June 22, 2023

Volume XIII, Number 173

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OFAC Expands Russian Sanctions

On May 19, 2023, the Department of Treasury’s Office of Foreign Asset Control (OFAC) expanded U.S. economic sanctions against Russia through the issuance of:

  • Amendment to Directive 4 Under Executive Order 14024

  • Determination Pursuant to Section 1(a)(i) of Executive Order 14024

  • Determination Pursuant to Section 1(a)(ii) of Executive Order 14071

  • Designations of Over 120 Entities and Individuals on the SDN List

In addition, OFAC issued four general licenses related to these expansions. (Recent Actions, Department of Treasury, Russia-related Designations; Issuance of Amended Russia-related Directive 4, Russia-related General Licenses; Publication of Russia-related Determinations; and New and Amended Frequently Asked Questions, May 19, 2023).

Amendment to Directive 4 Under Executive Order 14024

Executive Order 14024 Section 1(a)(iv) authorizes sanctions against any entity determined to be a political subdivision, agency, or instrumentality of the Government of the Russian Federation. On February 28, 2022, OFAC issued Directive 4 under Executive Order 14024 that determined the “Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation are political subdivisions, agencies, or instrumentalities of the Government of the Russian Federation.” The directive prohibits transactions with those entities but does not impose blocking sanctions. Accordingly, property and interests in property of the entities identified in the Russia-Related Sovereign Transactions Directive are “immobilized” under this less-than-blocking directive

On May 19, 2023, OFAC amended Directive 4 to require that  “United States persons who are in possession or control of property” of the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian must report to OFAC on or before June 18, 2023, and “annually thereafter by June 30.” The report must be submitted to [email protected] and must include:

1. The name and address of the person in possession or control of the property;

2. The date the property came into the possession or control of such person;

3. The entity or entities subject to the prohibitions of this Directive having an interest in the property;

4. A description of the property and its location in the United States or otherwise, including any relevant account types, account numbers, reference numbers, dates, or other information necessary to identify the property;

5. The actual, or if unknown, estimated value of the property in U.S. dollars as of May 31, 2023, for the initial report, and annually thereafter as of May 31. Foreign currencies must be reported in U.S. dollars with the foreign currency amount and notional exchange rate in the narrative; and

6. A copy of the most recent relevant account statement or other documentation to support the estimated value of the property.

An updated FAQ 998 clarified that this reporting requirement is “intended to identify assets of Directive 4 entities held by U.S. persons as of May 31, 2023” and is separate from the requirement under 31 C.F.R. § 501.604 to “file reports on rejected transactions involving any Directive 4 entity.”

Directive 4, as amended through the new reporting requirement, provides the U.S. government enhanced insight into the immobilized Government of Russia property and further aligns the United States Russia-related program with the European Union sanctions regime.

OFAC also issued General License 13E Authorizing Certain Administrative Transactions Prohibited by Directive 4 under Executive Order 14024, which conforms with Directive 4, as amended, and extends the expiration date of authorized transactions from June 6 to August 17, 2023. This license authorizes “U.S. persons, or entities owned or controlled, directly or indirectly, by a U.S. person . . . to pay taxes, fees, or import duties, and purchase or receive permits, licenses, registrations, or certifications, to the extent such transactions are prohibited by Directive 4 under Executive Order 14024.”

Determination Pursuant to Section 1(a)(i) of Executive Order 14024

Section 1(a)(i) of Executive Order 14024 authorizes the imposition of economic sanctions on persons determined “to operate or have operated in such sectors of the Russian Federation economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State.” Effective May 19, 2023, OFAC issued a Determination Pursuant to Section 1(a)(i) of Executive Order 14042 that applies these sanctions to the architecture, engineering, construction, manufacturing, and transportation sectors of the Russian Federation economy.

OFAC issued FAQ 1126 that describes the activities constituting architecture, engineering, construction, manufacturing, and transportation sectors. OFAC expects to promulgate regulations defining these terms consistent with the following descriptions:  

  • Architecture: includes “activities such as advising; pre-designing; designing; preparing sketches, reports, studies, assessments, site plans, working drawings, specifications, cost estimates, as-built drawings, or other materials; contract administration; site selection; and inspections concerning architectural and related matters involving the Russian Federation.”

  • Engineering: includes “activities such as advising; designing; recommending; consulting; constructing; installing, surveying; preparing studies, specifications, cost estimates, working drawings, process flow diagrams, arrangement drawings, or other materials; map making; planning; testing; analysis; and inspecting for engineering and related matters involving the Russian Federation.”

  • Construction: includes “activities such as the production, procurement, devising, framing, design, testing, financing, distribution, or transport involving the Russian Federation, of goods, services, or technology to fabricate, shape, alter, maintain, or form any buildings or structures, including the on-site development, assembly, or construction of residential, commercial, or institutional buildings, or of transportation infrastructure, in the Russian Federation; and any related activities.”

  • Manufacturing: includes “activities such as the creation, modification, repair, testing, or financing, of goods by manual labor or machinery involving the Russian Federation and any related activities.”

  • Transportation: includes “activities such as the production, manufacturing, testing, financing, distribution or transport to, from, or involving the Russian Federation of any mode of transport or any goods, services, or technology for the movement or conveyance of persons or property and the loading, unloading, or storage incidental to the movement of such persons or property; and any related activities.”

Executive Order 14024 authorizes OFAC to impose sanctions against any person determined to operate or have operated in the technology sector or the defense and related materiel sector of the Russian Federation economy, or any other sector of the Russian Federation economy as may be determined by the Secretary of the Treasury. Following the prerequisite sector determinations, including the May 19 action, OFAC may impose sanctions on any person determined to operate in the following sectors of the Russian economy:

  • Technology;

  • Defense and related materiel;

  • Financial Services;

  • Aerospace;

  • Electronics;

  • Marine;

  • Accounting;

  • Trust and corporate formation services;

  • Management consulting;

  • Quantum computing;

  • Metals and mining;

  • Architecture;

  • Engineering;

  • Construction;

  • Manufacturing; and

  • Transportation.

Determination Pursuant to Section 1(a)(ii) of Executive Order 14071

Section 1(a)(ii) of Executive Order 14071 prohibits the “exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any category of services as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, to any person located in the Russian Federation.” On May 19, 2023, OFAC issued a Determination Pursuant to Section 1(a)(ii) of Executive Order 14071 that applies this prohibition to architecture and engineering services, effective June 18, 2023. Accordingly, the “exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of architecture or engineering services to any person located in the Russian Federation” is prohibited.

Like the other Russia-related service prohibition determinations, the May 19 determination excludes:

“(1) any service to an entity located in the Russian Federation that is owned or controlled, directly or indirectly, by a United States person; and

(2) any service in connection with the wind down or divestiture of an entity located in the Russian Federation that is not owned or controlled, directly or indirectly, by a Russian person.”

OFAC issued FAQ 1128 indicating that it “expects to promulgate regulations that define the terms architecture services and engineering services consistent” with the definitions provided in this FAQ. These definitions mirror those provided in FAQ 1126 described above.

Designation of Over 120 Entities and Individuals on the SDN List

In addition to the Directive 4 reporting requirement and new categories of sanctionable sectors and prohibited services,  OFAC designated  “22 individuals and 104 entities, with touchpoints in more than 20 countries or jurisdictions” for “attempting to circumvent or evade sanctions and other economic measures against Russia, the channels Russia uses to acquire critical technology, its future energy extraction capabilities, and Russia’s financial services sector.” (Press Release, Department of Treasury, With Over 300 Sanctions, U.S. Targets Russia’s Circumvention and Evasion, Military Industrial Supply Chains, and Future Energy Revenues, May 19, 2023). These entities and individuals have been added to the SDN List, and, accordingly, sanctions apply to the listed entity and any entities in which it owns, directly or indirectly, a 50 percent or greater interest.

The U.S. Department of State also announced designations, including an action against Joint Stock Company Polimetall, the Russian holding company for major gold and silver producers. (Press Release, Department of State, United States Imposes Additional Sanctions and Export Controls on Russia in Coordination with International Partners, May 19, 2023). OFAC issued FAQ 1129 to clarify that sanctions against Polimetall do not apply to its ultimate parent company, Polymetal International PLC. OFAC determined that Polymental International PLC is not owned “50 percent or more by blocked persons or otherwise considered the blocked property of any blocked persons. U.S. persons, therefore, are not prohibited from dealing with Polymetal International PLC, its non-blocked subsidiaries, or non-blocked affiliates.”

The U.S. Department of State also designated Joint Stock Company Polyus, the largest Russian gold producer; however, OFAC issued General License 66 authorizing the wind down of transaction involving this entity and General License 67 authorizing certain transactions related to debt or equity of, or derivative contracts involving, this entity.

Five universities or educational institutions were also added to the SDN List: (1) Federal State Budgetary Educational Institution of Higher Education Grozny State Oil Technical University Named After Academician M.D. Millionshchikov; (2) Federal State Budget Educational Institution of Higher Education Saint Petersburg Mining University; (3) Federal State Budgetary Educational Institution of Higher Education Sergo Ordzhonikidze Russian State University for Geological Prospecting; (4) Federal State Budgetary Educational Institution of Higher Vocational Education Gubkin Russian State University of Oil and Gas;  and (5) State Budgetary Educational Institution of Higher Education Almetyevsk State Oil Institute. OFAC issued General License 68 authorizing the wind down of transactions involving these universities and institutes as well as any entity in which one or more of the above universities or institutions own, directly or indirectly, individually or in the aggregate, a 50 percent or greater interest.

© Copyright 2023 Squire Patton Boggs (US) LLPNational Law Review, Volume XIII, Number 166
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