New Sanctions and Export Controls for Russia and Belarus, Phase III

As Russia’s invasion of Ukraine continues, the White House countered with another wave of sanctions and export controls.

Building on the restrictions discussed in our Phase I and Phase II alerts, these new measures further deny Russia and Belarus access to U.S.-origin technology, weaken Russia’s defense sector, penalize specific entities and officials supporting the invasion, and cut off sources and methods of financing. The rapidly evolving landscape makes it essential for companies to evaluate their touchpoints with Russia, Belarus, and Ukraine.

1. Narrowed Scope for Software Exports to Russia and Belarus

Amendments to the Export Administration Regulations (EAR) effective on March 2 further narrowed License Exception ENC for the export of encryption items controlled under Category 5 of the Commerce Control List (CCL). Absent the license exception, many commercial software items will require an export license before making the software available for download in Russia or Belarus, including software classified under ECCN 5D002 and certain mass market items classified under ECCNs 5A992 or 5D992.

Under the new rule — which amends the earlier distinction based on government end users and state-owned enterprises — availability of License Exception ENC for exports to Russia or Belarus is now limited to civil end-users that are:

1) Wholly-owned U.S. subsidiaries;

2) Foreign subsidiaries of U.S. companies that are joint ventures with other U.S. companies;

3) Joint ventures of U.S. companies with companies headquartered in countries from Country Group A:5 or A:6;

4) Wholly-owned subsidiaries of companies headquartered in countries from Country Group A:5 or A:6; or

5) Joint ventures of companies headquartered in Country Groups A:5 or A:6 with other companies headquartered in Country Groups A:5 or A:6.

Companies that began due diligence to evaluate whether Russian customers fit within the scope of government end users, state-owned enterprises, military end users, or a military end use, will need to adjust the analysis to the new framework and to include customers in Belarus.

Exporters may also be able to rely on License Exception CCD (short for consumer communications devices) to provide ECCN 5A992/5D992 consumer items (e.g., computers, smartphones, and mobile apps) to individuals (other than certain government officials) and independent non-governmental organizations in Belarus and Russia. 

2. Ambiguity Regarding Exports of Source Code to Russia and Belarus for Internal Development Purposes

The changes to License Exception ENC for Russia and Belarus call into question whether U.S. companies can lawfully export certain source code to individual software developers and contractors in Russia and Belarus for internal company development purposes. This may be an oversight by the U.S. Department of Commerce; otherwise it would be permissible for a U.S. company to rely on License Exception ENC to export 5D002 source code to a wholly-owned U.S. subsidiary located in Russia, but not to an individual developer who contracts directly with the U.S. company — an outcome difficult to reconcile. 

We contacted officials at the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) to inquire, who confirmed they are aware of the potential ambiguity and are deliberating whether and how to respond. Companies with software development resources in Russia and Belarus should continue to monitor these changes (and others) as the situation in Ukraine develops.

3. Sweeping Export Control Restrictions on Belarus

The EAR amendments impose export restrictions on Belarus that mirror those levied on Russia last week. Exports to Belarus are now subject to: (1) expanded license requirements for items controlled in Categories 3-9 of the CCL; (2) the two Russia Foreign Direct Product (FDP) rules applicable to certain foreign-produced items; (3) a license review policy of denial, along with significantly restricted use of license exceptions; and (4) broad restrictions on “military end use” and “military end users” (as well as “military-intelligence end use” and “military-intelligence end users”).

BIS also added two Belarusian “military end users” to the Entity List (imposing an export license requirement for all items subject to the EAR destined for the listed entities) and tagged them with a “footnote 3” designation (subjecting those entities to the Russia/Belarus FDP rules). These entities are the Ministry of Defence of the Republic of Belarus and JSC Integral, a key manufacturer of integrated circuits and semiconductor devices.

4. Blocking Sanctions and Export Controls Aimed at Russian Officials, Elites, Defense Entities, and the Oil Refinery Industry

The Office of Foreign Assets Control (OFAC) added four high-profile individuals to the Specially Designated Nationals and Blocked Persons (SDN) List, including Russian President Vladimir Putin, Minister of Foreign Affairs Sergei Lavrov, Minister of Defense Sergei Shoigu, and Chief of the General Staff of the Armed Forces Valery Gerasimov. OFAC’s strongly worded announcement placed Putin in the dubious company of “despots such as Kim Jong Un, Alyaksandr Lukashenka, and Bashar al-Assad.”

Also added to the SDN List were 22 Russian defense-related entities that make combat aircraft, infantry fighting vehicles, electronic warfare systems, missiles, and unmanned aerial vehicles, as well as numerous individuals identified as “bankrolling Putin” and “Russia-backed influence actors,” along with their family members, businesses, aircraft, and one vessel (a superyacht).

As a reminder, U.S. persons (i) are barred from engaging in virtually all transactions, whether direct or indirect, involving SDNs or their direct or indirect property interests, and (ii) must block and report to OFAC any such property within their possession or control. Under OFAC’s 50 Percent Rule, any entity in which one or more SDNs in the aggregate own a 50% or greater interest must also be treated as an SDN, even if the entity does not separately appear on the SDN List. These blocking requirements will challenge companies in which Russian oligarchs are invested, often indirectly.

BIS separately added to the Entity List 91 entities identified as supporting the Russian military and defense industry. This list includes not only Russian entities, but also those based in Belize, Estonia, Kazakhstan, Latvia, Malta, Singapore, Slovakia, Spain, and Ukraine. The rapid pace of changes to U.S. government restricted parties lists, including the SDN List and Entity List, make it essential for companies to use comprehensive screening tools such as OFAC’s Consolidated Sanctions List and the International Trade Administration’s Consolidated Screening List.

BIS also issued expanded export controls targeting the Russian oil refinery sector as a key source of revenue for the Russian military. Additional restrictions now apply to the export of oil refining equipment identified in a new Supplement No. 4 to BIS’s existing Russian industry sector sanctions. While other exports to the Russian energy sector are subject to a “knowledge requirement” regarding the item’s intended use, BIS explicitly declined to extend this requirement to the new restrictions on oil refining equipment.

5. More Restrictions on Russian Financial Institutions, New and Expanded General Licenses

On February 28, OFAC further prohibited U.S. persons from engaging in any transactions involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation (the “Directive 4 Institutions”). The sanctions are implemented through Directive 4 issued under Executive Order 14024, barring U.S. persons from making direct or indirect transfers of assets to the Directive 4 Institutions and any foreign exchange transaction for or on their behalf.

To moderate the impact of sanctions on activities relating to Russian financial institutions, OFAC issued and amended several general licenses authorizing certain transactions related to energy, dealings in debt or equity of certain Russian financial institutions, the wind down of derivative contracts linked to the debt or equity of certain Russian counterparties, certain payments by U.S. persons necessary to day-to-day operations in Russia, and where a Directive 4 Institution’s sole function is to act as an operator of a clearing and settlement system. OFAC also authorized transactions involving any non-SDN entity owned 50% or more, directly or indirectly, by Alisher Burhanovich Usmanov, and unblocked the properties of those entities.

Following the White House’s earlier commitment, on March 1 the European Union removed access to SWIFT (the international financial messaging service) for seven Russian banks, including VTB Bank, Russia’s second largest financial institution (also recently added to the SDN List) and Bank Otkritie, the largest privately owned Russian bank. This move further isolates Russia’s banks from the global financial system and will hamper transactions involving Russian bank accounts, even if they are otherwise authorized.

If you would like additional information about the issues addressed in this client alert, please contact Rich Matheny or Jacob Osborn, or the Goodwin lawyer with whom you typically consult.