State Department’s Business Advisory on Russia Offers No New Rules, Underscores Reputational Risk
February 23, 2024
While issuing an expected swath of new sanctions against Russia today, the United States took the extraordinary step of issuing an advisory with due diligence guidance for doing business in Russia and Russia-occupied territories of Ukraine which will likely catch the attention of boardrooms of companies still doing business legally in the country.
On the eve of the two-year mark of the war in Ukraine, the United States today expanded its sanctions in commercial sectors including finance, energy, metals (including an expansion of sanctions on diamonds) and mining, semiconductors, ICT, logistics and transportation, chemicals, aerospace, financial, machine building, advanced manufacturing, engineering, construction, and Arctic development. It also sanctioned vessels engaged in Russia’s oil trade and released a new analysis of its oil price cap, as well as sanctioned three officials it said are responsible for opposition leader Alexei Navalny’s death.
But the State Department also issued a Russia Business Advisory today that “doing business in the Russia Federation and in Russia-occupied territories of Ukraine poses serious legal, financial, and reputational risks” noting “The serious risks stemming from this operating environment may be mitigated by rigorous due diligence, though substantial risk is likely to remain.”
Businesses, individuals, financial institutions, and other persons—including investors, consultants, non-governmental organizations, and due diligence service providers that operate in or have value chains linked to the Russian Federation or the areas it occupies in Ukraine (hereafter “businesses and individuals”) face significant operational, legal, economic, and reputational risks associated with their Russian business operations and relationships. Conducting heightened due diligence can, in many cases, help to reduce or mitigate these risks and facilitate increased transparency to all stakeholders regarding such risks.
In an Annex, the State Department offered guidance on Human Rights Due Diligence and Compliance Due Diligence for Sanctions and Export Controls.
In a statement, President Biden said today’s actions would “ensure Putin pays an even steeper price for his aggression abroad and repression at home.” Assistant Secretary of Commerce for Export Administration Thea D. Rozman said, “Russian children and prisoners are being exploited to build munitions. State surveillance, discrimination, and other forms of repression—including the deaths of challengers to Putin’s regime like Aleksey Navalny—have increased.” She vowed to “continue our vital multilateral coordination to strengthen the global response to Putin’s horrors.”
• Among the entities sanctioned today is the National Payment Card System JSC (NSPK) (which processes credit card payments in Russia and operates the Mir card), SUEK (the coal and energy giant which also owns power generation and logistics entities) and Mechel (a steel, minerals, transportation and energy powerhouse).
• It also sanctioned 12 vessels to “increase Russia’s circumvention costs” in connection with the oil price cap. Further, Treasury released an economic analysis defending its oil price cap policy which it says has forced Russia to sell its crude at about US$19 per barrel over the past month (this morning’s global price for crude is running around US$76); claiming the current discount is tied to increased price cap enforcement; and noting that the price cap has not disrupted energy markets, thus meeting its goals of reducing Russian energy revenue while ensuring oil availability on global markets.
• The United States sanctioned entities based in China, the UAE, Finland, Ireland, the Kyrgyz Republic, Azerbaijan, Lichtenstein, and Serbia it says are engaged in supporting Russia’s military industrial base.
• Further, the United States and its partners have expanded export controls, placing new restrictions on items for export abroad. BIS added 93 entities (mostly Russia-based but also others from Turkey, the UAE, the Kyrgyz Republic, India and South Korea) to the Entity List for “activities in support of Russia’s defense-industrial sector and war effort.” Also, in coordination with the EU, Japan, and the UK, the U.S. EU highlighted its list of 50 items known as Common High Priority Items, to which it has added five – all of which appear to be machine tools which “pose a heightened risk of being diverted illegally to Russia” for its military aims.
The EU also announced its 13th sanctions package against Russia. Sanctions circumvention continues to be a focus of these packages, but high-profile targets point to the sanctions expansion as well. The UK and Canada announced their latest sanctions packages earlier this week.
Useful sources:
State Department Russia Business Advisory: https://www.state.gov/russia-business-advisory/
Treasury’s Press Release: https://home.treasury.gov/news/press-releases/jy2117
Full list of sanction targets here: https://ofac.treasury.gov/recent-actions/20240223
Treasury Deputy Secretary Wally Adeyemo’s Comments Today here: https://home.treasury.gov/news/press-releases/jy2119
