Pressure Rising: New U.S. and UK Sanctions and Export Controls Increase Risks for Lingering Russia Exposure, Indirect Evasion in the Supply Chain, and IT Support for Russia Operations

OFAC broadened the definition of parties supporting Russia’s “military-industrial base” (for which the processing of “significant” transactions can trigger sanctions) to also include persons blocked under Executive Order 14024.

This expands the list of entities that can trigger such sanctions to include an additional 555 individuals and entities.

OFAC designated over 300 additional individuals and entities in 16 countries. Of those, the following are a few of the key designations. U.S. persons are prohibited from dealing with such persons, as well as any entity they own 50% or more. 

• Capital Markets: The Moscow Exchange (MOEX), the National Clearing Center (NCC), and the Non-Bank Credit Institution JSC National Settlement Depository (NSD). Because the NSD operates as one of Russia’s primary securities depositaries, the designations collectively impact a large number of Russian securities held by non-Russian parties or non-Russian securities held by Russian parties if NSD is in the custodial chain. OFAC issued two general licenses (General Licenses 99 and 100) authorizing certain wind-down activities with these entities through August 13, 2024.
• Insurance: Gas Industry Insurance Company Sogaz (Sogaz), and JSC Russian National Reinsurance Company (RNRC).
• Supporting Russia’s Domestic War Economy: Over 100 individuals and entities that operate or have operated in the defense, manufacturing, technology, transportation, or financial services sectors of the Russian Federation economy.
• Russian LNG: Individuals, entities, and vessels involved in the Obsky LNG, Arctic LNG 1, and Arctic LNG 3 projects.
• Sanctions and Export Evasion: Over 90 individuals and entities assisting Russian sanctions evasions across Russia, Belarus, the British Virgin Islands, Bulgaria, Kazakhstan, the Kyrgyz Republic, China, Serbia, South Africa,Türkiye, and the United Arab Emirates. 

OFAC issued a general license (General License 98) that allows for the wind down of activities involving 15 of the sanctioned entities.

The Prohibition: Bringing the U.S. in line with earlier restrictions issued by the EU and the UK, U.S. persons are prohibited from exporting, reexporting, selling, supplying, directly or indirectly, to a person in Russia:

• Information technology (IT) consultancy & design services, or
• IT support and cloud-based services for enterprise management software and design and manufacturing software to any person located in the Russian Federation.

The prohibition takes effect on September 12, 2024.

Exclusions:

• Any service provided to an entity that is owned or controlled by a U.S. person (an exemption that was never available under the UK rule and was withdrawn by the EU effective mid-June).
• Any service connected with the wind down or divesture of an entity in Russia (not owned or controlled by a Russian person).
• Any service for software that is subject to the U.S. Export Administration Regulations (EAR), and the export of such software is otherwise authorized by BIS.

General Licenses: OFAC also updated General Licenses 6D and 25D to account for certain exceptions involving agricultural and medical activities, and exchanges of communication over the Internet.

Listing Addresses on the Entity List: BIS now lists “high risk” addresses on the Entity List (as opposed to an address associated with a name). BIS will identify which items subject to the EAR require an export license if exported, reexported, or transferred to such addresses.

Hong Kong Addresses: Eight addresses in Hong Kong will be added. The export, reexport, or transfer to any person at these addresses will require a license if the item is subject to the EAR and it is listed on the Commerce Control List, or Supplement No. 7 (Supplement No. 7 is a list of items controlled for export to Iran, Russia, and Belarus).

A license is now required to export, reexport, or transfer to Russia or Belarus EAR99 software if it is for:

• Enterprise resource planning (ERP);
• Customer relationship management (CRM);
• Business intelligence (BI);
• Supply chain management (SCM);
• Enterprise data warehouse (EDW);
• Computerized maintenance management system (CMMS);
• Project management software, product lifecycle management (PLM);
• Building information modelling (BIM);
• Computer aided design (CAD);
• Computer-aided manufacturing (CAM); and engineering to order (ETO).

There are certain exceptions for entities owned or controlled by U.S. persons, or persons from A:5 or A:6 countries, as well as software used for agricultural and medical purposes.

A license is now required to export, reexport, or transfer to Russia the following items:

• HTS Code Restrictions: Over 500 additional types of items based on HTS codes.
• Riot Control Agent Restrictions: 10 riot control agents based on their Chemical Abstracts Service number.

BIS designated four Chinese companies and one Russian company, all within the defense sector, to the Entity List.

It is prohibited to export, reexport, or transfer any item subject to the EAR to such persons.

BIS issued Temporary Denial Orders (TDO) to two Russian procurement networks facilitating exports of aircraft parts to Russia through third countries.

The TDOs cut off the right to export items subject to EAR from the U.S. as well as the rights to receive or participate in exports from the U.S. or reexports of items subject to the EAR

BIS explained that it reached out (privately) to over 130 U.S. distributors of BIS’s “high priority” items and imposed additional restrictions when these distributors ship items to certain foreign suppliers identified on a list provided by BIS. BIS noted that these foreign suppliers are in turn supplying these items to Russia.

Moving forward, BIS explained it will target Russian diversion efforts through Entity List additions, specifically targeting foreign companies that supply U.S.-branded products to Russia.

The UK introduced a number of new asset-freezing designations. UK persons are prohibited from making funds or economic resources available to or for the benefit of asset-freeze targets, and from otherwise dealing with their funds or economic resources. The new designations include:

• Six entities operating in or supporting the Russian LNG sectors.
• A Russian insurer and ship manager.
• Two entities involved in Russian civil nuclear.
• Four entities connected with the Russian financial system (including MOEX and the National Settlement Depository) in line with the U.S. additions.
• 21 suppliers to the Russian military-industrial complex (which, in addition to various Russian entities, includes entities based in Türkiye, China, Israel, and Kyrgyzstan).
• Six beneficiaries (entities and individuals) of the invasion in key sectors.
• Two entities linked to the Wagner Group. 

The UK also used powers to specify four vessels in Russia’s shadow fleet and two vessels which have shipped weapons to Russia. So-called ‘specified ships’ are prohibited from entering UK ports, may be given a movement or a port entry direction, can be detained, and will be refused permission to register on the UK Ship Register or have its existing registration terminated. They also can not benefit from the oil price cap.