Analysis

Trade Attys React To Historic Expansion Of Russia Sanctions

Law360 (February 25, 2022, 7:00 PM EST) -- Never before has an economy with the size and global impact of Russia been subject to the types of forceful sanctions and export controls that several countries invoked in response to the invasion of Ukraine, and now trade attorneys are bracing for the aftershock as they hustle to navigate challenges that the evolving measures present.

On Thursday, President Joe Biden expanded a freeze on the assets of Russian oligarchs and state-owned banks, placed new limits on state-owned energy, logistics, and shipping firms' ability to raise money, and instituted a far-reaching blockade that's expected to halve Russia's access to semiconductors and other crucial technology to hamstring the nation's military and industrial capacity.

While the tools at his disposal are not new — Russia has been under targeted, open-ended U.S. sanctions since 2014 — Biden is using a much bigger and more powerful toolbox as he and international partners unhitch Russia from the world economy.

"This is the first time that we have used [such sanctions] against a country with such an economic footprint in the world," Judith Alison Lee, the co-chair of Gibson Dunn's international trade practice group, told Law360 on Friday. "No other country that has been subjected to these types of sanctions has had the economic impact that Russia has."

Banks and payment processors are scrambling to meet compliance burdens under the new regime, but there is perhaps no corner of global trade that won't feel the impacts as they ripple outward.

"The logistical and the practical challenges are intense," Greenberg Traurig LLP shareholder Kara Bombach told Law360 on Thursday following the announcement. "Simply having safe and secure supply chains [and] being able to receive lawful payments for lawful exports will be challenging. Given the scope of the sanctions and just how integrated the Russian economy really is with the rest of the world, it's a good opportunity for companies and organizations, maybe who historically haven't really taken on board a sanctions compliance program."

Moving forward, deals with even a hint of Russian ties will need strict scrutiny, according to Holland & Knight LLP partner Antonia I. Tzinova.

"If anything smells like Russia or Ukraine — the parts of Ukraine that are subject to these prohibitions — you just need to screen all the parties to make sure that they're not designated persons and figure out what is the prohibition with respect to that particular person," Tzinova, a member of Law360's Trade editorial board, told Law360 shortly after Biden's announcement on Thursday. "You just need maybe a wholesale screen on all your counterparties, wholesalers, et cetera, just to make sure that you're not dealing with a designated person going forward."

The sanctions and export controls are a double-whammy for the information technology sector and clients who have people on the ground in Russia and the disputed Donetsk and Luhansk regions.

For instance, the sanctions that the U.S. imposed on Russia in 2014 amid its invasion of Crimea had the "unexpected or hidden implication" of disrupting call centers and software programming shops that businesses worldwide relied on, according to Bombach.

When those restrictions came down, clients asked, "What do we do? Our entire call center and software support team are sitting in Crimea. Can we still use them? Can we pay their payroll? Can we support getting them out and moving them kind of across the border into another place that's not in Crimea that's subject to the restrictions?" Bombach said.

And those were "very discreet, very surgical, very targeted sanctions," that pale in comparison to the new measures, Bombach said.

The comprehensive controls that the U.S. placed Thursday on a swath of tech exports will only compound headaches for the global tech manufacturing sector because the controls effectively bar Russia from importing any tech with even a minimal connection to the U.S.

"It doesn't affect only U.S. exporters," Tzinova said. "A lot of U.S. technology goes into foreign-made products. And so to the extent that such technologies are incorporated into foreign-made products — unless de minimis content — those would not be able to be exported to Russia, as well."

The U.S. Department of Commerce has created new license requirements for all export control classification numbers in Categories 3-9 of the Commerce Control List, adding products under 58 new ECCNs covering things such as microprocessors, navigation systems, lasers and sensors critical to everything from consumer electronics to Russian President Vladimir Putin's war machine.

The U.S. will adopt a policy of denying such licenses, except for certain medical and humanitarian technology, "government space cooperation" and civil telecommunications infrastructure, according to the Commerce Department.

"This is a very potent weapon that the U.S. has," Lee said.

While the Kremlin was prepared for economic sanctions announced in recent days, having stockpiled currency reserves since the Crimea sanctions nearly a decade ago, Putin may not have had time to brace for a chip blockade since the U.S. beefed up its trade control might in 2020 to combat Chinese electronics manufacturer Huawei, according to Lee.

"The U.S. has always had a foreign direct product rule. And what the U.S. did with Huawei is to tweak that to really make it on steroids," she said, adding that "those restrictions are going to ripple through the technology trade."

Enforcing the technology barricade is an international effort. On Thursday, Biden touted a "coalition of partners representing well more than half of the global economy" that included the United Kingdom, Canada, Japan, Australia and New Zealand, as well as France, Germany, Italy and two-dozen other European Union members. Notably missing were China and India, the latter of which remains in consultation with the U.S., Biden said Thursday.

Sanctions-avoiding actors could take advantage of the situation to turn a profit.

"There are states like China that can take advantage of the situation," Lee said. "The U.S. is very concerned about China assisting Russia in evading the sanctions."

The impact of new trade restrictions on shipping routes remains to be seen. Wary shippers reportedly drew down their presence in the Black Sea ahead of Russia's invasion on Thursday. Russia and Ukraine have also closed their ports on the adjacent Azov Sea. On Friday, real-time shipping maps showed dozens of vessels idle at the mouth of the Strait of Kerch connecting the Black Sea and Azov Sea.

"It's such an awful situation, and it's very difficult to untangle the impact of sanctions, export control, and trade restriction from the impact of acts of aggression and war that Putin is making," Bombach said.

The attorneys noted the human toll that Putin's attack, and the resulting sanctions, will have not just locally, but around the world.

"The Russian people will suffer because they will be cut off from a lot," said Tzinova, who is originally from Bulgaria. "Oil prices are likely to go up in the U.S. It's going to be kind of a chain reaction. Most likely, we will then see higher inflation. Everybody is going to suffer."

--Editing by Vaqas Asghar.

For a reprint of this article, please contact reprints@law360.com.

Hello! I'm Law360's automated support bot.

How can I help you today?

For example, you can type:
  • I forgot my password
  • I took a free trial but didn't get a verification email
  • How do I sign up for a newsletter?
Ask a question!