Is it Still Legal to Trade with Russia?

Russia’s invasion of Ukraine has unleashed against it a barrage of punitive trade measures by Canada, Europe, the United Kingdom, the United States, and other countries. Russia has hit back with its export bans (and perhaps also to secure needed goods for war). So, is it still legal to trade with Russia?

After almost 20 years of talks, in December 2011 Russia was accepted into the World Trade Organization (WTO). By then, Russia had become the “R” in BRICS – the acronym given to the grouping of the foremost emerging economies of that time. Structural reforms and its WTO accession further propelled Russia’s transition from a closed economy and increased its participation in global trade. By 2016 Russia was the world’s 11th largest economy – by GDP. Russia’s exports hit their highest point in 2012 and 2013. Then, in March of 2014 Russia invaded and occupied the Crimea region of Ukraine.

The West Sanctions Russia for the Occupation of Crimea

Trade relations between the West and Russia began to gradually contract with the introduction of punitive sanctions in 2014. U.S. Executive Order (EO) 13660 of March 10, 2014, targeted individuals who had illegally asserted control in the Crimea. As the occupation continued, additional EOs blocked the property of and prohibited unlicensed transactions with:

• Targeted Russian government officials and persons operating in the arms and materiel related sectors (EO 13661, March 19, 2014); 
• Targeted individuals operating in financial services, energy, metals and mining, engineering, and defense and related materiel sectors of Russia (EO 13662, March 24, 2014);
• The entire Crimea region of Ukraine (EO 13685, December 19, 2014); and
• For U.S. banks, the primary market for non-ruble denominated bonds issued by the Central Bank of the Russian Federation and other Russian “sovereign” entities, which are also prohibited from lending non-ruble denominated funds to them (Russia–Related Directive Under EO 13883, ‘‘CBW Act Directive,’’ issued September 16, 2019).

 

Sanctions imposed by the European Union, the United Kingdom, Canada, and other major economies adopted a similar approach. These sanctions left trading relations with Russia largely intact. Compliance consisted of conducting the screening of individuals and entities before doing business with them, as is best practice with all international transactions. 

 

U.S. Sanctions Russia for Elections Interference

In response to findings that Russia had interfered in the U.S. 2016 elections and those of its allies, the U.S. issued EO 14024, “Blocking Property with Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation” (April 15, 2021). Russia’s financial services sector was almost immediately added as a target of sanctions. Still leaving untouched trading relations with Russia, these new sanctions also expanded the categories of individuals whose property is to be blocked and with whom unlicensed transactions are prohibited:

• Targeted individuals operating in Russia’s technology sector, their spouse and adult children;
• Targeted Russian individuals found to have engaged in and/or provided material support for malicious cyberattacks, assassinations, interference in democratic elections, or manipulation of digital currencies, their spouse and adult children;
• Targeted current or former Russian government officials, their spouse and adult children; 
• Targeted Russian individuals or entities found to be responsible for or complicit in cutting or disrupting gas or energy supplies to Europe, the Caucasus, or Asia; 
• Identified vessels engaged in specified activities for construction of Russian energy export pipelines (EO 14039 issued on August 20, 2021); and
• Targeted individuals or entities operating in Russia’s financial services sector, inclusive of virtual currency transactions.

General Licenses are issued for a limited period for specified activities to support the winding down of activities with sanctioned individuals and entities. Their expiry dates should be closely monitored for compliance, in particularly with financial transactions.

 

The West Responds to Russia’s Invasion of Ukraine

Russia’s March 2022 invasion of Ukraine provided a turning point in its trading relations with the West. In addition to an unprecedented expansion in the number and authority of individuals and entities targeted by sanctions (Putin included), the U.S., EU and other Western partners moved to impose sanctions against strategic sectors of the Russian economy, and to restrict trade in specified goods and services, resulting in a much broader impact on trade with Russia.

Higher Import Tariffs on Many Russian Goods

On March 11, 2022, President Biden signed legislation revoking Most Favored Nation (MFN) status with Russia and Belarus. MFN status is accorded to all WTO members. Reversing the trend begun 11 years ago, this act by the U.S., and expected to be replicated by EU and others, affects goods trade with Russia. Many products, if allowed to be traded, will now attract the higher tariffs assigned to international pariah, North Korea.

Restrictions on Trade with Russia

Recently issued U.S. Executive Orders ((EO 14066 of March 8, 2022; EO 14068 of March 11, 2022; and EO of April 6, 2022) have also limited trade with Russia. They prohibited the following transactions by U.S. persons wherever located:

• any new investments in Russia;
• importation, exportation, provision of trade finance or of new investments in crude oil; petroleum; petroleum fuels, oils, and products of their distillation; liquefied natural gas; coal; and coal products of Russian origin;
• importation into the U.S. of Russian-origin fish, seafood and preparations; alcoholic beverages; non-industrial diamonds; and other products that may later be identified;
• exportation, reexportation, sale, or supply, directly or indirectly, of luxury goods, and any other products that may later be identified to any person located in Russia;
• exportation, reexportation, sale, or supply, directly or indirectly, of U.S. dollar-denominated banknotes to the Government of the Russian Federation or any person in Russia;
• any approval, financing, facilitation, or guarantee by a U.S. person of a transaction by a foreign person for a prohibited transaction; and
• authority to prohibit in any sector provision of services to any person in Russia.

 

General Licenses have permitted transactions that are ordinarily incident and necessary solely to permit the completion or winding down of written contracts entered into before the sanctions. They do not permit new contracts for the prohibited transactions. The following licenses are currently valid:

• General License 17A with regard to U.S. importation of fish, seafood, and preparations until June 23, 2022; and
• General License 18 to permit the transfer of U.S. dollar-denominated banknotes for noncommercial transactions and personal remittances involving U.S. persons, withdrawals from automated teller machines, and the hand carrying of U.S. dollar-denominated banknotes.
• General License 25 authorizing transactions to support continued telecommunications transmissions in Russia.

Non-Russian-origin items may be permitted to depart from or transit through Russia. Also permitted are transactions to sell or re-direct shipments of prohibited imports not involving sanctioned persons and under specified conditions.

Comprehensive Embargo on Trade with Russian-Controlled Areas of Ukraine

As with the Crimea, Russia’s recognition of the break-away areas of Ukraine – Donetsk People’s Republic and Luhansk People’s Republic (“Covered Regions”) have led to comprehensive sanctions in those areas of Ukraine. It is now prohibited for U.S. persons; parties physically located in the U.S.; and U.S. citizens and permanent residents wherever located to:

• export, reexport, sell, or supply, directly or indirectly, any goods, services, or technology to the Covered Regions;
• engage in new investments in the Covered Regions;
• import into the U.S. any goods, services, or technology from the Covered Regions; and
• approve, finance, facilitate, or guarantee a prohibited transaction by a non-US party with respect to the Covered Regions.

Tightened Controls on Export of Dual-Use Items & Ban on Sale of Oil Refining Equipment

The U.S., EU, and major allies have placed strict controls on the export to Belarus and Russia of dual-use technology, software, or commodities that could be used by Russia to wage its war in Ukraine. Dual-use items are developed for civilian use but may have military applications. The categories of items controlled for export include electronics, telecommunications and encryption items, sensors and lasers, navigation and avionics, marine, and aerospace. Many were previously exempt from such controls. Exporters will have to submit a license application for these items. The export, re-export, or transfer of foreign-produced items that are: (i) the direct product of specified US technology; or (ii) produced by a plant or its components using specified US technology is also controlled (“Foreign Direct Product rules”).

License applications will most likely be denied unless the export is for humanitarian, flight or maritime safety, civil telecommunications, government-to-government activities, companies or subsidiaries of specified countries, or able to meet limited license exceptions. Some Belarussian and Russian entities have been barred from receiving any US-origin items, except for permitted food and medicines. The U.S. and the EU have also banned the export of oil and gas refining equipment to Belarus and Russia.

 

Is It Still Legal to Trade with Russia?

In light of the restrictive measures on trade with Russia, as well as Russia’s own export bans, trade with a Russian individual, company, or a person or company in Russia must be approached with caution. Red Flags to pay attention to include:

• Does the transaction involve the export to Belarus or Russia of electronics, telecommunications, encryption, sensors, lasers, navigation, avionics, marine, or aerospace technology, software, or commodities?
• Does the transaction involve the export of oil/gas refining technology?
• Does the transaction involve any of the activities directly prohibited by the U.S. or a country to whose laws your activities are subject?
• Does the transaction involve or could it involve trade with an area in Ukraine that is under Russian control?
• Does or could the transaction involve a sanctioned or denied person or entity?

Steps to take include:

• Exercise caution in structuring transactions or activities that are still permitted; 
• Carefully scrutinize, with your attorney, provisions in existing contracts involving trade with Russia or with a Russian entity; and
• Monitor this ever-changing and escalating situation.

 

This post does not constitute legal advice. Please contact us or another attorney with experience in sanctions and export control laws for more information.