Sanctions and export controls levied by the United States and its allies against Russia in response to its invasion of Ukraine have imposed significant costs on the Russian economy, military industrial complex, and political elite.1 But the impact of the new Russia economic sanctions and export control measures reach far beyond the targeted government, sectors, entities, and individuals. As a result of new U.S. and multilateral economic measures taken against Russia in the past year, U.S. persons now face increased primary sanctions risks when doing business in Russia or with Russians in third countries, and non-U.S. persons face heightened secondary sanctions risks when engaging in activities that may constitute “support” for Russian government and military actions. This article examines select measures imposed against Russia by the U.S. and others, discusses the significance of enhanced multilateral cooperation on sanctions and export control administration and enforcement, and highlights key takeaways for industries seeking to effectively manage the legal, practical, and political risks associated with export control and economic sanctions compliance.
Overview Of U.S. Economic Sanctions and Export Controls
Economic Sanctions and Export Controls
Though often colloquially referred to under the umbrella term “sanctions,” economic sanctions and export controls are formally separate, albeit closely related, tools of economic statecraft.
Generally, economic sanctions refer to a broad range of measures governing the activities of U.S. persons wherever located; whereas, export controls govern the export, reexport, and in-country transfer of U.S.-origin controlled items.2
The U.S. utilizes economic sanctions against its targets, including foreign governments and regimes, economic sectors, entities, and individuals, in a variety of contexts, with the aim of modifying the target’s behavior or promoting other national security or foreign policy objectives.3 Economic sanctions may encompass measures such as blocking assets and interests in assets subject to U.S. jurisdiction; restrictions on access to the U.S. financial system, including transactions with U.S. individuals and businesses; limits on the availability of private and government loans, investments, insurance, and underwriting; trade restrictions; and denial of foreign assistance and government procurement contracts.4 U.S. export controls are designed to promote U.S. national security and foreign policy objectives as well as to maintain U.S. strategic technological leadership.5 Both economic sanctions and export controls are flexible because they can be adjusted in response to a target’s behavior or changes in factual circumstances.
Agencies Responsible for U.S. Economic Sanctions and Export Controls
The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) is responsible for administering and enforcing economic and trade sanctions. Sanctions programs implemented by OFAC are based on multiple legal authorities, including executive orders (“E.O.”) issued by the President and statutes passed by Congress, and such authorities are further codified by OFAC in its regulations (31 C.F.R. Parts 501-599).6 In addition to OFAC, the U.S. Department of State (“State Department”) develops and implements foreign policy-related sanctions to maximize their economic impact on targets and minimize damage to U.S. economic interests.7 The State Department also endeavors to build international support for the implementation of economic sanctions, which are most effective when implemented multilaterally.8
The U.S. export control system, which compliments the U.S. sanctions regime, is diffused among multiple licensing and enforcement agencies; however, U.S. export controls can generally be divided into dual-use and military controls.9 The U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) implements and enforces the Export Administration Regulations (“EAR”) (15 C.F.R. Parts 730-774), which regulate the export, reexport, and in-country transfer primarily of “dualuse” items, and the State Department’s Directorate of Defense Trade Controls (“DDTC”) administers the International Traffic in Arms Regulations (“ITAR”) (22 C.F.R. Parts 120-130), which regulate the export and temporary import of defense articles, data, and services.
U.S. and International Response to Ukraine Invasion
U.S. Response to Russia’s Invasion
The U.S. utilizes sanctions as a core element of its Russia policy, employing them to counter and deter Russian malign activities in a variety of contexts. The U.S. has sanctioned Russia in response to its aggression in Ukraine (beginning in 2014 when Russia annexed Crimea), malicious cyber activities, political influence campaigns, chemical weapons use, human rights abuses, misuse of energy exports as a coercive tool, weapons proliferation, and trade with and political support for North Korea, Syria, and Venezuela.10
In response to Russia’s invasion of Ukraine, the U.S. has imposed full blocking sanctions on Russian individuals and firms, placing numerous targets on OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”). OFAC has imposed sectoral sanctions targeting certain sectors of the Russian economy, such as the consulting and accounting sectors, which have been identified by the Secretary of the Treasury pursuant to E.O. 13662.11 OFAC has also specifically targeted major Russian banks (including the Russian Central Bank), financial institutions, energy exporters, airlines, media outlets, and others. In addition, BIS has imposed export controls targeting strategic goods and technologies that were not previously subject to control, including microelectronics in the Russian military’s supply chain, imposing “significant and long-lasting consequences on Russia’s defense industrial base, which relies extensively on foreign-sourced items.”12 In early 2023, BIS added several Iranian drone producers to its Entity List for transferring unmanned aerial vehicles to Russia for use in Ukraine.13
The U.S.-led, “Western” sanctions and export controls targeting Russia imposed over the past year are unprecedented in terms of their scope, coordination, and speed.14 Analysis by the Economist Intelligence Unit’s global forecasting team “found that 36% of the world’s population live in countries that have actively condemned Russia and imposed sanctions on the Russian economy,” in relation to its 2022 invasion of Ukraine.15 When it comes to economic statecraft, however, perhaps the more important figure to note is that those same countries account for roughly 70% of global GDP.16 A multilateral coalition of pro-Western countries – including the European Union (“EU”), the United Kingdom (“UK”), Canada, Australia, New Zealand, Japan, and South Korea, as well as the formerly-neutral Switzerland, Finland, and Sweden, among others – have joined the U.S. (to some extent) in imposing sanctions and export controls against Russia in response to its aggression in Ukraine.17 Despite considerable variation in the degree of cooperation achieved between the U.S. and its international partners, many Volume 4, No. 2 11 consider the multilateral response to Russia’s invasion in 2022 to be the most sophisticated collective economic measures ever imposed against a major power.18
To date, countries supportive of Ukraine have assisted its effort to resist the Russian invasion in two main ways: sending weapons to Ukraine and imposing restrictions on Russia. And over time, Ukraine’s supporters have grown increasingly willing to send more advanced weapons and impose harsher punishments. The multilateral coalition of nations, initially assembled on an ad hoc basis outside of the structures of any preexisting international organization or framework, has established and reified intergovernmental relationships amongst relevant licensing bodies and law enforcement agencies. This kind of multilateralism – with respect to both the administration and enforcement of economic sanctions and export controls – may, in time, prove a momentous development. As the Russian war campaign wages on, the multilateral economic campaign to counter Russian aggression continues to grow more robust and effective.
Impact of New Russia Economic Sanctions and Export Controls
When discussing the economic effects of U.S. and multilateral measures to counter Russian aggression in Ukraine, such effects can generally be divided into two categories: intended and unintended. The infliction of economic, political, and strategic harm on Russia and its enablers are among the chief intended consequences of such measures. On October 14, 2022, the State Department, OFAC, and BIS issued a Joint Alert informing the public about the impact of U.S. sanctions and export controls on Russia’s military-industrial complex. 19 The alert noted that sanctions have immobilized assets held by the Central Bank of Russia worth hundreds of billions of dollars and imposed sweeping restrictions on access to the U.S. financial system.20 U.S. and allied export restrictions have left Russia’s defense sector incapable of replacing “over 6,000 pieces of military equipment, such as tanks, armored personnel carriers, and infantry fighting vehicles,” and “Russian hypersonic missile production has nearly ceased due to the lack of necessary semiconductors used in the manufacturing process.”21 Moreover, production of Russian surface-to-air missiles, airborne early warning and control aircraft, and even civilian vehicles has either drastically fallen in output or ceased altogether.22 One of Russia’s largest tank producers was even forced to furlough employees due to a lack of necessary foreign components halting its production lines.23
Unintended Consequences Though sanctions and export control measures are generally designed to minimize unintended consequences and mitigate undesired economic harm, some degree of spillover is inevitable. Fortunately, the U.S. does not have, and in fact has never had, a substantial trading relationship with Russia.24 Nevertheless, U.S. sanctions and export controls on Russia have significantly affected certain U.S. businesses and sectors engaged with Russia.25 Measures designed to isolate Russia may also have contributed to global economic trends, worsening negative trends from COVID-19, disrupting international supply chains, exacerbating volatility in commodity markets, and negatively influencing global economic growth.26
From an enterprise risk perspective, the war in Ukraine has radically altered the risk profile of any businesses operating in and around Russia, or with Russian parties. In light of unprecedented U.S. and multilateral measures against Russia, businesses need to make commensurate investments in their compliance programs to mitigate heightened legal and regulatory risk. To avoid costly enforcement actions on the back-end, businesses must devote sufficient resources on the front-end to building robust, risk-based compliance programs, implementing effective internal controls and due diligence procedures, including denied party screening, and, where appropriate, conducting internal investigations into potential misconduct.
Multilateral cooperation with respect to both the administration and enforcement of economic measures targeting Russia has altered the risk profile of doing business with Russia and has increased the likelihood of penalties for non-compliance. Failing to comply with these restrictions can result in significant fines and reputational damage, making it crucial for businesses to understand and adhere to these regulations. Investing in export control and sanctions compliance helps businesses mitigate these risks and avoid reputational harm associated with enabling Russia’s aggression in Ukraine.
The unprecedented international response to Russia’s invasion also portends a broader paradigm shift in the relationship between geopolitics and international business. Rising tensions between the “West” and adversarial nations like Russia and China have resulted in a torrent of economic measures designed to deal economic blows.
The United States has long used economic sanctions and export controls as means of effecting its foreign policy around the globe. But the coordination of these efforts with other nations, collectively representing 70% of the world’s GDP, in the absence of a set multilateral regime makes the response to Russia’s invasion of Ukraine unique. As multilateral cooperation deepens and governments step up their enforcement efforts, investing in export control and sanctions compliance has never been more crucial.
Torres Trade Law is an international trade and national security law firm that assists clients with the import and export of goods, technology, and services. We have extensive experience with the various regimes and agencies governing national security and trade such as U.S. Customs and Border Protection, the Department of Commerce Bureau of Industry and Security, the Department of State Directorate of Defense Trade Controls, the Department of Treasury Office of Foreign Assets Control, the Committee on Foreign Investment in the United States, the Defense Counterintelligence and Security Agency, and others. Our firm provides clients with full support for all trade and national security law issues, including U.S. export control and economic sanctions laws, industrial security, and trade strategy and policy.
1 See Treasury-Commerce-State Alert: Impact of Sanctions and Export Controls on Russia’s Military-Industrial Complex, U.S. Dep’t of the Treasury, OFAC Joint Alert (Oct. 14, 2022), https://home.treasury.gov/system/files/126/20221014_russia_alert.pdf.
2 See U.S. Export Controls and Sanctions Overview, Torres Trade Law (2020), https://www.torrestradelaw.com/ckfinder/userfiles/files/US%20Export%20Controls%20and%20Sanctions%20Overview.pdf.
3 See Economic Sanctions: Agencies Assess Impacts on Targets and Studies Suggest Several Factors Contribute to Sanctions’ Effectiveness, Government Accountability Office, GAO-20-145 (Oct. 2019), https://www.gao.gov/assets/gao-20-145.pdf.
4 Id. at 3-4.
5 See Mission Statement, BIS (accessed Jan. 31, 2023), https://www.bis.doc.gov/index.php/about-bis/mission-statement.
6 See Enforcement of Economic Sanctions: An Overview, Congressional Research Service, IF12063 (Mar. 18, 2022), https://crsreports.congress.gov/product/pdf/IF/IF12063.
7 See Office of Economic Sanctions Policy and Implementation, Division for Counter Threat Finance and Sanctions, U.S. Dep’t of State, https://www.state.gov/economic-sanctions-policy-andimplementation/.
9 See The U.S. Export Control System and the Export Control Reform Initiative, Congressional Research Service, R41916 (Jan. 28, 2020), https://sgp.fas.org/crs/natsec/R41916.pdf.
10 See U.S. Sanctions on Russia, Congressional Research Service, R45415 (Jan. 18, 2022), https://sgp.fas.org/crs/row/R45415.pdf.
11 See E.O. 13662 of Mar. 20, 2014; Blocking Property of Additional Persons Contributing to the
Situation in Ukraine, 79 Fed. Reg.16,167 (Mar. 24, 2014), https://www.federalregister.gov/documents/2014/03/24/2014-06612/blocking-property-of-additionalpersons-contributing-to-thesituation-in-ukraine.
12 Supra note 1, at 3.
13 See Commerce Restricts Foreign-Made Components to Seven Iranian Entities Supplying Drones Used by Russia to Attack Ukraine, BIS Press Release (Jan. 31, 2023), https://www.bis.doc.gov/index.php/documents/about-bis/newsroom/pressreleases/3213-iran-drones/file.
14 See The Economic Impact of Russia Sanctions, Congressional Research Service, IF12092 (Dec. 13, 2022), https://crsreports.congress.gov/product/pdf/IF/IF12092.
15 Russia can count on support from many developing countries, Economist Intelligence Unit (Mar.
17 See generally Minami Funakoshi et al., Tracking sanctions against Russia, Reuters (July 7, 2022), https://www.reuters.com/graphics/UKRAINECRISIS/SANCTIONS/byvrjenzmve/;Amb. Mark Green, Countries That Have Sanctioned Russia, Wilson Center (May 10, 2022), https://www.wilsoncenter.org/blog-post/countries-have-sanctioned-russia.
18 See, e.g., Sanctions on Russia Over Ukraine, Session 20 of the Congressional Study Group, Brookings Institute (Dec. 29, 2022), https://www.brookings.edu/research/sanctions-on-russia-overukraine/.
19 Supra note 1.
20 Id. at 2.
21 Id. at 3.
24 The Economic Impact of Russia Sanctions, Congressional Research Service, IF12092 (Dec. 13, 2022), https://crsreports.congress.gov/product/pdf/IF/IF12092.
By Olga Torres, Managing Member, Derrick Kyle, Senior Associate, and Alex Dieter, Law Clerk, Torres Trade Law, PLLC, Dallas, TX