank of the Russian Federation, the National Wealth Fund, or the Ministry of Finance of Russia regarding bonds issued by them or lending funds, stemming from Directive 1 under the EO, issued in June 2021. Now, participation in the secondary market for bonds issued by the abovementioned institutions also is barred.

On February 24, Directive 2 under EO 14024 prohibited U.S. financial institutions from opening accounts or processing transactions for certain Russian banks; and Directive 3 prohibited any U.S. citizen from lending money to certain institutions. Ultimately, these two directives ban the most relevant Russian banks from U.S. financial markets. General Licenses 5 through 12 contain exceptions to this.

Directive 4 under EO 14024, issued February 28, next prohibited U.S. citizens from conducting any transaction involving or on behalf of the Russian Central Bank, Ministry of Finance and the National Wealth Fund, as well as all transactions attempting to evade that ban. There are some energy related exceptions under General License 8(a). Additionally, the Russian Direct Investment Fund was added to the SDN List.

On March 2, General Licenses 9(a), 10(a), 13, and 14 were issued, allowing some limited transactions involving Russian banks, specifically relating to debt, derivatives, administrative transactions, and clearing and settlement transactions. The three big Russian institutions that are targeted by Directive 4 as mentioned above still remain barred from most transactions.

Also on March 2, the Department of Transportation issued a notice banning all Russian aircraft from U.S. airspace. This suspends all passenger, cargo and charter flights by Russian carriers and additionally bans all Russian civil aircraft operators from flying in U.S. airspace. Airplanes already en route to or in the U.S. had until March 2, 9pm EST to leave U.S. airspace.

More locally, as of March 3, some Atlanta-based global companies have ceased operations in Ukraine and Russia, while others continue to conduct their business. UPS has announced that it will not deliver to either Ukraine or Russia. It is unclear, as of March 3, whether UPS will continue to use Russian airspace; but following the U.S. ban of Russian aircraft, we can expect Russia to follow suit in the coming days. Also, as of March 3, Coca-Cola Hellenic Bottling Company AG, the leading beverage production and distribution company in the region for the Coca-Cola Company, has ceased operations in Ukraine but continues operating its ten plants in Russia.

By the EU:

The EU also introduced new sanctions in response to the invasion.

On February 23, import and export bans for the so called Donetsk People’s Republic and Luhansk People’s Republic were issued for certain goods as well restrictions on trade and investment and a prohibition to supply tourism. They also barred the Russian state from accessing the EU’s capital and financial markets.

On February 25, the European Council introduced new financial sanctions, targeting 70% of the banking market. They also prohibited the sale, supply, transfer or export of goods and technology in oil refining to Russia. Further, the sale of aircrafts, spare parts and equipment to Russian airlines was banned, as well as the provision of related insurance and maintenance services. Additionally, the EU banned the sale of semiconductors, cutting edge technologies and other goods and technology that may help with enhancement of the defense and security sector in Russia.

On February 28, Russian airlines as well as all Russian registered aircraft and aircraft flown or chartered by Russians persons or entities were banned from landing in or flying over the EU. Any transactions relating to the Central Bank of Russia were also banned.

On March 2, the sale, supply, transfer or export of euro banknotes to Russia was banned. Further, any investment or other participation in projects co-financed by the Russian Direct Investment Fund was prohibited.

At the time of posting, we see additional sanctions coming into force. Our HBS International Business Group and its trade specialists will continue to monitor and provide periodic updates to the most significant of these Russia sanctions developments.

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* Ivo Kaitschick is a German law student at WWU Muenster, presently doing an internship in Atlanta at HBS.