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Insights from Windward Maritime AI. Will sanctions on Russian crude oil put enough pressure on Russia?

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Insights from Windward Maritime AI. Will sanctions on Russian crude oil put enough pressure on Russia?

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Insights from Windward Maritime AI. Will sanctions on Russian crude oil put enough pressure on Russia?

While no official sanctions have been issued on Russian crude oil, the market seems to take matters into its own hands. The confusion and uncertainty among global traders and shipping companies bring oil benchmarks and barrel prices to new heights. Let’s take a look at the impact such sanctions, official or market-driven, can have on the oil trade industry. In the last 60 days, 224 different crude oil tankers operated at Russian ports. Out of these, 126 tankers still haven’t arrived at their next destination and called port. The potential volume of Russian crude oil these tankers are carrying comes up to87,400,000barrels of crude oil.50.34% of these barrels are headed to the USA and Europe, while the other 49.66% are expected at Russia, Asia and other countries in the Caribbean and Latin America.

These numbers above include not only tankers that departed from Russian ports, but also take into consideration any other tankers they may have interacted with. We looked at tankers crude oil carriers that engaged in an STS during the past 30 days, following their departure from Russian ports.

While most results were innocent STS as part of the vessels’ daily routine, we did notice a few that seemed to act differently. All appear still en-route to their different destinations-Big Stone Anchorage, Zhanjiang port China, Malta, Amsterdam, and a couple of tankers that are anchored in Greece. From the Windward data, it seems that all the tankers aside from one crude oil carrier operating under the Bahamas flag loaded their cargo prior to the start of the recent Russian attack on Ukraine. Meaning they loaded the oil before it was related to any market-driven sanctions or confusion.

Conclusion

In the last few days, the price per barrel reached a 7-year high hitting the 114 USD mark. With more than 87 million Russian oil barrels in the ocean right now, the crude oil trading industry is looking at a potential 10B USD that will potentially reach nowhere. With so much money at stake, will shipping and energy stakeholders really align with both official and market-driven regulations?

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President Biden Issues Executive Order Banning U.S. Imports of Russian Origin Oil, Gas, and Coal

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On March 8, 2022, President Biden issued Executive Order 14066 which prohibits the following actions:

-The importation into the United States of any “crude oil; petroleum; petroleum fuels, oils, and products of their distillation; liquefied natural gas; coal; and coal products” of “Russian Federation origin”;

-New investment in the Russian energy sector by U.S. persons, wherever located; and

-Any approval, financing, facilitation, or guarantee by a U.S. person, wherever located, of any transaction conducted by a non-U.S. person that would be prohibited by Executive Order 14066 if performed by a U.S. person or within the United States.


The Executive Order further prohibits any transaction by anyone (whether a U.S. person or a non-U.S. person) that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate any of Executive Order 14066’s prohibitions, as well as conspiracies to violate the prohibitions.

In a Fact Sheet, the Biden Administration stated that the Executive Order is intended to “further deprive President Putin of the economic resources he uses to continue his needless war of choice”.  A  press release from the U.S. Department of the Treasury also stated that “[t]he United States continues to take severe action to hold the Russian Federation accountable for its brutal, unprovoked invasion of Ukraine.  Treasury has targeted the infrastructure supporting President Putin’s invasion of Ukraine”.

Executive Order 14066 is immediately effective.  However, the U.S. Treasury Department’s Office of the Foreign Assets Control (“OFAC”) has issued General License 16 authorizing all transactions that are “ordinarily incident and necessary to the importation into the United States” of certain products of “Russian Federation Origin”, if performed pursuant to written contracts or written agreements entered into prior to March 8, 2022.  The products of “Russian Federation Origin” authorized for import into the U.S. under General License 16 are:

-Crude oil;

-Petroleum;

-Petroleum fuels;

-Oils, and products of their distillation;

-Liquified natural gas; and

-Coal products.

General License 16 will remain effective until April 22, 2022, at which time all such transactions will be fully prohibited.  General License 16 does not  authorize any other actions that are prohibited under the existing Russian Harmful Foreign Activities Sanctions Regulations or transactions with persons who are otherwise subject to blocking sanctions unless such actions or transactions are separately authorized by OFAC.

OFAC also issued new Frequently Asked Questions (FAQ) guidance and updated existing FAQ guidance in order to clarify certain aspects of the Executive Order.  Among other things, these FAQs establish definitions for the terms “Russian Federation origin”, “new investment in the energy sector in the Russian Federation” and “energy sector”.  The FAQs also clarify that the Executive Order’s prohibitions do not extend to products that are not of Russian Federation origin “even if such products transit through or depart from the Russian Federation”.

Additionally, U.S. Customs and Border Protection (“CBP”) issued Cargo Systems Messaging Service Number 51260049 indicating that it will “be requiring filers of entries or admissions to Foreign Trade Zones for shipments of [the Russian Federation origin banned products] to provide purchase orders and/or executed contracts and/or any other documentation showing when the order and/or contract went into effect” through the expiration of General License 16 on April 22, 2022.  CBP also stated it will require the documentation prior to unlading and it “should include conveyance information, bill of lading number(s) and entry number(s) or FTZ admission information.”

Anyone reviewing Executive Order 14066 should also be aware of the significant sanctions and export controls that the U.S. government imposed on Russia prior to Executive Order 14066.

_____________________________________________________________________

Grant Leach is an Omaha-based partner with the law firm Husch Blackwell LLP focusing on international trade, export controls, trade sanctions and anti-corruption compliance.

Cortney O’Toole Morgan is a Washington D.C.-based partner with the law firm Husch Blackwell LLP. She leads the firm’s International Trade & Supply Chain group.

Tony Busch is an attorney in Husch Blackwell LLP’s Washington, D.C. office and is a member of the firm’s International Trade & Supply Chain practice team.

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Update: Who Is Winning The U.S.-China Trade War?

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In 2018, U.S. President Donald J. Trump initiated a trade war with China. The trade war, which has never officially ended, continues to this day. Neither side appears to be winning and many bystander countries are benefiting as a result of this international dispute. 

In some cases, these countries are seeing a number of positive impacts, including an increase in trade exports. This article will take a look at where the U.S.-China trade war currently stands and what outcomes have occurred as a result.


 

An end to globalization?

One of the main concerns springing from the U.S.-China trade war was that it would damage the international economy and bring an end to globalization. Specifically, because the United States and China are the two largest global economies. However, even a global pandemic could not totally destroy the integrated economies of the world. 

Recent research demonstrates that U.S. tariffs on Chinese goods resulted in higher import prices in the U.S. and the Chinese retaliatory measures ended up harming Chinese importers. In the end, two-way trade between the U.S. and China dried up. However, contrary to speculators’ fears, globalization has not disappeared and many bystander countries benefited from the trade war through increased exports.

Explaining Bystander Country Growth

It seems unsurprising that global participants would fill the void after China was axed from the U.S. trade pipeline. Countries like Mexico, Malaysia, and Vietnam benefited the most. However, more surprisingly is that global trade, in products affected by the trade war, increased 3% relative to products not impacted by tariffs. So, not only did imports from other countries increase, but overall global trade increased.

One possible theory is that countries saw the trade war as a chance to expand their global market presence. China, which utilized a zero-COVID policy over the past few years, saw lags in its trade activity as a result. These gaps in global trade gave countries the opportunity to invest in additional trade opportunities or the chance to mobilize larger portions of their workforce. These changes enabled countries to increase exports without increasing prices.

Another theory explaining the growth is how third countries were able to export more to the U.S. and China. This change shrank their per-unit costs of production and economies of scale thus allowing them to offer more products for lower prices. Countries, where global export prices are declining, are also those where the largest increases in global exports are occurring.

Country Trade Growth Factors

One might wonder, what more could be done to take advantage of these types of trade wars in the future? Some countries increased exports overall. Others reallocated their trade by shifting their exports from other countries to the U.S. Finally, in some cases countries saw an overall decrease because they sold less overall. Two primary factors emerged to explain these patterns.

Deep Trade Agreements

Deep trade agreements (agreements that go beyond just tariff regulation, but include other behind-the-border protections) were significant. In a “deep” trade agreement fundamental economic integration provisions, like tariff preferences, export taxes, investments, and intellectual property rights are combined with other provisions. The first layer of these provisions usually supports economic integration like rules of origin and anti-dumping and countervailing duties. Then, other provisions that promote social welfare, like environmental laws or labor market regulations are added in, on top. 

Trade agreements beyond just tariff preferences and other fundamental provisions help minimize fixed costs of expanding into foreign markets. Countries with these types of agreements had the necessary security to expand trade as the U.S. and China vie for economic supremacy.

Accumulated Foreign Direct Investment

Deep trade agreements weren’t the only important factor though. Accumulated foreign direct investment was also significant. Foreign direct investment is different from other types of investment because FDI occurs when an investor based in a home country acquires an asset in a foreign nation with the intent to manage that asset. Many areas that are undergoing increased social, political, and economic connections to global markets also see increased direct foreign investment.

Foreign direct investment is significant because it helps manage the utilization of scarce global resources. Poor countries often lack the necessary capital to build the necessary economic infrastructure. By receiving these foreign funds, which are managed from abroad, countries can better develop their economies.

Supply chains interacted like dominoes

Analysts at the Peterson Institute for International Economics predicted as far back as 2016 that U.S. tariffs would cause widespread production shifts in a “daisy chain.” In essence, when U.S. tariffs hit China, companies moved production to a third country. This move then caused other activities in third countries to be shuffled. 

Analysts have noted that the complexity of modern supply chains makes predicting these outcomes difficult to predict. However, countries that were more integrated into the global economy seemed more likely to land firm relocations.

No Reshoring of U.S. Jobs

Unfortunately, relocations did not occur in the United States. Supporters of the trade war often hoped that it would result in the reshoring of U.S. jobs. Others were supportive because it demonstrated a way to hold China accountable for its deleterious authoritarianism. 

In any case, the trade war did not result in massive amounts of jobs returning to the United States as many had hoped – although admittedly this is something that’s difficult to measure. Overall, third countries were the main winners as they replaced Chinese imports with their own.

Bystander countries benefited the most, especially those with a high degree of trade integration. A good business plan can help a business navigate trying times. In the same sense, countries that adopted a strategy for global trade shakeups came out on top. Despite worries of an end to globalization, the trade war seems to have actually diversified trade and spread opportunities to other countries. In reality, the trade war has helped push us towards a world where trade is not monopolized by the U.S. and China.

Conclusion

Initially, we asked who was winning the U.S.-China trade war? The answer is clear: third countries with deep connections to international partners. This means countries that were able to take advantage of supply-chain shakeups and countries that already had existing trade agreements and large amounts of foreign investment. 

For the United States, and China, it appears that the trade war did not result in any major gains. Some analysts believe that it does more harm than good. The U.S. did not see any increased reshoring of jobs and economic activities. Really, the U.S. replaced Chinese imports with imports from alternative countries

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Global Aluminium Market: Russia Could Lose Export Earnings, Europe to See Higher Prices

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IndexBox has just published a new report: ‘World – Aluminum – Market Analysis, Forecast, Size, Trends and Insights’. Here is a summary of the report’s key findings.

The global aluminium market will see significant changes this year. Due to sanction restrictions, many key importers may refuse purchases from Russia, which could result in global supply chain disruptions. Russia is the second-largest supplier in the global aluminium market, accounting for 11% of total supplies.

Approximately 78% of Russian aluminium exports are sent to ten countries, namely Turkey (20%), Japan (14%), China (10%), the Netherlands (9%), the U.S. (7%), Greece (5%), Chinese Taiwan (4%), Italy (3%), South Korea (3%), and Norway (3%). Financial and logistic sanctions posed on Russia amid its conflict with Ukraine could damage supply chains, leading to local metal shortages in European countries and the U.S. and higher aluminium prices. Russia may lose its share in global aluminium exports due to possible secondary sanctions on countries that will continue importing from the country. Competitors like Canada and India are also likely to attempt to drive out Russia from the market.


 

Russia’s Aluminium Exports

In 2021, the amount of aluminum exported from Russia soared to 4M tonnes, rising by 50% compared with the previous year. In value terms, supplies skyrocketed to $7.9B.

Turkey (807K tonnes), Japan (542K tonnes) and China (410K tonnes) were the main destinations of aluminum exports from Russia, with a combined 44% share of total volume. In value terms, Turkey ($1.5B), Japan ($1.1B) and China ($720M) constituted the largest markets for aluminum exported from Russia worldwide, together comprising 42% of total supplies.

In terms of the main countries of destination, China saw the highest growth rate of the value of exports in 2021. Supplies to China rose more than threefold, while shipments for the other leaders experienced more modest paces of growth.

Global Aluminium Exports in 2020

The amount of aluminium exported worldwide stood at 24M tonnes in 2020, increasing by 2.3% on the year before. In value terms, supplies amounted to $44.7B.

The shipments of the eight major exporters of aluminium, namely Canada (2.9M tonnes), Russia (2.7M tonnes), India (2.1M tonnes), the United Arab Emirates (2.0M tonnes), the Netherlands (1.9M tonnes), Malaysia (1.5M tonnes), Australia (1.4M tonnes) and Norway (1.3M tonnes), represented more than half of total supplies. The following exporters – South Africa (594K tonnes), Germany (482K tonnes), Saudi Arabia (476K tonnes), Bahrain (469K tonnes) and the U.S. (424K tonnes) – each finished at a 10% share of total volume.

In value terms, Canada ($5.4B), Russia ($4.2B) and India ($3.9B) were the countries with the highest levels of exports in 2020, with a combined 30% share of global supplies. The Netherlands, the United Arab Emirates, Norway, Malaysia, Australia, South Africa, Saudi Arabia, Germany, Bahrain and the U.S. lagged somewhat behind, comprising a further 43%.

Leading Aluminium Importers

In 2020, the U.S. (3.5M tonnes), followed by the Netherlands (2.2M tonnes), Japan (2.1M tonnes), Germany (1.9M tonnes), Malaysia (1.6M tonnes), South Korea (1.4M tonnes), and Turkey (1.2M tonnes) represented the major importers of aluminium, together mixing up 57% of total purchases. Italy (1,058K tonnes), Poland (675K tonnes), Spain (657K tonnes), Taiwan (Chinese) (602K tonnes), Thailand (583K tonnes) and Mexico (512K tonnes) followed a long way behind the leaders.

In value terms, the U.S. ($7B), the Netherlands ($4.1B) and Germany ($3.8B) constituted the countries with the highest levels of imports in 2020, with a combined 32% share of global supplies.

Source: IndexBox Platform

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U.S. and EU Impose Sanctions in Connection with the Crisis in Ukraine: A Detailed Look

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On February 21, 2022, President Biden issued a new executive order targeting the breakaway regions known as the Donetsk People’s Republic (“DNR”) and Luhansk People’s Republic (“LPR”, and together with the DNR, the “Covered Regions”) in eastern Ukraine.  On February 22, 2022, President Biden announced further sanctions, specifically designating two major Russian banks and three close associates of Russian President Vladimir Putin, and imposed increased restrictions on dealings in Russia’s sovereign debt.  On February 23, 2022, the EU adopted, a set of new Regulations and Decisions implementing asset freezes and travel bans notably against senior Russian officials and close associates of President Putin, financial restrictions limiting Russia’s access to the EU’s capital and financial markets, and trade restrictions targeting economic relations with the Covered Regions. The actions follow President Putin’s formal recognition of the independence of those breakaway regions and react to the continued involvement of Russian military forces.

New U.S. Sanctions

February 21, 2022 Executive Order

The February 21 executive order largely extends the existing restrictions on the Crimea region of Ukraine and applies them to the Covered Regions.  In particular, the executive order prohibits:

-New investment in the Covered Regions;

-Importation into the U.S. of any goods, services, or technology originating in the Covered Regions;

-Exportation, reexportation, sale or supply from the United States or by a U.S. persons of any good, services or technology to the Covered Regions; and

-Any approval, financing, facilitation, or guarantee by a U.S. person of prohibited transactions.

The executive order further authorizes the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) to add to the Specially Designated Nationals (“SDN”) list any person determined by the Secretary of the Treasury, in consultation with the Secretary of State:

-To operate in the Covered Regions;

-To be a leader, official, senior executive officer, or member of the board of directors of an entity operating in the Covered Regions;

-To be owned or controlled or acting on behalf of any person blocked under the executive order; or

-To have materially assisted or supported any person blocked under the executive order.

However, although some individuals in the Covered Regions have been previously designated under the Crimea-related authorities, no person has been designated yet under the executive order as of the date of this alert.

Simultaneously with the issuance of the executive order, OFAC issued six general licenses to permit otherwise prohibited activity in the Covered Regions.  Most significantly, General License 17 authorizes all transactions that are ordinarily incident and necessary to the winddown of transactions in the Covered Region until March 23, 2022.  Note, however, that a specific license from OFAC would still be required for any transactions with an SDN designated under the executive order.  The other five general licenses authorize the following activity:

–General License 18– authorizing the export or reexport to the Covered Regions of certain agricultural, medical, and COVID-19 related products and services;

–General License 19– authorizing transactions that are ordinarily incident and necessary to the receipt or transmission of telecommunications in the Covered Regions;

–General License 20– authorizing transactions by the United Nations and other specified non-governmental organizations;

–General License 21– authorizing transactions related to non-commercial, personal remittances to the Covered Regions; and

–General License 22– authorizing transactions related to the exportation of services or software from the United States or by U.S. persons that are incident to the exchange of personal communications over the internet, such as instant messaging, chat and email, social networking, sharing of photos and movies, web browsing, and blogging.

One key question following the issuance of the executive order is how the specific territories of the Covered Regions will be determined.  This may be particularly challenging, given the shifting borders of the DNR and LPR throughout their prolonged conflict with the Ukrainian government.  We anticipate that OFAC will seek to clarify this question through the guidance in the form of responses to “Frequently Asked Questions” in the coming days.

February 22, 2022 Actions

On February 22, 2022, in a speech in which President Biden stated that “Russia has now undeniably moved against Ukraine,” he announced “the first tranche of sanctions to impose costs on Russia,” promising to “continue to escalate sanctions if Russia escalates.”  Subsequently, OFAC issued a press release detailing the specific actions, all of which were taken pursuant to the existing Executive Order 14024, which included the designation of two major Russian banks and three close associates of President Putin as SDNs as well as restrictions on transactions involving Russian sovereign debt.

Specifically, the two Russian banks targeted are the Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (“VEB”) and Promsvyazbank Public Joint Stock Company (“PSB”), along with 42 of their subsidiaries.  The designations were made pursuant to a contemporaneous determination issued by Treasury Secretary Janet Yellen that Russian financial institutions are eligible for sanctions under Executive Order 14024 (previously, determinations had also been made on April 15, 2021, with respect to the technology sector and defense sectors).  Both banks are state-owned institutions and play key roles in servicing Russia’s sovereign debt and defense contracts.  Further, in connection with PSB’s designation, OFAC designated the following five Russian-flagged vessels in which PSB has an interest:

-Baltic Leader (IMO: 9220639), a cargo vessel;

-Linda (IMO: 9256858), a crude oil tanker;

-Pegas (IMO: 9256860), a crude oil tanker;

-Fesco Magadan (IMO: 9287699), a container ship; and

-Fesco Moneron (IMO: 9277412), a container ship.

In addition, three close associates to President Putin – including the Chairman and CEO of PSB and two sons of previously designated oligarchs – were added to the SDN list.  As a result of these designations, U.S. persons are prohibited from virtually all transactions with the listed parties or entities of which they own fifty percent or more, directly or indirectly.  In addition, “significant” transactions with these entities could create secondary sanctions liability under Section 228 of the Countering America’s Adversaries Through Sanctions Act (“CAATSA”).

OFAC also issued a new Directive 1A under Executive Order 14024, which replaces the prior Directive 1.  The effect of the new Directive 1A is to expand existing sovereign debt prohibitions to cover participation in the secondary market for bonds issued after March 1, 2022 by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation.  Specifically, Directive 1 previously prohibited U.S. financial institutions from, as of June 14, 2021, participating in the primary market for bonds issued by Russia’s Central Bank, National Wealth Fund or Ministry of Finance, or lending funds to those organizations.  Directive 1A keeps those prohibitions in place, and additionally prohibits U.S. financial institutions – effective March 1, 2022 – from participating in the secondary market for bonds issued by the listed organizations.  Note that OFAC clarified in FAQ guidance that the fifty percent rule does not apply to Directive 1A so that entities owned by the institutions identified in Directive 1A are not themselves automatically subject to the restrictions.

In conjunction with these restrictions, OFAC also issued General License 2, which authorizes transactions involving the servicing of bonds issued by VEB prior to March 1, 2022, and General License 3, which authorizes a winddown period with respect to VEB through March 24, 2022.  No similar general license has been issued yet regarding transactions involving PSB.

Potential Further Action

The Biden Administration has also implied that additional multi-lateral sanctions could be forthcoming, indicating an incremental approach.  A Fact Sheet issued in conjunction with the February 21, 2022 executive order explained that the executive order “is distinct from the swift and severe economic measures we are prepared to issue with Allies and partners in response to a further Russian invasion of Ukraine. We are continuing to closely consult with Ukraine and with Allies and partners on next steps and urge Russia to immediately deescalate.”  As also noted above, President Biden characterized the February 22, 2022 actions as the “first tranche” of sanctions and kept open the possibility for “escalation” depending on how Russia responds.  An embargo on semiconductors and advanced technology has reportedly been considered as part of a second tranche of actions if Russia escalates or continues its incursion further into Ukraine.

New EU Sanctions

February 21, 2022 Designations

On February 21, the Council of the European Union (“EU”)  imposed travel bans and asset freezes (including a prohibition to make funds or economic resources available) on five new individuals “for actively supporting actions and implementing policies that undermine or threaten the territorial integrity, sovereignty and independence of Ukraine,” bringing the total number of designated parties to 193 individuals and 48 entities on the EU’s list of parties subject to Ukraine-related sanctions.

The new designations include members of the State Duma of the Russian Federation, who were elected to represent the annexed Crimean peninsula and the City of Sevastopol on 19 September 2021, as well as the head and deputy head of the Sevastopol electoral commission.

February 22-23, 2022 Actions

On February 22, the Presidents of the European Council and European Commission jointly announced that an additional package of restrictive measures will be swiftly adopted by the EU in reaction to Russia’s latest aggression against Ukraine, which the EU sees as “illegal and unacceptable” under the Minsk Agreements, which stipulate the full return of the Covered Regions to the control of the Ukrainian government.

The same day, Josep Borrell, the High Representative of the Union for Foreign Affairs and Security Policy, urged Russia “to reverse the recognition, uphold its commitments, abide by international law and return to the discussions within the Normandy format and the Trilateral Contact Group.” Borrell later announced in a joint press conference with French Minister for Europe and Foreign Affairs Jean-Yves Le Drian that the 27 Member States had unanimously agreed on a new package of sanctions.

The new package has been swiftly adopted and published in the Official Journal of the EU on February 23 through 4 Council Decisions and 5 Regulations amending EU’s current sanctions program targeting Russia progressively strengthened since 2014, which already included:

-Individual restrictive measures consisting of travel bans and assets freezes on designated individuals and entities;

-Comprehensive restrictions on economic relations with Crimea and Sevastopol, including (i) an import ban on goods from Crimea and Sevastopol, (ii) restrictions on trade and investment related to certain economic sectors and infrastructure projects, (iii) a prohibition to supply tourism services in Crimea or Sevastopol, and (iv) an export ban for certain goods and technologies;

-An import and export ban on trade in arms as well as an export ban for dual-use items for military end-users or end-use in Russia;

-Financial restrictions limiting access to EU primary and secondary capital markets for certain Russian banks and companies;

-Economic restrictions limiting Russia’s access to sensitive technologies and services that can be used for oil production and exploration.

As announced, the new package of sanctions is quite wide-ranging and intended to “hurt [Russia] a lot” in the words of High Representative Borrell.

First, the legal acts of February 23 (Council Implementing Regulation (EU) 2022/260 and 2022/261 ; Council Decision (CFSP) 2022/267) formally designate individuals and entities which will be subject to individual restrictive measures, namely a travel ban and an asset freeze, in the Union. The new designations target:

-336 members of the Russian State Duma who voted for the recognition of the two self-proclaimed republics; and

-22 decision-makers involved in the illegal decision in addition to 4 entities (Internet Research Agency, Bank Rossiya, PROMSVYAZBANK and VEB) financially and materially supporting, or benefiting from them, those operating in the Russian defense sector and having played a role in the invasion such as senior military officers, as well as individuals engaging in a “disinformation war” against Ukraine.

The legal acts (Council Implementing Regulation (EU) 2022/259 ; Council Decision (CFSP) 2022/265) also provided for a derogation from the application of the new restrictive measures targeting Bank Rossiya, PROMSVYAZBANK and VEB. The competent authorities of a Member State may authorize the release of certain frozen funds or economic resources belonging to these Russian banks, or the making available of certain funds or economic resources to those entities, under such conditions as the competent authorities deem appropriate and after having determined that such funds or economic resources are necessary for the termination by August 24, 2022, of operations, contracts, or other agreements, including correspondent banking relations, concluded with those entities before February 23, 2022.

Moreover, further financial restrictions limiting Russia’s access to the EU’s capital and financial markets will now apply (Council Implementing Regulation (EU) 2022/262 ; Council Decision (CFSP) 2022/264) including notably:

-A prohibition to directly or indirectly purchase, sell, provide investment services for or assistance in the issuance of, or otherwise deal with transferable securities and money-market instruments issued after March 9, 2022 by Russia and its government, the Central Bank of Russia or any person or entity acting on behalf or at the direction of the said Central Bank;

-A prohibition to directly or indirectly make or be part of any arrangement to make any new loans or credit to the above-mentioned persons and entities;

-The current prohibitions applicable to securities giving the right to acquire or sell such transferable securities are extended to the securities giving rise to a cash settlement determined by reference to transferable securities.

Finally, the legal acts (Council Implementing Regulation (EU) 2022/263 ; Council Decision (CFSP) 2022/266) introduce extensive trade restrictions targeting economic relations with the Covered Regions of Donetsk and Luhansk, on the model of those already targeting Crimea and Sevastopol including:

-A prohibition to import goods from the Covered Regions into the EU and to provide, directly or indirectly, financing or financial assistance as well as insurance and reinsurance related to such imports;

-A prohibition to (i) acquire any new, or extend any existing participation in ownership of, real estate in or located in the Covered Regions, including the acquisition in full of such an entity or the acquisition of shares therein, and other securities of a participating nature of such an entity; (ii) grant or be part of any arrangement to grant any loan or credit or otherwise provide financing, including equity capital, to an entity in the Covered Regions, or for the documented purpose of financing such an entity; (iii) create any joint venture in the Covered Regions or with an entity in the Covered Regions; and (iv) provide investment services directly related to these prohibited activities;

-A prohibition to sell, supply, transfer or export goods and technology listed in Annex II suited for use in the transport, telecommunications, energy, oil and gas and mineral sectors, to (i) any natural or legal person, entity or body in the Covered Regions, or (ii) for use in the Covered Regions;

-A prohibition to provide, directly or indirectly, technical assistance or brokering services related to the goods and technology listed in Annex II, or related to the provision, manufacture, maintenance and use of such items to any natural or legal person, entity or body in the Covered Regions or for use in the Covered Regions;

-A prohibition to provide, directly or indirectly, financing or financial assistance related to the goods and technology listed in Annex II to any natural or legal person, entity or body in the Covered Regions or for use in the Covered Regions.

-A prohibition to provide technical assistance, or brokering, construction or engineering services directly relating to infrastructure in the specified territories in the mentioned sectors, independently of the origin of the goods and technology; and

-A prohibition to provide services directly related to tourism activities in the Covered Regions.

The new restrictive measures entered into force on February 23, the date of their publication in the Official Journal of the EU.

Potential Further Action

In reaction to the latest events, Olaf Scholz, Germany’s Chancellor, announced that Germany will halt the certification of Nord Stream 2, a gas pipeline designed to bring natural gas from Russia directly to Europe, a decision welcomed by both High Representative  Borrell and President Ursula von der Leyen.

On February 23, 2022, President Biden announced that he would direct OFAC to sanction Nord Stream 2 AG – a wholly owned subsidiary of Gazprom, which is already subject to U.S. sectoral sanctions – and its corporate officers.

The EU had warned it will leave the door open to the adoption of more wide-ranging political and economic sanctions at a later stage should Russia use “the newly signed pacts with the self-proclaimed “republics” as a pretext for taking further military steps against Ukraine.” As President Putin declared war against Ukraine and escalated military action on February 24, President Michel of the European Council urgently convened an extraordinary meeting of the European Council. EU leaders intend to meet later today to discuss further restrictive measures that “will impose massive and severe consequences on Russia for its action, in close coordination with our transatlantic partners.”

The Member States will also keep a close eye on Belarus, which is said to have “aided and supported the Russian actions” in Ukraine, and the EU is ready to enlarge the listing criteria “to target those who provide support or benefit from the Russian government – the oligarchs, in plain language,” if needed.

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Global Supply Chains Brace for Russia-Ukraine Conflict – Four Major Risks

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As tens of thousands of Russian troops continue to mass along the Ukrainian border, and with diplomatic talks between the U.S. and Russia yet to bear fruit, the threat of a Russian invasion within the next few weeks appear to be growing.

A Russian invasion of Ukraine has the potential to cause extensive and debilitating disruption across global supply chains, resulting in rising input costs to a heightened threat of cyber attacks (see below).

Today thousands of U.S. and European companies do business with suppliers in Russia and Ukraine, which could be at risk during a prolonged military conflict. Analysis of global relationship data on the Interos platform reveals key findings:

-More than 1,100 U.S.-based firms and 1,300 European firms have at least one direct (tier-1) supplier in Russia.

-More than 400 firms in both the U.S. and Europe have tier-1 suppliers in Ukraine.

-Software and IT services account for around 12% of supplier relationships between U.S. and Russian/Ukrainian companies, compared with 9% for trading and distribution services, and 6% for oil and gas. Steel and metal products are other common items purchased from the two countries.

While the proportion of U.S. and European supply chains that include tier-1 Russian or Ukrainian suppliers is relatively low, at around 0.75%, this figure increases significantly when indirect relationships with suppliers at tier 2 and tier 3 are included.

-More than 5,000 firms in both the U.S. and Europe have Russian or Ukrainian suppliers at tier 3 (representing 2.76% and 2.37% of their respective supply chains).

-More than 1,000 firms in both the U.S. and Europe have tier-2 suppliers based in Ukraine, with around 1,200 dependent on suppliers at tier 3.

Supply chain and information security leaders in U.S. and European organizations should review their dependence on Russian and Ukrainian suppliers at multiple tiers as a key first step in their efforts to assess risk exposure in the region and ensure operational resilience.

Four Major Risks for Global Supply Chains

In the event of a Russian invasion of Ukraine, there are four major areas where global supply chains could be negatively impacted:

1. Commodity prices and supply availability

2. Firm-level export controls and sanctions

3. Cyber security collateral damage

4. Wider geopolitical instability

1. Commodity price increases. Energy, raw material and agricultural markets all face uncertainty as tensions escalate. Russia provides over a third of the European Union’s (E.U.) natural gas, and threats to this supply could force up prices at a time when companies and consumers are already facing higher energy bills. Natural gas supply pressures likely would spike volatility in other energy markets too. By one estimate, an invasion could send oil prices spiraling to $150 a barrel, lowering global GDP growth by close to 1% and doubling inflation. Even lower estimates of $100 a barrel would cause input costs and consumer prices to soar.

Food inflation is another risk, with Ukraine on track to being the world’s third largest exporter of corn, and Russia the world’s top wheat exporter. Ukraine is also a top exporter of barley and rye. Rising food prices would only be exacerbated with additional price shocks, especially if core agricultural areas in Ukraine are seized by Russian loyalists.

Metal markets may also continue to be squeezed. Russia controls roughly 10% of global copper reserves, and is also a major producer of nickel and platinum. Nickel has been trading at an 11-year high, and further price increases for aluminum are likely with any disruption in supply caused by the conflict.

2. Firm-level Export controls and sanctions. Commodity cost pressures could be exacerbated by targeted U.S. and European export controls. The use of such controls to restrict certain companies or products from supply chains has soared over the last few years. While many have been aimed at Chinese companies, a growing number of Russian firms have been earmarked for export controls for “acting contrary to the national security or foreign policy interests of the United States”.

Prominent Russian companies already on a U.S. restrictions list include Rosneft and subsidiaries and Gazprom. Extending export controls and sanctions to Gazprom’s subsidiaries, other energy producers, and key mining and steel market firms could further impact supply availability and input costs. Not surprisingly, U.S. companies and business groups are urging the government to be cautious in how it applies any new rules.

U.S. and E.U. export controls would also likely target the Russian financial sector – including state-owned banks – if an invasion takes place, and may be a tactic for deterrence as well. U.S. officials have noted that any sanctions would be aimed at the Russian financial sector for “high impact, quick action response”.

3. Cyber security collateral damage. Entities linked to malicious cyber activity may also face further repercussions from the U.S. and its partners. Ukraine is certainly no stranger to Russian cyber aggression. Russia has twice disrupted the Ukrainian electric grid, first in December 2015 leaving hundreds of thousands of Ukrainians in the cold, and then again the following year. But destructive attacks on the country’s infrastructure could also spark significant collateral damage in global supply chains.

In 2017, the NotPetya attack on Ukrainian tax reporting software spread across the world in a matter of hours, disrupting ports, shutting down manufacturing plants and hindering the work of government agencies. The Federal Reserve Bank of New York estimated that victims of the attack, which included companies such as Maersk, Merck and FedEx, lost a combined $7.3 billion.

This figure could pale in comparison to the global supply chain impact of a Russia-Ukraine military conflict, which would inevitably include a cyber element. Whether Russia would target its cyberwar playbook at U.S. or E.U. targets in retaliation for any support to Ukraine remains hotly debated. But the Cybersecurity Infrastructure and Security Agency (CISA) has been urging U.S. organizations to prepare for potential Russian cyber attacks, including data-wiping malware, illustrating how the private sector risks becoming collateral damage from geopolitical hostilities.

4. Geopolitical instability. Just as cyber warfare would be unlikely to remain within Ukraine’s borders, so the destabilizing effect of a Russian invasion could have wider geopolitical ramifications. In Europe, a refugee crisis could emerge, with three to five million refugees seeking safety from the conflict. In Africa and Asia, rising food prices could fuel popular uprisings. Of the 14 countries that rely on Ukraine for more than 10% of their wheat imports, the majority already face food insecurity and political instability.

China is watching closely to see how the world responds if Russia invades Ukraine. The superpower has its own aspirations of seizing territory and extending its sphere of influence. Taiwan’s defense minister has remarked that tensions over Taiwan are the worst in 40 years. A Russian invasion could further embolden China to enlist military tactics against Taiwan – something that, as well as its far-reaching geopolitical implications, would have a significant impact on electronics and other global supply chains.

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Although many of these risks may not materialize, and represent a worst-case scenario, executives should be thinking now about the potential impact of a Russia-Ukraine military conflict on their operations over the coming months. These same leaders need to ensure that appropriate contingency plans are in place for their most critical supply chains and riskiest suppliers in the region.

Risk mitigation strategies include:

-evaluating required levels of inventory and labor in the short to medium term;

-discussing business continuity plans with key suppliers; and

-preparing to switch to, or qualify, alternative sources for essential products and services.

With proper analysis, planning and execution, it is possible to mitigate significant risk and ensure operational resilience.

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Xinjiang US Import Sanctions Looming Over Global Supply Chains

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On December 23, 2021, President Biden signed into law the Uyghur Forced Labor Prevention Act (the “UFLPA”), which passed Congress with strong bipartisan support. With the UFLPA, the US has targeted imports of goods sourced from or produced in the Xinjiang region of China in an effort to address allegations of forced labor. Until now, similar orders had focused only on certain products – computer parts, cotton and cotton products, silica-based products, apparel, and hair products – from Xinjiang or from certain Xinjiang producers. The new measures will affect a wide range of industries and supply chains around the world. Companies are obliged to apply heightened diligence and transparency requirements in Chinese-based supply chains, and anticipate extended shipment delays for US imports and possible shifts in global apparel, food, solar, electronics, and automotive sectors, among others.

Background

The UFLPA was a bipartisan effort following on the heels of congressional action dating to 2019 in reaction to alleged human rights abuses against ethnic minorities in Xinjiang. It was enacted as part of a whole-of-government effort to combat alleged forced labor abuses in Xinjiang:

-US Customs and Border Patrol (“CBP”) has issued Withhold Release Orders (“WROs”) applying to cotton, tomato, apparel, hair products, silica-based products, and computer parts from Xinjiang.

-The Bureau of Industry and Security (“BIS”) of the Department of Commerce added more than 50 Chinese entities on the Entity List.

-The Office of Foreign Assets Control (“OFAC”) of the US Department of the Treasury designated more than a dozen persons on the Specially Designated Nationals and Blocked Persons List (“SDN List”) under the Global Magnitsky Human Rights Accountability Act.

-The US Department of State imposed visa restrictions against China Communist Party officials “believed to be responsible for, or complicit in, the unjust detention or abuse of Uyghurs, ethnic Kazakhs, and members of other minority groups in Xinjiang” as well as their family members.[1]

The UFLPA calls for a ban on the import of “all goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in the Xinjiang Uyghur Autonomous Region of China, or by persons working with the Xinjiang Uyghur Autonomous Region government for purposes of the ‘poverty alleviation’ program or the ‘pairing-assistance’ program.” These programs, per the UFLPA, subsidize the establishment and operation of manufacturing facilities in the Xinjiang Region.

In fact, CBP’s authority to withhold release of imports suspected of involving forced labor already has existed for almost 100 years under Section 307 of the Tariff Act of 1930, which prohibits importing into the US any product that was “mined, produced, or manufactured wholly or in part by forced labor, including forced or indentured child labor.” CBP enforces the prohibition through the issuance of WROs.

CBP first began issuing WROs relating to Xinjiang in 2016. Most recently, in 2020 and 2021, CBP issued a series of WROs. Some apply to listed companies and their subsidiaries while others apply to the entire Xinjiang region:

In one of its first major actions under the Biden Administration, on June 24, 2021, CBP issued a WRO instructing ports of entry to detain shipments containing “silica-based materials” that are “derived from or produced using” products manufactured by Hoshine Silicon Industry Co. (“Hoshine”). Hoshine is one of the largest global producers of metallurgical-grade silicon, the raw material needed to produce solar-grade polysilicon that is used to create solar cells. In addition, BIS added Hoshine and four other Chinese companies to the “Entity List,” banning exports, re-exports, or transfers of US goods and technology to the listed entities. When the new order under the UFLPA goes into effect, the 2021 restrictions will be viewed merely as a preview to a much more pervasive region-wide and not sector-specific import ban that will reverberate through a wider variety of supply chains.

The US government has identified the following industries as involving heightened risk due to potential forced labor in Xinjiang:

Where there is suspicion that the goods contain materials originating in Xinjiang, these industries’ products will likely be held at customs as banned from imports into the US on suspicion of being sourced with forced labor.

What does the Uyghur Forced Labor Prevention Act do?

Pursuant to the UFLPA, 180 days after enactment of the Act, on June 21, 2022, CBP will apply a “rebuttable presumption” that applies to any goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in the Xinjiang Region or produced by the entities listed by the Task Force. This “rebuttable presumption” will apply except when the CBP determines that the importer has:

(a) fully complied with the guidance described in the China forced labor strategy and any regulations issued to implement that guidance;

(b) completely and substantively responded to all inquiries for information submitted by the CBP to ascertain whether the goods were mined, produced, or manufactured wholly or in part with forced labor; and

(c) shown, by clear and convincing evidence, that the good, ware, article, or merchandise was not mined, produced, or manufactured wholly or in part by forced labor.

CBP advises that the importer may be required to submit time cards, wage payment receipts, and daily process reports that demonstrate the employment status of the employees in order to meet the burden of proving the lack of forced labor. In fact, textile companies whose cargoes got held up at US ports pursuant to Section 307 have needed to prove such evidence to CBP to get the goods released.

Finally, the UFLPA calls for increased enforcement of WROs. Within 30 days of making its determination, CBP will submit a public report to congressional committees identifying the good and evidence it has considered. The UFLPA provides for the Forced Labor Enforcement Task Force (the “Task Force”), in consultation with the Secretary of Commerce and Director of National Intelligence, to develop a strategy for supporting enforcement of CBP WROs.

What does this mean for companies?

The UFLPA is distinguished from a CBP WRO, which subjects to detention at US ports of entry products produced by listed entities or, in many cases, any products derived from or incorporating such products because the UFLPA’s rebuttable presumption will subject any and all goods sourced from or produced in XUAR to the import ban. The release process under the UFLPA will be what it has been for WROs.

To release the goods from detention, the importer must either re-export them from the US or provide evidence demonstrating that the goods were not manufactured with forced labor. In practice, goods subject to a CBP WRO are banned from entering the US until and unless the importer can convince CBP that it should not be withheld.

For example, in January 2021, CBP stopped a UNIQLO shipment of men’s cotton shirts that had arrived at the Port of Los Angeles / Long Beach pursuant to the XPCC cotton WRO. UNIQLO was required to provide various detailed records of the production chain (including timecards, salary records, and transportation records) from the raw cotton grower to the bulk trader to the yarn maker to the finished product. While UNIQLO argued that the shirts were not produced by XPCC, the burden is on the importer to prove the negative; even if UNIQLO eventually succeeds in convincing CBP, the shipment will have been delayed for months. Thus, the new WRO will also trigger shifting of supply chains by companies that do not want to take that risk.

In addition to customs consequences, a variety of measures may be applied to Xinjiang-affiliated entities. For example, an Entity List designation prohibits exports and reexports of all US goods, software and technology to those entities absent a license from BIS. Even more, those listed on the SDN List are prohibited from dealing, directly or indirectly, with US persons and are likely blocked from the global financial system altogether.

1. Shifting of Supply chains

When the rebuttable presumption under the UFLPA becomes effective on June 21, 2022, all goods sourced from or produced in XUAR – including any goods incorporating or derived from such goods in any amount – will essentially be banned from entering the US pending a favorable determination by Customs.  In other words, there is no de minimis requirement for the import ban. Therefore, companies should expect and plan for global supply chain pricing and sourcing issues.

For instance, as 40-45 percent of the world’s solar-grade polysilicon comes from Xinjiang, the US solar projects industry will start to suffer even greater supply chain headaches. Currently, the WRO only applies to silica-based materials if the silicon was produced by Hoshine. Under the rebuttable presumption, it will extend to any products containing either silicon or polysilicon produced in China. This is expected to impact the supply and pricing of polysilicon worldwide. China produces more than 65% of the world’s silicon and around 89% of the world’s polysilicon. Most of the polysilicon production is believed to be outside of Xinjiang. Since Xinjiang is not a transparent place at present, it is hard to say exactly how much. US importers will likely encounter third-country suppliers who are reluctant to dig as deeply as the UFLPA demands.

In order to avoid import delays, component and product manufacturers in third countries (for example, Germany and South Korea) will seek to shift their supply chains to products that are not sourced from or produced in XUAR, if possible. Those efforts are beginning now in anticipation of the June effective date.

2. Heightened Supply Chain Transparency and Recordkeeping Obligations in Affected Sectors

Companies – especially those in industries listed above as identified by the US government to be higher risk – need to establish heightened supply chain transparency obligations. Supply chain transparency will help companies in the uphill battle of meeting the burden to prove the absence of forced labor. Up to now, transparency in Chinese in-country supply chain has been lacking, which makes it difficult to forecast the future impacts of the UFLPA. Without such transparency, it will be nearly impossible for companies to convince the CBP, “by clear and convincing evidence, that the good, ware, article, or merchandise was not mined, produced, or manufactured wholly or in part by forced labor.”

Transparency and recordkeeping will go hand-in-hand, and both will be necessary to navigate the UFLPA waters. In addition to requiring transparency on all levels of the supply chain, companies also need to keep records of the entire supply chain to be able to quickly and easily provide such records to CBP as evidence of lack of forced labor, if and when necessary.

3. Reputational and Banking risks

Aside from US sanctions enforcement risks, reliance on Xinjiang suppliers in any aspect of a supply chain presents significant dual-sided reputational risks. For example, due to reputational concerns, major brands, such as Calvin Klein, Gap, H&M, IKEA, Patagonia, and Tommy Hilfiger, stopped purchasing or committed to stop purchasing cotton sourced from Xinjiang.

There is also reportedly backlash from Chinese authorities and consumers. Brands that issued statements against sourcing cotton from Xinjiang, such as Burberry, thereafter faced a public backlash from Chinese consumers. Intel issued an apology to its Chinese customers after facing backlash for telling its suppliers that it would not be using forced labor or goods sourced from XUAR.

Banks in particular are highly attuned to OFAC primary and secondary sanctions-enforcement risks, as well as the above-mentioned reputational risks. In view of the 9- and 10-figure sanctions-related settlements, even non-US financial institutions are generally conservative in their sanctions compliance and risk appetite. Sanctions pose an existential risk to some banks that rely on access to US correspondent banking accounts in order to deal in US dollars. Thus, aside from the CBP order, banks and companies continuing to engage in transactions directly or indirectly with sanctioned Chinese producers risk having their transactions rejected or blocked by the US and global financial systems.

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Vedia Biton Eidelman is an associate in Eversheds Sutherland’s International Trade Practice. She advises clients on a wide range of regulatory matters, including sanctions (OFAC) and antiboycott matters; antidumping, countervailing duty and safeguard actions before the US International Trade Commission (ITC) and the US Department of Commerce (DOC); export controls (ITAR and EAR); national security controls on investment in US entities (CFIUS); trade policy issues such as free trade agreement negotiations; customs matters; and transactional due diligence.

[1]  M. Pompeo, “The United States Imposes Sanctions and Visa Restrictions in Response to the Ongoing Human Rights Violations and Abuses in Xinjiang,” (July 9, 2020), https://2017-2021.state.gov/the-united-states-imposes-sanctions-and-visa-restrictions-in-response-to-the-ongoing-human-rights-violations-and-abuses-in-xinjiang/index.html.

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U.S. Government Signals that Increased Sanctions and Export Controls Will Likely Follow if Russia Invades Ukraine

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Russia has amassed more than 100,000 troops at the Ukrainian border, leading the White House to issue a warning on January 25 that the U.S. is “prepared to implement sanctions with massive consequences that were not considered in 2014 [when Russia invaded and annexed the Crimea region of Ukraine]” if Russia “further invades Ukraine”. President Biden conducted a telephone call with Ukrainian President Volodymyr Zelenskyy on January 27 in order to reaffirm his administration’s support for Ukraine. The White House has proposed a strategic response which could hurt Russia with measures calculated to exact immediate and sustained harm to the Russian economy. A senior administration official stated that “[i]n addition to financial sanctions, which have immediate and visible effect on the day they’re implemented, we’re also prepared to impose novel export controls that would deal Putin a weak strategic hand over the medium term.” Congress is also considering taking action, with a bipartisan group of Senators currently negotiating provisions of S. 3488 titled the “Defending Ukraine Sovereignty Act of 2022” and a companion bill introduced in the House (H.R. 6470).

However, for the avoidance of doubt, the U.S. has not yet responded systematically to the Russia-Ukraine border situation through new sanctions or export controls (though OFAC did designate four (4) Ukrainian officials on January 20, 2022 for acting on Russia’s behalf).

The Biden Administration has indicated that any retaliatory sanctions and export controls will likely be closely aligned with an expected European response. According to media reporting, potential responsive U.S. sanctions and export controls measures could include:

Office of Foreign Assets Control (“OFAC”) Specially Designated National and Blocked Persons List (“SDN List”). President Biden said he would consider personally sanctioning Russian President Vladimir Putin, which would most likely mean placing Putin on the SDN List. The U.S. would likely place many other Russian individuals and entities on the SDN List, such as “oligarchs” perceived to be close to the Russian regime. S. persons are prohibited from dealing with SDN List designees, whether directly or indirectly, and the OFAC 50 Percent Rule extends such “blocking” sanctions to entities owned, directly or indirectly, 50 percent or more by one or more SDN List designees.

Exclusion from the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) System. This measure was implemented against Iran in 2012 and would be harmful to the Russian economy.

U.S. Dollar Clearing Sanctions. While certain designees under OFAC sanctions are already prohibited from clearing transactions through U.S. correspondent banks, a more widescale ban on such transactions for even non-designated entities could be far more impactful.

Secondary Market Russian Sovereign Debt. Effective June 14th, 2021, OFAC Directive 1 under Executive Order 14024 prohibits U.S. financial institutions from engaging in activities with the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation and the Ministry of Finance of the Russian Federation which involve either participation in the primary market for ruble or non-ruble denominated bonds issued by those institutions or lending ruble or non-ruble denominated funds to those institutions. The U.S. could expand these sanctions to also prohibit the secondary market from conducting transactions tied to Russian sovereign debt.

Widescale Blocking of Transactions with Russian Banks and Other SSI List Designees. Many Russian banks and other entities are currently designated on the OFAC Sectoral Sanctions Identifications List (“SSI List”), which prohibits certain limited activities such as dealings in debt issued by SSI List designees, but which otherwise allows U.S. persons to generally transact with SSI List designees. OFAC could upgrade these SSI List designations to SDN List designations which would then fully block any dealings with these entities by U.S. persons and the U.S. financial system.

Increased Sanctions and Export Controls Targeting Russian Energy Exports. Currently, Directive 4 of the SSI List imposes sanctions on various Russian deepwater, Arctic offshore and shale projects for the exploration for or production of oil or gas and the Protecting Europe’s Energy Security Act imposes additional sanctions on Russia’s Nord Stream 2 natural gas export pipeline. The U.S. could significantly enhance these sanctions in response to Russian military action against Ukraine. For example, in a January 26 interview with NPR, U.S. State Department spokesman Ned Price stated that “if Russia invades Ukraine, one way or another, Nord Stream 2 will not move forward, and we want to be very clear about that.”

Export Administration Regulations (“EAR”) Foreign-Produced Direct Product Rule (“FPDPR”). The U.S. previously imposed a modified version of the EAR’s FPDPR against Huawei, which prevents persons and companies abroad from supplying Huawei with foreign-origin items manufactured from certain types of U.S. software or technology. Many media reports have speculated that the U.S. could use a version of the FPDPR to restrict the supply of certain items to Russia generally or to certain sectors of the Russian economy.

Bureau of Industry and Security (“BIS”) Entity List Designations. The EAR generally prohibits any exports, reexports, or transfers of items “subject to the EAR” to persons named on the BIS Entity List. BIS has used this tool to significant effect in recent years, especially in regards to China. BIS could also use the Entity List to deprive Russian companies of their access to U.S.-origin goods and software.

Any new sanctions and export controls would affect many countries and industries around the world. However, nothing has happened yet and everything discussed above is currently speculative.

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Grant Leach is an Omaha-based partner with the law firm Husch Blackwell LLP focusing on international trade, export controls, trade sanctions and anti-corruption compliance.

Cortney O’Toole Morgan is a Washington D.C.-based partner with the law firm Husch Blackwell LLP. She leads the firm’s International Trade & Supply Chain group.

Tony Busch is an attorney in Husch Blackwell LLP’s Washington, D.C. office and is a member of the firm’s International Trade & Supply Chain practice team.

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OFAC Sanctions Four Ukrainian Officials for Acting on Russia’s Behalf; Additional Russia Sanctions Could Follow

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As tensions run high between Washington and Moscow over a possibly imminent Russian invasion of Ukraine, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) designated today four (4) current and former Ukrainian officials under Executive Order (“EO”) 14024 dated April 15, 2021. In a press release issued earlier today, OFAC asserted the Russian Federal Security Service (“FSB”) “recruit[s] Ukrainian citizens in key positions to gain access to sensitive information, threaten the sovereignty of Ukraine, and then leverage these Ukrainian officials to create instability in advance of a potential Russian invasion.” OFAC also noted that Russian agents have sought to influence U.S. elections since at least 2016.

In today’s action, OFAC added two (2) current Ukrainian Members of Parliament – Taras Kozak and Oleh Voloshyn – to the Specially Designated Nationals and Blocked Persons List (“SDN List”) and labeled them FSB “pawns”. OFAC accused Kozak of amplifying false narratives regarding the 2020 U.S. elections and Voloshyn of undermining Ukrainian government officials and advocating Russian interests. OFAC also added two (2) former Ukrainian officials to the SDN List – Volodymyr Oliynyk and Vladimir Sivkovich. OFAC asserts Oliynyk gathered information about Ukraine’s critical infrastructure for the FSB and Sivkovich engaged in influence and disinformation campaigns targeting both the Ukraine and the U.S.

All four (4) SDN designations were made pursuant to EO 14024, which authorizes OFAC to impose sanctions on persons who act or purport to act for or on behalf of, directly or indirectly, the Government of the Russian Federation. As a result of the designations, all property and interests in property of these persons in the U.S. or controlled by U.S. persons must be blocked and reported to OFAC. U.S. persons are prohibited from sending or receiving any provision of funds, goods, or services to/from these newly designated SDNs. According to OFAC’s “50% Ownership Rule,” these sanctions also extend to any entities in which these SDNs directly or indirectly hold, either individually or in the aggregate with other SDNs, an ownership interest of 50% or more.

The U.S. has also recently signaled its readiness to impose additional sanctions if Russia proceeds with an invasion of Ukraine, but has not shared many details of its plans. On January 21, 2022, Deputy Secretary of the Treasury Wally Adeyemo in a conversation with Ukraine Minister of Finance Serhiy Marchenko “emphasized that the United States and its allies and partners are prepared to inflict significant costs on the Russian economy if Russia further invades Ukraine.” Some news reports have forecasted that restrictions on semiconductor exports to Russia, sanctions against Russian financial institutions, and controls on foreign-produced goods going to Russia are among the options under consideration by the White House. However, any additional sanctions beyond the four (4) SDN designations reported in this post are purely speculative at this time.

Husch Blackwell’s Export Controls and Economic Sanctions Team continues to monitor U.S. sanctions and export controls against Russia and will provide further updates if additional developments occur.

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Tony Busch is an attorney in Husch Blackwell LLP’s Washington, D.C. office and is a member of the firm’s International Trade & Supply Chain practice team.

Cortney O’Toole Morgan is a Washington D.C.-based partner with the law firm Husch Blackwell LLP. She leads the firm’s International Trade & Supply Chain group.

Grant Leach is an Omaha-based partner with the law firm Husch Blackwell LLP focusing on international trade, export controls, trade sanctions and anti-corruption compliance.

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New Executive Order Authorizes Imposition of Additional Sanctions on the Government of Belarus and Certain Sectors of the Belarusian Economy

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On August 9, 2021, President Biden issued Executive Order 14038 (the “EO”) which expanded the scope of the national emergency previously declared in EO 13405 of June 16, 2006. The EO imposes additional sanctions in response to conduct by the Government of Belarus (“GoB”) and the President Alyaksandr Lukashenka regime which the Biden Administration described as “long-standing abuses aimed at suppressing democracy and the exercise of human rights and fundamental freedoms.” As specific examples, the EO cites the “fraudulent” August 9, 2020 election administered by the GoB, in which Lukashenka was reelected, and the GoB’s forced grounding of an international flight to arrest Belarusian journalist Raman Pratasevich and his partner Sofia Sapega.

Among other things, the EO gives the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) the discretionary authority, in consultation with the U.S. Secretary of State, to impose blocking sanctions on GoB agencies, GoB leaders and officials, and individuals and companies operating in the defense and related materiel, security, energy, potassium chloride (potash), tobacco products, construction or transportation sectors of the Belarusian economy. The EO also authorizes OFAC to sanction individuals and entities “responsible for or complicit in” activities such as “actions or policies that threaten the peace, security, stability, or territorial integrity of Belarus,” suppression of human rights and freedom of the press, electoral fraud, deceptive transactions, and public corruption.

OFAC immediately used its authority under the EO in order to add multiple persons and entities to its Specially Designated Nationals & Blocked Persons List (“SDN List”). Those added to the SDN List under the EO include:

-BelKazTrans and Closed Joint-Stock Company New Oil Company, who were sanctioned for operating in the energy sector of the Belarusian economy;

-Inter Tobacco, Energo-Oil and Grodno Tobacco Factory Neman, who were sanctioned for operating in the tobacco product sector of the Belarusian economy;

-Cyprus-based Dana Holdings Limited, who was sanctioned for operating in the construction sector of the Belarusian economy; and

-Belaruskali OAO, who was sanctioned for being owned by the GoB and for operating in the potassium chloride (potash) sector of the Belarusian economy.

The U.S. Treasury Department published a separate press release which identifies all of the SDNs designated by OFAC under the EO. As a result of these designations, all property and interests in property of these SDNs that are or come within the U.S. or the possession or control of U.S. persons are blocked, and U.S. persons are generally prohibited from engaging in transactions involving such SDNs unless authorized by OFAC. OFAC’s “50% Ownership Rule” will also extend these blocking sanctions to any entities owned 50 percent or more, individually or in the aggregate, directly or indirectly, by one or more of these newly designated SDNs. Additionally, the EO gives OFAC the authority to impose blocking sanctions on any non-U.S. persons who provide material assistance to any SDN designated pursuant to the EO.

For Belaruskali OAO, OFAC issued General License 4, which authorizes the wind down of transactions involving Belaruskali OAO, or any entity owned 50% or more by Belaruskali OAO, through 12:01 a.m. eastern standard time on December 8, 2021. OFAC issued FAQ 918 to provide additional information regarding General License 4.

OFAC also issued FAQ 917 which clarifies the scope of the EO’s sector-based sanctions as follows:

The identification of a sector pursuant to E.O. of August 9, 2021 provides notice that persons operating in the identified sector risk exposure to sanctions; however, the identification of a sector does not automatically block all persons operating in that sector of the Belarus economy. Only persons designated on OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List), and entities owned 50 percent or more, individually or in the aggregate, directly or indirectly, by one or more such persons, are subject to blocking sanctions.

As a result, the EO does not automatically sanction persons operating in the identified sectors of the Belarusian economy, but it does provide OFAC with the authority to impose blocking sanctions on such persons at any time.

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Cortney O’Toole Morgan is a Washington D.C.-based partner with the law firm Husch Blackwell. She leads the firm’s International Trade & Supply Chain group.

Grant Leach is an Omaha-based partner with the law firm Husch Blackwell focusing on international trade, export controls, trade sanctions and anti-corruption compliance.

Tony Busch is an attorney in Husch Blackwell’s Washington, D.C. office.