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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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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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U.S. Sanctions Turkey’s Defense Procurement Entity Over Its Purchase of Russian Missile System

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The U.S. Department of State (“State Department”) announced the imposition of sanctions on Turkey’s Presidency of Defense Industries (“SSB”) pursuant to Section 231 of the Countering America’s Adversaries Through Sanctions Act (“CAATSA”). The U.S. is sanctioning SSB over its procurement of the S-400 surface-to-air missile system from Russia’s Rosoboronexport (“ROE”). SSB is Turkey’s primary defense procurement entity and ROE is Russia’s main exporter of arms. As a result of Turkey’s actions, the U.S. is imposing full blocking sanctions on four SSB officials along with certain non-blocking CAATSA sanctions on the SSB entity.

CAATSA Section 231 requires the President to impose at least five sanctions from the menu of twelve available sanctions authorized under CAATSA Section 235 on any person determined to have knowingly engaged in a significant transaction with the defense or intelligence sectors of the Russian government. ROE is listed on the State Department’s List of Specified Persons (the “LSP”) and recognized as being a part of the defense sector of the Russian government, therefore the State Department determined that CAATSA required the imposition of sanctions on SSB.

The State Department and U.S. Department of Treasury (“Treasury Department”) have selected the following sanctions from CAATSA Section 235 to impose on SSB:

-“a prohibition on granting specific U.S. export licenses and authorizations for any goods or technology transferred to SSB (Section 235(a)(2));

-a prohibition on loans or credits by U.S. financial institutions to SSB totaling more than $10 million in any 12-month period (Section 235(a)(3));

-a ban on U.S. Export-Import Bank assistance for exports to SSB (Section 235(a)(1));

-a requirement for the United States to oppose loans benefitting SSB by international financial institutions (Section 235(a)(4)); and

-imposition of full blocking sanctions and visa restrictions (Section 235(a)(7), (8), (9), (11), and (12)) on Dr. Ismail Demir, president of SSB; Faruk Yigit, SSB’s vice president; Serhat Gencoglu, Head of SSB’s Department of Air Defense and Space; and Mustafa Alper Deniz, Program Manager for SSB’s Regional Air Defense Systems Directorate.”

Although CAATSA Section 235 gave the State and Treasury Departments the discretion to impose full blocking sanctions on SSB, they chose not to do so and instead only imposed those blocking sanctions on the four previously-identified SSB senior officers.

In order to effectuate these sanctions, the Treasury Department’s Office of Foreign Assets Control (“OFAC”) added SSB to its new “Non-SDN Menu-Based Sanctions” list with designations specifying the above-listed non-blocking, menu-based CAATSA Section 235 sanctions. Additionally, OFAC added the four individual SSB officers to its Specially Designated Nationals and Blocked Persons (“SDN”) list. As a result, all of their property and interests within U.S. jurisdiction are blocked and U.S. persons are prohibited from conducting transactions with them without an OFAC license.

State Department’s Directorate of Defense Trade Controls (“DDTC”) is responsible for issuing and administering export licenses under the U.S. International Traffic in Arms Regulations (“ITAR”).  DDTC issued the following notice on December 14, 2020 explaining how it will implement the new export licensing restrictions which are now applicable to SSB under these new CAATSA sanctions:

“[E]ffective immediately DDTC will not approve any specific license or authorization to export or re-export any defense articles, including technical data, or defense services where SSB is a party to the transaction. This prohibition does not apply to temporary import authorizations or to current, valid, non-exhausted export and re-export authorizations. However, the prohibition does apply to new export and re-export authorizations – including amendments to previously approved licenses or agreements and licenses in furtherance of previously approved agreements. This sanction does not apply to subsidiaries of SSB; however, licenses submitted to DDTC which name subsidiaries of SSB are still subject to a standard case-by-case review, including a foreign policy and national security review. We are not imposing a prohibition on U.S. Government procurement from SSB as part of this action.”

The U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) is responsible for issuing and administering export licenses under the U.S. Export Administration Regulations (“EAR”). BIS also issued its own notice on December 14, 2020 which generally stated BIS “has implemented a policy of denial for export license applications to [SSB].”  However, BIS’s notice did not address whether these new CAATSA sanctions would affect existing BIS export licenses issued for SSB or transactions with SSB subsidiaries under the EAR.

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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.

Camron Greer is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.

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US Imposes Additional Sanctions on Key Sectors of Iranian Economy

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On Friday, January 10, 2020, President Trump issued a new Executive Order, “Imposing Sanctions With Respect to Additional Sectors of Iran” (“E.O.”), which authorizes the imposition of sanctions against persons operating in or transacting with Iran’s construction, mining, manufacturing or textile sectors. The E.O. also imposes secondary sanctions against foreign financial institutions (“FFIs”) that engage in “significant financial transactions” within these sectors. Concurrently, the US Department of the Treasury, Office of Foreign Assets Control (“OFAC”), designated several Iranian and third-country metal producers and mining companies, a number of senior Iranian officials, and third-country entities that have transacted in the Iranian metal and mining sectors. This Legal Update provides a brief summary of these new sanctions and designations and discusses their impact on US and non-US businesses and financial institutions.

Designations. Concurrently with the E.O., OFAC designated several Iranian and third-country entities, including 17 Iranian metal producers and mining companies (described as the largest metals manufacturers in Iran); an Oman-based steel supplier; a network of three China- and Seychelles-based entities; and a vessel involved in the purchase, sale and transfer of Iranian metals products, as well as in the provision of critical metals production components to Iranian metal producers. OFAC also designated, pursuant to pre-existing authorities, several senior Iranian officials who have “advanced the regime’s destabilizing objectives.”[i]

New Targeted Sanctions. The E.O. imposes sanctions on the construction, mining, manufacturing and textile sectors of the Iranian economy, expanding on those already imposed on the country’s energy, shipping and financial sectors under Executive Order 13846 (“E.O. 13846”) and the iron, steel, aluminum and copper sectors under Executive Order 13871 (“E.O. 13871”). The aim of the new E.O. is to “deny the Iranian government revenues, including revenues derived from the export of products from key sectors of Iran’s economy, that may be used to fund and support its nuclear program, missile development, terrorism and terrorist proxy networks, and malign regional influence.” The new sanctions come amid rising tensions between the United States and Iran and only days after targeted, tit-for-tat military actions by both countries.

The E.O. authorizes the Secretary of the Treasury, in consultation with the Secretary of State, to block all property and interests in property that are in the United States, or within the possession or control of any US person, belonging to any person (meaning an individual or an entity) determined to:

1. be operating in the construction, mining, manufacturing, or textile sectors of the Iranian economy;

2. have knowingly engaged, on or after January 10, 2020, in a significant transaction for the sale, supply, or transfer to or from Iran of significant goods or services used in connection with one of the aforementioned sectors of the Iranian economy;

3. have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any persons whose property and interests in property are blocked pursuant to the E.O.; or

4. be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to the E.O.[i]

Importantly, the E.O. authorizes the Treasury Department to designate as a Specially Designated National (“SDN”), any “person,” including non-Iranian and non-US persons, who operates in or knowingly engages in a significant transaction in these sectors of the Iranian economy. The E.O. also permits the Treasury Secretary to designate other sectors of the Iranian economy to be subject to sanctions in the future.

Secondary Sanctions on Foreign Financial Institutions. In addition to the targeted sanctions discussed above, the E.O. permits the Secretary of the Treasury, in consultation with the Secretary of State, to impose correspondent account and payable-through-account (“CAPTA”) secondary sanctions on any FFI that, on or after January 10, 2020, knowingly conducts or facilitates any “significant financial transaction”:

i. for the sale, supply, or transfer to or from Iran of significant goods or services used in connection with one of the aforementioned sectors of the Iranian economy; or

ii. for or on behalf of any person whose property and interests in property are blocked pursuant to this order.

CAPTA sanctions “may prohibit the opening, and prohibit or impose strict restrictions on the maintaining” of such accounts in the US by FFIs determined to have engaged in the conduct described in the E.O.

Impact of the New Iranian Sanctions and Related Designations

The E.O. expands on the sanctions already put into place against Iran following the reimposition of secondary sanctions against the country announced in May 2018 and as expanded under E.O. 13846 (sanctions against Iranian energy, shipping and financial sectors) and E.O. 13871 (sanctions against Iranian iron, steel, aluminum and copper sectors).

Under the current sanctions regime, it remains prohibited for US persons—including US-owned or -controlled entities—to engage in virtually any transaction, directly or indirectly, with Iran without OFAC authorization. US persons are further prohibited from transacting without authorization with those persons and entities designated by OFAC and added to the SDN List, including via this recent round of designations.

The new sanctions introduced by the E.O. increase OFAC’s ability to sanction non-US persons, as the E.O. enables the United States to designate and block the property and interests in property of those non-US persons operating in or engaging in significant transactions with the construction, mining, manufacturing or textile sectors of Iran.[i] This has the effect of cutting off such non-US persons from the US financial system (and the US market more generally). Businesses with a presence in the European Union may continue to face challenges as they take into account this enhanced sanctions authority in light of the EU blocking statute, which prohibits EU companies from direct or indirect compliance with certain US sanctions laws, including Iranian sanctions.

It remains a secondary sanctions risk for FFIs (and non-US businesses) to knowingly engage in significant transactions involving certain Iranian persons on the SDN List.[i] Additionally, as discussed above, CAPTA sanctions may be imposed against FFIs who conduct or facilitate any “significant financial transaction” in one of the sectors of the Iranian economy specified in the E.O., regardless of whether such transactions have a US nexus. FFIs and non-US businesses may now include an evaluation of significant transactions in the Iranian construction, mining, manufacturing or textile sectors as part of their Iran sanctions risk assessments.

While the E.O. does not define either the term “significant transaction” or “significant financial transaction,” we suspect that the Treasury Department will apply a standard similar to previously issued guidance published in relation to E.O. 13871. Accordingly, such a determination will likely be based on a multifactor, totality-of-the-circumstances assessment of a broad range of factors, including the size, number and frequency of the transactions or services; their type, complexity and commercial purpose; and the level of awareness of the institution’s management.[i]

Since reinstating secondary sanctions in 2018, the United States has only designated non-US entities under secondary sanctions in a few limited circumstances.[i] However, this E.O. joins a series of preexisting Iran-related secondary sanctions authorities[ii] and further extends the extraterritorial reach of the Iran sanctions program to advance US policy objectives.

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Endnotes

[1] See Press Release, Treasury Targets Iran’s Billion Dollar Metals Industry and Senior Regime Officials (January 10, 2020), available at https://home.treasury.gov/news/press-releases/sm870

[1] The E.O., by its terms, does not apply with respect to any person for conducting or facilitating a transaction for the provision (including any sale) of agricultural commodities, food, medicine, or medical devices to Iran.

[1] The blocking provision of the E.O. requires that the property or interests in property comes within the United States or within the possession or control of a US person (e.g., through use of the US financial system in such transactions).

[1] See OFAC FAQ 636, available at https://www.treasury.gov/resource-center/faqs/sanctions/pages/faq_iran.aspx

[1] See OFAC FAQ 671, available at https://www.treasury.gov/resource-center/faqs/sanctions/pages/faq_iran.aspx

[1] See, e.g., OFAC, “Iran-related Designations; Issuance of Iran-related Frequently Asked Question,” (Sept. 25, 2019), available at https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20190925.aspx (adding Chinese tanker companies to the SDN list due to their alleged role in transporting Iranian oil).

[1] See, e.g., Mayer Brown Legal Update, “US to Reimpose Secondary Sanctions Against Iran Amid EU Opposition” (May 9, 2018), available at https://www.mayerbrown.com/en/perspectives-events/publications/2018/05/us-to-reimpose-secondary-sanctions-against-iran-am Executive Order 13846, “Reimposing Certain Sanctions With Respect to Iran,” (Aug. 6, 2018).

About the authors:

–Tamer Soliman is a partner in Mayer Brown’s Washington DC and Dubai offices, global head of the firm’s Export Control & Sanctions practice and a member of the International Trade practice.

–Ori Lev is a partner in Mayer Brown’s Washington DC office and a member of the Financial Services Regulatory & Enforcement practice and the Consumer Financial Services group.

–Yoshi Ito is a partner in Mayer Brown’s Washington DC office and a member of the International Trade and Public Policy, Regulatory & Political Law practices.

–Brad Resnikoff is a partner in Mayer Brown’s Washington DC office and a member of the Financial Services Regulatory & Enforcement practice.

–Liz Owerbach is an associate in Mayer Brown’s Washington DC office and a member of the firm’s Export Control & Sanctions and International Trade practices.

–Brad Cohen is an associate in Mayer Brown’s New York office and a member of the Litigation & Dispute Resolution practice.

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USCOC, NAM Oppose More Sanctions on Russia

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Washington, DC – In a major policy shift, the US Chamber of Commerce (USCOC)  and National Association of Manufacturers (NAM), two of the largest business groups in the US, have publicly come out in opposition to the sanctions imposed by the White House on Russia following that country’s February military incursion into neighboring Ukraine.

The groups ran newspaper advertisements last week in several publications including the New York Times, Wall Street Journal and Washington Post, asserting that “the only effect” of additional sanctions would be “to bar US companies from foreign markets and cede business opportunities to firms from other countries.”

Both groups had, previously, confined their opposition to the sanctions in a series of private meetings with Obama Administration officials.

The ads ran under the headline, “America’s Interests Are at Stake in Russia and Ukraine“.

Its text read: “With escalating global tensions, some US policymakers are considering a course of sanctions that history shows hurts American interests. We are concerned about actions that would harm American manufacturers and cost American jobs. The most effective long-term solution to increase Americas global influence is to strengthen our ability to provide goods and services to the world through pro-trade policies and multilateral diplomacy.”

Jay Timmons, NAM president and CEO, wrote, “History shows that unilateral sanctions don’t work. President Reagan recognized this reality three decades ago when he lifted the ineffective grin embargo on the Soviet Union.”

The only effect of such sanctions, Timmons said, “is to bar US companies from foreign markets and cede business opportunities to firms from other countries. It’s time to put American jobs and growth first.”

US workers and industries, wrote USCOC President and CEO, Thomas J. Donohue, “pay the cost of unilateral economic sanctions that have little hope of increasing the United States ability to achieve its foreign policy goals.”

Both the US and European Union have imposed penalties against Russian companies, as well Ukrainian supporters of the separatists with Russian President Vladimir Putin threatening to retaliate against US and European companies if broader sanctions are imposed.

US officials have said that the current sanctions now in place have fueled a record $60 billion capital outflow in the first quarter of this year, as well as losses in Russia’s stock market and currency.

The Ukrainian government, the US and its European Union allies say Russia is fueling the conflict by providing manpower and weapons including tanks and anti-aircraft missiles to separatist rebels in Ukraine.

07/08/2014