• On the eve of the 2024 Group of Seven (G7) Leaders’ Summit, the United States imposed new sanctions and export control measures against Russia further targeting sanctions evaders and, for the first time, the Russian securities market infrastructure with immediate consequences.
• Certain of the measures bring U.S. policies in greater alignment with (or go further than) those of the EU and UK. These include the imposition of blocking sanctions on the three pillars of Russia’s securities infrastructure, the Moscow Exchange (“MOEX”), the National Clearing Center (“NCC”), and the Non-Bank Credit Institution Joint Stock Company National Settlement Depository (“NSD”), and a new prohibition on providing certain software and IT services to Russia.
• Other measures expand upon and reinforce preexisting measures, such as the decision to increase the scope of activities for which foreign financial institutions (“FFIs”) may be targeted by secondary sanctions and broaden the types of software and industrial items that are subject to export controls against Russia and Belarus.
• Companies and banks that continue to operate in Russia or transact with Russian parties should take careful account of their possible increased exposure to sanctions and export controls under the new measures.

U.S. Measures

Sanctions on Russia’s financial securities infrastructure

The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) added three key components of Russia’s financial securities infrastructure to the List of Specially Designated Nationals and Blocked Persons (“SDN List”): MOEX, NCC, and NSD (collectively, the “Securities Entities”). MOEX runs Russia’s largest public securities markets, while NCC and NSD are subsidiaries of MOEX and serve as MOEX’s clearing agent and Russia’s central securities depository, respectively. As a result of these sanctions, and unless a general or specific license from OFAC provides otherwise (as discussed below), the Securities Entities are blocked and U.S. persons are prohibited from engaging in transactions involving them or property or property interests owned by them. Non-U.S. persons may also risk exposure to secondary sanctions if they continue to deal with the Securities Entities. It should be noted that the UK sanctioned each of MOEX, NCC and NSD the day after OFAC (the EU has not yet sanctioned MOEX or NCC but, as discussed below, the EU sanctioned NSD in June 2022).

Along with the imposition of these sanctions, OFAC issued two new general licenses (“GLs”), GL 99, GL 100, and amended GL 8J, authorizing certain transactions involving MOEX, NCC, NSD, or any entity in which one of these entities owns a 50 percent or greater interest, as follows:

• GL 99 authorizes the wind down of transactions involving the Securities Entities, including the divestment to non-U.S. persons of debt or equity issued or guaranteed by, or derivative contracts involving the Securities Entities, until 12:01 a.m. eastern daylight time on August 13, 2024. For example, U.S. persons are permitted to divest equity securities issued by MOEX to non-U.S. persons provided that all actions related to the divestment (including settlement) are completed by that date. After that date, such securities must be blocked and reported to OFAC.
• GL 100 authorizes transactions involving the Securities Entities in their capacity as a depository, central counterparty or clearing house, or public trading market with respect to the divestment of debt or equity issued by non-blocked entities to non-blocked, non-U.S. persons, until 12:01 a.m. eastern daylight time on August 13, 2024.
• GL 8J authorizes certain transactions related to energy involving NCC (in addition to other Russian SDNs specified in the general license).

Although NSD has been subject to EU sanctions since June 2022, the general view has been that transactions involving NSD do not violate EU sanctions provided NSD does not receive any fees or other funds/economic resources. When the OFAC sanctions take full effect on August 13 (assuming no extensions of GLs 99 and 100), U.S. persons and non-U.S. persons wishing to avoid secondary sanctions risks will be prohibited from participating in any activities that involve the Securities Entities. The new sanctions therefore will restrict activities such as the sale of local Russian securities traded on the MOEX and other transactions that would involve the NCC or NSD once the general licenses discussed above expire in mid-August.

In response to the sanctions, MOEX suspended trading in U.S. dollars and euros, and subsequently Hong Kong dollars, while MOEX stocks initially plummeted but later recovered. Trading in U.S. dollars and euros will now move to over-the-counter settlement which will likely lead to greater spreads.

Software and IT services bans

Echoing actions the EU (and, to some extent, the UK) had previously taken, OFAC announced that, effective September 12, 2024, prohibitions on the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of (1) IT consultancy and design services or (2) IT support services or cloud-based services for enterprise management software and design and manufacturing software to any person located in Russia.

The following activities will not be prohibited:

• Providing services to an entity located in Russia that is owned or controlled, directly or indirectly, by a U.S. person;
• Providing services in connection with the wind down or divestiture of an entity located in Russia that is not owned or controlled, directly or indirectly, by a Russian person;
• Providing services for software that is:
  • Subject to the Export Administration Regulations (“EAR”), and has been licensed or otherwise authorized for exportation, reexportation, or transfer (in-country) to Russia; or
  • Not subject to the EAR, and would be eligible for a license exception or other authorization for exportation, reexportation, or transfer (in-country) to Russia if it were subject to the EAR.

OFAC is maintaining authorizations for certain telecommunication and internet-related transactions, as well as humanitarian transactions, under GLs 6D and 25D. These authorizations are intended to “mitigate the impacts to Russian civil society and protect public access to information communications technology.” OFAC also issued FAQs 1184-1188 regarding the new prohibitions.

The UK and EU previously implemented similar restrictions on providing IT consultancy services to entities in Russia - the UK restriction is on “IT consultancy and design services” and the EU restriction is on “IT consultancy services.”

Expansion of ability to sanction Foreign Financial Institutions

On December 22, 2023, President Biden issued Executive Order (“E.O.”) 14114, amending E.O. 14024 to authorize OFAC to target FFIs that conduct or facilitate significant transactions or provide any service involving Russia’s military-industrial base (see our OnPoint). Now, in an updated sanctions advisory and the newly issued FAQ 1181 and revised FAQ 1151, OFAC has expanded the definition of “Russia’s military-industrial base” to include “all persons blocked pursuant to E.O. 14024, as well as any person operating in the technology, defense and related materiel, construction, aerospace, and manufacturing sectors of the Russian Federation economy (and other sectors as may be determined pursuant to E.O. 14024).” Further, OFAC states that “Russia’s military-industrial base may also include individuals and entities that support the sale, supply, or transfer, directly or indirectly, [to Russia] of critical items identified in determinations pursuant to” E.O. 14024.

Technically, this does not represent a significant policy change, as E.O. 14024 already authorized OFAC to impose sanctions on any person determined “to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of” persons blocked under E.O. 14024. However, it signals OFAC’s increased willingness to impose secondary sanctions on non-U.S. financial institutions that engage in a wide variety of activities relating to Russia.

FAQ 1182 confirms that legitimate humanitarian activity and agricultural and medical trade, as well as the provision of financial services to facilitate such activities, remain authorized pursuant to certain general licenses. Still, it cautions that OFAC “remains focused on counteracting activity that involves sanctions evasion or third-country support to Russia’s military-industrial base.”

Broadening of export controls

In concert with OFAC’s sanctions announcement, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) announced expanded export control measures against Russia and Belarus to “further degrade” Russia’s military capabilities. Among other things, the new rule expands export controls to prohibit the export or re-export to Russia or Belarus of certain software designated under the Export Administration Regulations (“EAR”) as EAR99 as well as more than 500 additional 6-digit Harmonized Tariff System codes (“HTS codes”) related to certain industrial items.

Restrictions regarding certain EAR99 software

On September 16 of this year (90 days after the rule is formally published), certain EAR99-designated software and software updates will become subject to new export control measures generally requiring a license to export, reexport, or transfer (in-country) to or within Russia or Belarus. The new controls will apply to the following types of software:

• 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).

Notably, the EU also imposed a ban on the sale, supply, transfer, or export to entities in Russia of the same types of software listed above in December 2023. The UK has not yet introduced similar restrictions.

Certain subsidiaries and joint ventures of U.S. companies and certain allied countries are excluded from the new license requirement, as are entities that operate exclusively in the medical or agricultural sectors.

Additional industrial items restricted

U.S. export controls prohibit the export or reexport to, or in-country transfer within, Russia or Belarus of various industrial items identified in Supplements No. 4 and 6 to part 746 of the EAR. The new measures identify industrial items captured by 522 additional HTS codes that now will require a BIS license for export to, reexport to, or in-country transfer within Russia or Belarus, assuming no license exception applies. By imposing export controls on these additional HTS codes, BIS aims to prevent circumvention of export license requirements by those who would otherwise be able to change the classification of an item requiring a license to the classification of an item in a similar HTS code that does not require a license.

Changes and additions to the Entity List

BIS is revising its regulations to enable it to add “Addresses with High Diversion Risk” to the Entity List, to help prevent export control evasion. According to BIS, so-called export control and sanctions evaders often use shell companies to carry out international transshipment, easily dissolving and re-forming entities with different names to avoid being caught by compliance screening. To create these shell companies, evaders use corporate service providers, which provide them with an address to use on paperwork and where they can receive shipments. The revised regulations will enable BIS to identify addresses that appear multiple times on the Entity List or Unverified List in association with different company names, without identifying a particular entity name. A license requirement will thereby be imposed on all entities that use identified addresses. Already, BIS has added eight Chinese addresses to the Entity List that are linked to shipments of sensitive goods to Russia. BIS also added four Chinese entities and one Russian entity to the Entity List.

Seizure of Assets

A controversial topic of discussion by G7 members has been whether they will seize frozen Russian Central Bank reserves to support Ukraine. On April 24, 2024, President Biden signed into law an aid package for Ukraine that included the Rebuilding Economic Prosperity and Opportunity for Ukrainians Act (“the REPO Act”). The REPO Act authorizes the U.S. Government to seize frozen Russian sovereign assets, including Central Bank holdings, subject to U.S. jurisdiction and use them to support and rebuild Ukraine.

The United States froze roughly $5 billion in Russian sovereign assets at the outbreak of the war in Ukraine, which could now be used to aid Ukraine, pursuant to the REPO Act. The law mandates that any effort to seize these assets should be done in coordination with other G7 member states. At this time, no action has been taken to seize Russian sovereign assets.

The EU also implemented legislation in May 2024 which requires central securities depositories in the EU to contribute almost all of the net profits accrued on frozen assets of the Central Bank of Russia to the EU and those funds shall be used to support and rebuild Ukraine.

In retaliation to the REPO Act, on May 23, the Russian President signed into law Decree No. 442 (the “Decree”), which allows the Russian state to seize U.S. assets in Russia, including those of U.S. citizens and U.S. companies. According to the Decree, the Russian Government will adopt measures to compensate for the damage caused to the Russian state and Russian Central Bank by actions and decisions of the U.S. Government and U.S. courts. Such measures should apply where Russian authorities were “unjustifiably” deprived of their property; the authorities can apply to Russian courts to determine whether such deprivation took place. In connection with the measures, the Government Commission for Control over Foreign Investments will provide a list of assets (e.g. immovable property, movable property, shares and equity interests, other rights and assets) of the United States and persons associated with it, including U.S. citizens, U.S. companies, and persons under U.S. control (“U.S. persons”).

Given the timing for the Russian Government to implement further regulations, it is possible that actions under the Decree (if any) will not be taken immediately. However, we anticipate that when such actions begin, the Russian state will first try to seize assets of U.S. persons that are frozen in type C accounts.

***

The business landscape in and involving Russia continues to change rapidly. Companies should continue to keep abreast of legal developments and take necessary steps to obtain authorizations and licenses where needed.