No Time for a Year in Review with a Bear on the Loose

The Biden Administration continues to place pressure on Russia, and on Feb. 24, 2023, marked the one-year anniversary of Russia's invasion of Ukraine with additional sanctions, export controls and tariffs. These new policies are part of an international effort to increase the cost of Russia's continued aggression against Ukraine. Although the latest measures are focused primarily on Russia, Belarus and Iran, it is likely that the Biden Administration will expand its efforts to include other third-country organizations that continue to act as a relief valve to the Russian Federation.

OFAC Sanctions

Metals and Mining Sector of the Russian Economy

The U.S. Department of the Treasury Office of Foreign Assets Control (OFAC) added the metals and mining sector of the Russian economy to its growing list of sectors already subject to U.S. sanctions. In a determination pursuant to Executive Order (E.O.) 14024, any person determined to operate or have operated in the metals and mining sector of the Russian economy may be subject to U.S. sanctions in the future. This move aligns the U.S. with the European Union (EU), which had already sanctioned the metals and mining sector in 2022. The list of sectors subject to U.S. sanctions under E.O. 14024 already includes quantum computing, accounting, trust and corporate formation services, management consulting, financial services, aerospace, electronics, marine, technology, and defense and related materiel sectors of the Russian economy.

SDN: By the Numbers

Additionally, OFAC added 242 names to the Specially Designated Nationals Blocked Persons (SDN) list. Below is a breakdown of the new additions:

• 38.1 percent individuals
• 53.2 percent entities
• 8.7 percent vessels
• 18.7 percent governors or regional heads
• 3.6 percent Russian ministers
• 13 financial institutions, including banks that until now were able to continue servicing some of the transactions outside the scope of existing sanctions
• 35 entities operating in the technology sector of the Russian economy
• 4 entities operating in the defense and related materiel sector of the Russian economy

Importantly, in what appears to be an evolution in U.S. sanction strategy in Russia, of the newly designated individuals and entities, OFAC sanctioned more than 30 third-country actors for their roles in sanctions evasion efforts. Designated parties include Swiss, German and Italian nationals who allegedly assisted Russian companies covertly procure sensitive Western technologies and equipment. U.S. persons generally are prohibited from dealing with SDNs or any entity owned 50 percent or more by an SDN.

Extended General Licenses Relating to Energy and Certain Administrative Functions of the Russian Government

General License (GL) 8F authorizes U.S. persons to engage in energy-related transactions with listed entities. Although GL 8F is similar to its predecessor (GL 8E), it adds Bank Zenit Public Joint Stock Company and Bank Saint-Petersburg Public Joint Stock Company to the list of authorized entities. The current license expires on May 16, 2023.

Like its predecessor (GL 13C), GL 13D authorizes certain transactions prohibited by Directive 4 under E.O. 14024. Specifically, U.S. persons and entities owned or controlled by U.S. persons are authorized to pay taxes, fees or import duties as well as purchase or receive permits, licenses, registrations or certifications involving the Central Bank of the Russian Federation, the National Wealth Fund and the Ministry of Finance, provided the transactions of these U.S. persons or entities are ordinarily incident and necessary to day-to-day operations in the Russian Federation. The current license expires on June 6, 2023.

New General Licenses to Wind Down or Divest

GL 60 authorizes transactions ordinarily incident and necessary to the wind-down of transactions of the following blocked persons:

• Bank Saint-Petersburg Public Joint Stock Company
• Bank Zenit Public Joint Stock Company
• Joint Stock Commercial Bank Primorye
• Public Joint Stock Company Bank Uralsib
• Joint Stock Company Commercial Bank Lanta Bank
• SDM-Bank Public Joint Stock Company
• Public Joint Stock Company Stock Commercial Bank Metallurgical Investment Bank
• Public Joint Stock Company Ural Bank for Reconstruction and Development
• Credit Bank of Moscow Public Joint Stock Company
• Any entity in which one or more of the above persons own, directly or indirectly, individually or in the aggregate, a 50 percent or greater interest

Additionally under GL 60, U.S. persons are authorized to reject all transactions ordinarily incident and necessary to the processing of funds involving one or more of the listed entities, rather than block the transaction. GL 60 is valid through May 25, 2023.

GL 61 authorizes all transactions ordinarily incident and necessary to the divestment or transfer, or the facilitation of the divestment or transfer, of debt or equity of the following blocked persons:

• Bank Saint-Petersburg Public Joint Stock Company
• Bank Zenit Public Joint Stock Company
• Public Joint Stock Company Bank Uralsib
• Joint Stock Company Commercial Bank Lanta Bank
• SDM-Bank Public Joint Stock Company
• Public Joint Stock Company Stock Commercial Bank Metallurgical Investment Bank
• Any entity in which one or more of the above persons own, directly or indirectly, individually or in the aggregate, a 50 percent or greater interest

This does not authorize U.S. persons to sell, or to facilitate, directly or indirectly, the sale of, covered debt or equity to any person whose property and interests in property are blocked. Additionally, U.S. persons are not authorized to purchase or invest in, or to facilitate the purchase of or investment in, covered debt or equity, unless the purchase or investment is ordinarily incident and necessary to the divestment or transfer of covered debt or equity as described in the general license.

BIS Export Controls

The U.S. Department of Commerce Bureau of Industry and Security (BIS) issued two final rules to go into immediate effect on Feb. 24, 2023.

First Final Rule: Industry Sector Sanctions and Luxury Goods Export Controls

The first final rule expands the scope of Russian and Belarusian industry sector sanctions and "luxury goods" export controls. Specifically, the rule seeks to align U.S., Russian and Belarusian export controls with those of U.S. allies and partners.¹

Alignment of Supplement No. 2 and Supplement No. 4

BIS aligned Supplement No. 2 and Supplement No. 4 with U.S. allies in three key ways. First, the scope of both supplements now includes the Russian and Belarusian industry sector. Second, the methodology for identifying items that require an export license is now governed by using the Harmonized Tariff Schedule (HTS)-6 Code and HTS Description, replacing the Schedule B number and Schedule B description. It is important to note that the HTS-6 Code is the controlling factor when determining license requirements and will include EAR99 items. The HTS description is only intended to assist exporters with filing responsibilities.

Finally, any modified or designed "parts," "components," "accessories" and "attachments" for items identified in Supplement No. 2 or Supplement No. 4 will also require a license to export. This expansion does not include "any 'part' or minor 'component' that is a fastener, washer, spacer, insulator grommet, bushing, spring, wire, or solder."

Additional Listed Items in Supplement No. 4 and Supplement No. 6

BIS added items to Supplement No. 4 and Supplement No. 6 that will require a license to Russia or Belarus. Although BIS has changed the methodology to determine license requirements of Supplement No. 2 and Supplement No. 4 to the HTS-6 Code, Supplement No. 6 does not use the same methodology. Further, the final rule provides clarifying detail to facilitate the public's ability to understand the list of chemical and biological weapon-related EAR99 items in Supplement No. 6 that now require a license.

Additional Luxury Goods Subject to Licensing Requirements

The new rule added 276 additional "luxury goods" items to 15 C.F.R. Section 746 Supplement No. 5, expanding the list by 70 percent. While Supplement No. 5 still uses Schedule B numbers and descriptions from the U.S. Census Bureau to identify "luxury goods," BIS may transition to the HTS-6 methodology in a continued effort to align the U.S. approach to that of its allies and partners.

Countries Exempt from Licensing Requirements

BIS has added Taiwan to Supplement No. 3, which lists countries that are exempt from export control on Russia and Belarus. Supplement No. 3 includes countries that have committed to implementing substantially similar export controls against Russia and Belarus.

Additions to the BIS Entity List

Eighty-six entities were added to the BIS Entity List, a list which places licensing requirements on certain entities to export certain items. Licensing requirements related to most of the newly designated entities will be subject to a presumption of denial. Although the majority of the new entities are Russian, some entities are located in Canada, China, France, Luxembourg and the Netherlands. BIS indicated that these entities were being added to the Entity List for evading sanctions and providing backfill supply to support Russia's defense industry. In addition, BIS noted that several of the non-Russian entities are subsidiaries of entities based in China and Russia.

Second Final Rule: New Export Controls for Iran

In a second final rule issued on Feb. 24, 2023, BIS provided new export controls for Iran to curtail the use of U.S.-origin products, software and technology from being used in Iranian drones, which Russia has been using in its conflict in Ukraine. The additional export controls for Iran are similar to the export controls for Russia and Belarus. The second final rule makes the following additions to 15 C.F.R. Section 746:

• The creation of Supplement No. 7, which provides a list of EAR99 items that will now be subject to licensing requirements for export to Iran. Similar to Supplement No. 2 and Supplement No. 4, Supplement No. 7 uses HTS-6 Codes to determine licensing requirements. Further, Supplement No. 7 covers "components," "parts," "accessories," and "attachments" of the listed items.²
• Expands the scope of the Russia/Belarus Foreign Direct Product (FDP) rule to include items listed in Supplement No. 7 and items specified in Categories 3, 4, 5 and 7 of the Commerce Control List (CCL). Additionally, BIS created an Iran FDP rule. While, the Russia/Belarus FDP expands the scope of applicable items, the Iran FDP has a narrow scope and only includes the Supplement No. 7 and CCL categories.
• Countries exempt from export controls on Russia and Belarus in Supplement No. 3, which now includes Taiwan, are also exempt from the new export controls on Iran.

Customs Updates

President Joe Biden signed a proclamation on Feb. 24, 2023, to raise the tariff rate for certain products of Russia. Specifically, the ad valorem duty rate on most metal and metal products from Russia has increased from 35 to 70 percent. Further, the proclamation increased the ad valorem duty rate on certain chemicals and minerals produced in Russia to 35 percent. These changes will go into effect on April 1, 2023.

Finally, the proclamation targeted aluminum articles and derivative aluminum articles that are the product of Russia. Effective March 10, 2023, these products will have a 200 percent ad valorem duty rate. Further, effective April 10, 2023, any aluminum articles and derivative aluminum articles in which any amount of primary aluminum smelted or cast in Russia is used in their manufacture will be subject to a 200 percent ad valorem rate of duty.

Takeaways

Together, these actions have an impact in both a tangible and symbolic way. On the one hand, the Biden Administration is signaling that its arsenal of economic measures is far from empty and that the U.S. government is willing to continue to impose export controls and sanctions based on the evolving state of the war. At the outset of the war, many posited that the U.S. government had already stretched its capacity to impact U.S. businesses to the limit. By continuing to ratchet up the restrictions on Russia and Belarus – and now other third countries such as Iran – the administration shows a resolve to keep tightening any remaining transactions not yet affected by sanctions.

It is notable that in an accompanying press release, the Treasury Department stated that OFAC "will continue to impose sanctions on actors inside and outside of Russia that circumvent sanctions and enable Russia to procure resources critical to enabling Russia's war of aggression against Ukraine." Accordingly, it is likely that future sanctions may target parities in countries that provide material support to Russia.

On the other hand, the timing of the measures with the one-year anniversary of Russia's invasion signifies the United States' continuing support of Ukraine, despite the passage of time. The enhanced sanctions demonstrate that the administration's focus on the day-to-day action in Ukraine and the U.S. continued support persists.

For additional information or questions regarding these new Russia-related economic measures, applicability of general licenses, or any other trade-related matters applicable to your transaction, please contact the authors or another member of Holland & Knight's International Trade Group.

Notes

¹ Each of the Supplements listed below can be found in 15 C.F.R. § 746.

² This expands on an already comprehensive Iran sanctions regime which did not cover the foreign-products identified in the new Iran FDP rule if they were made outside of the United States using goods or technology subject to the Export Administration Regulations (EAR).

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.