Recent Trade & Tariff Perspectives

February 23, 2022  |  Jeff Simpson  Director, Compliance—Global Forwarding

Potential Russian Sanctions: What May Be Implemented and the Impact on U.S. Companies

As the crisis in Ukraine continues with the ongoing threat of a Russian invasion, the United States and European allies have publicly stated there would be swift implementation of sanctions against Russia if the situation escalates. In today’s weekly perspective, we’ll cover which sanctions will most likely be implemented and the impact they are expected to have on U.S. companies should they be put in place.

Anticipation of multilateral sanctions levied by the United States if Russia invades Ukraine

Though there is currently no guarantee regarding exactly what sanctions will be implemented by the United States and its European allies if Russia invades Ukraine, the most logical path is the implementation of financial sanctions. These sanctions would likely have an immediate impact on Russia, while the sanctioning and controlling of technology and physical goods would take longer to have an effect.

Potential implementation of financial sanctions

In the United States, sanctions would be executed via the Office of Foreign Asset Control (OFAC) under the Department of Treasury, against the Russian Financial Sector (i.e., banks and similar institutions), by listing various—if not all—Russian financial institutions on the Specially Designated Nationals and Blocked Persons List (also known as the SDN List).

These OFAC sanctions would have an immediate effect of cutting off Russian banks from financial markets and would cut off foreign lending and sales of sovereign bonds. Foreign entities worldwide would be forced to halt any business with these Russian financial institutions.

OFAC would presumably employ similar sanctions it has used on Iranian banks in the past. However, as Russian financial institutions are significantly larger and more entrenched into the global economy than Iranian banks, these sanctions would have a more immediate, far-reaching impact on the Russian economy. Additionally, individual sanctions would likely occur via the listing of high-ranking individuals within Russia on the SDN List. These individual SDN listings could go as high as Russian President Vladimir Putin himself.

Impact of financial sanctions on U.S. businesses

Effectively, these sanctions against the Russian financial sector would preclude any U.S. entity from engaging with these banks. Thus, these banks would no longer be allowed to facilitate—directly or indirectly—any financial transactions that involve U.S. companies.

Technology and physical goods controls

The United States and its European allies would likely implement technology and physical goods controls against Russia—presumably in the electronic and microprocessor industry, but the controls could very well encompass other commodities as well. Commodity and physical good controls wouldn’t likely have an immediate impact, but over time, would cause significant production, development, and supply chain issues in Russia.

Technology sanctions against Russia would be in the form of goods and technology controls under the Export Administration Regulations (EAR), which is the jurisdiction of the Bureau of Industry and Security (BIS) under the Department of Commerce. Most likely, these controls would be similar to the controls BIS placed on Huawei years prior, but would likely apply to a wider swath of Russian companies across industries—or potentially all Russian companies, rather than just one company, which was the case with Huawei.

BIS would bar American companies from providing commodities, technology, etc. to these industry sectors and companies in Russia. This would, in turn, seriously disrupt—if not cut off completely—the Russian companies’ supply chains that are needed to produce goods. One clear aim of these controls would be to stop the growth of strategic industries in Russia, such as the oil and gas and defense industries.

Technology and physical goods control impact on U.S. companies

U.S. companies must be aware of the specifics regarding what controls are ultimately put in place. The reality is, because of the “extraterritorial nature” of the EAR— or more specifically, the Foreign Direct Product Rule (FDP rule)—these controls would not only stop Russia from receiving U.S. manufactured goods, but also foreign-made products that have more than a de minimis content of U.S. origin physical components and/or technology.

As with all exports, U.S. companies should have safeguards in place to ensure compliance. These “rings of defense” for U.S companies should include:

• Conducting denied party screening
• Incorporating contractual language, which puts customers and business partners on notice that U.S. export regulations must be followed for their goods and technology, even after export from the United States
• Knowing the Export Control Classification Number (ECCN) of their products and technology and how to apply their specific ECCNs for export control purposes
• Having an export compliance program in place as a best practice

This guidance is not unique to the current situation with Russia. It is recommended to be a routine and integrated business practice.

February 21, 2022 update

There is no disputing that this is an extremely fluid situation. U.S. companies should be monitoring the situation very closely. President Biden signed an Executive Order (E.O.) to respond to President Putin’s action to recognize the Donetsk and Luhansk Regions (DNR and LNR) of Ukraine as “independent” states.

This E.O. prohibits:

• New investment in the DNR or LNR of Ukraine by a United States person, wherever located
• The importation into the United States, directly or indirectly, of any goods, services, or technology from the DNR or LNR of Ukraine
• The exportation, re-exportation, sale, or supply, directly or indirectly, from the United States, or by a U.S. person, wherever located, of any goods, services, or technology to the DNR or LNR of Ukraine
• And any approval, financing, facilitation, or guarantee by a U.S. person, wherever located, of a transaction by a foreign person where the transaction by that foreign person would be covered by these prohibitions if performed by a U.S. person or within the United States

Additionally, this E.O. authorizes the issuance of general licenses to ensure that humanitarian and other related activity can continue in these regions.

February 22, 2022 update

President Biden announced earlier today that the United States would impose sanctions on the Russian financial sector with full blocking on two, large Russian financial institutions and comprehensive sanctions on Russian debt.

Additionally, the President said the United States would impose sanctions on Russian elites and their families. “Today, I’m announcing the first tranche of sanctions to impose costs on Russia,” President Biden said in the same speech. “We’ll continue to escalate sanctions if Russia escalates.”

This announcement represents the first set of sanctions in a phased approach to Russia’s actions in Ukraine. It is anticipated that if Russia continues to escalate in Ukraine, additional sanctions will be put in place.

Stay informed on developments

C.H. Robinson continues to closely monitor this legislation. Subscribe to our Client Advisories and Trade and Tariff Insights to be notified when changes take place. Connect with one of our trade policy experts to learn more.