U.S. economic sanctions programs and export controls generally have a soft spot for transactions related to the supply of agricultural commodities, medicine, and medical devices (“AgMed”). This is not only because certain sanctioned countries (e.g. Iraq) have experienced humanitarian catastrophes as a result of sanctions themselves, but the Trade Sanctions Reform and Export Enhancement Act of 2000 (“TSRA”) has since prevented U.S. Presidents from implementing any unilateral agricultural or medical related sanctions against a foreign country or entity.

As the U.S. Government began implementing sanctions and export controls against Russia in response to its invasion of Ukraine, the U.S. Department of Treasury’s Office of Foreign Assets Controls (“OFAC”) and the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) have simultaneously implemented corresponding exceptions, general license authorizations, and/or favorable licensing policies for AgMed related transactions. Below is a summary outline of those sanctions and export controls actions thus far where corresponding AgMed-related exceptions, license authorizations, and/or favorable licensing policies have been issued. Businesses involved in AgMed transactions with Russia and/or Ukraine touchpoints should carefully assess their sanctions and export controls risks and make sure they have the proper controls in place.

1. Comprehensive U.S. Sanctions on the so-called Donetsk and Luhansk People’s Republics (“DNR” and “LNR”)

On February 21, 2022 President Biden issued E.O. 14065 in response to Russia’s purported recognition of the DNR and LNR, prohibiting virtually all transactions involving persons subject to U.S. jurisdiction with these two regions of Ukraine (and authorizing expansion of these prohibitions to other regions in the future). These prohibitions administered by OFAC are essentially an extension of the same comprehensive sanctions on the annexed Crimea region since E.O. 13685 of December 19, 2014.

Shortly thereafter, BIS made conforming revisions to its Export Administration Regulations’ (“EAR”) on February 24, 2022, in 15 C.F.R. § 746.6. That section previously contained a licensing requirement for the export or reexport (including deemed exports or reexports) of any item subject to the EAR (including EAR99 items) limited to the Crimea region, except food and medicine designated as EAR99. The revision now expands this requirement to the DNR and LNR regions. Note that the exception for food and medicine doesn’t include medical devices—especially as these terms are defined by the EAR.

NOTE: OFAC and BIS maintain their own regulations for Crimea, DNR, and LNR, which include AgMed related transactions.

Although § 746.6 of the EAR imposes a review policy of denial for licensing requests, applications for transactions authorized under OFAC’s Ukraine-Related General Licenses (“GL”) are to be reviewed on a “case-by-case basis.” Those relevant OFAC GL’s cover a broad range of AgMed items, but since BIS also maintains simultaneous jurisdiction over the export or reexport of even EAR99 medical devices to the Crimea, DNR, and LNR regions—which are not included in the exception with EAR99 food and medicine—a BIS license may still need to be applied for and obtained prior to the export, reexport, or transfer (in-country) of any medical devices.

• Crimea region: OFAC’s GL No. 4 provides authorization for persons subject to U.S. jurisdiction engaging in certain AgMed transactions with the Crimea region, subject to various exceptions and specified exclusions. However, note that authorized medical supplies here are limited to those medical devices identified in OFAC’s List of Medical Supplies for GL No. 4 (last updated Aug. 12, 2016). In accordance with § 746.6 of the EAR, licensing from BIS may still be required for transactions related to medical devices or any items that are not EAR99.

• DNR and LNR: for these regions OFAC has issued GL No. 18, which is broader in its scope of authorizations than GL No. 4 and medical devices are not limited by any enumerated lists. GL No. 18 also authorizes transactions ordinarily incident and necessary to the prevention, diagnosis, or treatment of COVID-19 (including research or clinical studies related to COVID-19) in the DNR and LNR. In accordance with § 746.6 of the EAR, licensing from BIS may still be required for transactions related to medical devices or any items that are not EAR99.

2. Payments & Financial Instruments—Sanctions on Russia’s Financial Sector

Since Russia began its invasion of Ukraine, the U.S. Government has been imposing extensive economic sanctions against Russia’s financial sector, including its top ten financial institutions (“FI”) and its Central Bank, with potentially more on the horizon. Most of these sanctions were pursuant to E.O. 14024 and/or accompanying directives, ranging from a full-blocking of a designated bank and its subsidiaries (e.g. VTB, VEB, PSB, Sovcombank), to correspondent and payable-through account sanctions on Sberbank (Russia’s largest FI), and broad prohibitions on dealings with the Russian Central Bank of the Russian Federation in accordance with Directive 4 of that order. Any entity owned 50-percent or more by these designated FIs are also considered sanctioned to the corresponding extent (i.e. OFAC’s 50-percent rule applies).

From a compliance perspective, these far-reaching sanctions are going to make engaging in and/or processing payment transfers and use of financial instruments involving Russia difficult for businesses and FIs, wherever located. Further complicating such transactions, the U.S. Government has also committed along with its allies to remove “selected” Russian banks from the SWIFT messaging system in order to disconnect them from the global financial system, which the European Union has already acted on by excluding seven Russian banks that include VTB (Russia’s second-largest bank). Overcompliance by U.S. and European banks is likely, making it difficult to find an FI that would be willing to facilitate even permissible trade with the country.

Nevertheless, OFAC has since issued several general license authorizations (e.g. certain clearing and settlement transaction by the Central Bank) and published many frequently asked questions related to these sanctions actions involving Russia’s financial sector. GL No. 6 authorizes all transactions otherwise prohibited by E.O. 14024 that are ordinarily incident and necessary to: (1) the exportation or reexportation of AgMed items, replacement parts and components for medical devices, or software updates for medical devices to, from, or transiting the Russian Federation; or (2) the prevention, diagnosis, or treatment of COVID-19 (including research or clinical studies relating to COVID-19). Businesses and FIs subject to U.S. jurisdiction can continue to engage in transactions where any Russian FIs sanctioned pursuant to E.O. 14024 are involved, consistent with the terms of GL No. 6.

3. Prohibited/Restricted Parties, End-users, and End-Uses

OFAC Sanctions Programs

Since the invasion of Ukraine, Russian oligarchs, their families, and businesses have increasingly been targeted for sanctions under E.O. 14024. However, some of these individuals and entities were already sanctioned under distinct authorities that comprise OFAC’s Ukraine-/Russia-related Sanctions Program (i.e. Executive orders 13660, 13661, 13662, 13685, and their related directives). In addition, there are likely many other Russian and foreign entities owned by these persons that are constructively sanctioned under the corresponding authority, pursuant to OFAC’s 50-percent rule. Although AgMed related transactions involving such sanctioned persons may be authorized in accordance with GL No. 6 where only E.O. 14024 and/or its related directives apply, if other sanctions authorities are also applicable, then GL No. 6 alone would not necessarily authorize the underlying AgMed transactions.

BIS End-User and End-Use Based Controls

Significant changes have also been made to the EAR’s military end-user and end-use based controls involving Russia, as well as numerous entities being moved to and added to the Entity List (See 15 C.F.R. Part 744). BIS licensing requirements apply—subject to a policy of denial—to the export, reexport, and transfer (in-country) of items subject to the EAR (including EAR99 and foreign made items subject to applicable de minimis calculations) to such end-users and end-uses. This licensing requirement also applies where a foreign made item is a direct product of U.S. technology, software, or produced through equipment identified anywhere on the EAR’s Commerce Control List (“CCL”), even if the end-item is itself EAR99, pursuant to revisions made to EAR’s Foreign Direct Product Rule (“FDPR”) effective March 26, 2022.

Notwithstanding this license requirement, certain exceptions apply, including for EAR99 food and medicine as defined by the EAR (Note: medical devices are not included under this exception, and a license from BIS may be necessary).

4. Controlled Agricultural Commodities, Medicine, and Medical Devices

For any AgMed items that are not EAR99, their export, reexport, or transfer (in-country) may be subject to licensing requirements by BIS, and regardless of any potentially applicable general license authorization from OFAC. On February 24, 2022 a major overhaul of the EAR took place in response to Russia’s invasion of Ukraine. A new § 746.8 was added in its Embargoes and Other Special Controls (15 C.F.R. Part 746) that imposes expansive license requirements with very restrictive review policies for any items subject to the EAR in categories 3-9 of the CCL. Foreign made items (excluding certain countries) that are bound for Russia and incorporate controlled U.S. materials are also now subject to revised de minimis analysis, as well as application of the FDPR where the foreign made item is a direct product of U.S. technology, software, or produced through equipment in CCL categories 3-9 (effective March 26, 2022).

The overall licensing policy for such transactions is a policy of denial, but certain categories of exports, reexports, or transfers are to be reviewed on a case-by-case basis, including meeting humanitarian needs.

The author of this blog post is Kian Meshkat, an attorney specializing in U.S. economic sanctions and export controls matters. If you have any questions please contact him at 202-440-2591 or meshkat@falawpc.com.

The information provided in this post does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available are for general informational purposes only.  Information on this post may not constitute the most up-to-date legal or other information.  Links to other third-party websites are only for the convenience of the reader, user or browser; the the author does not recommend or endorse the contents of the third-party sites.