QUESTION – Getting Paid for Past Exports: I legally exported aircraft parts to a Russian customer and the export portion of the transaction was complete before February 24, 2022. I am expecting payment soon. Am I allowed to get paid by the Russian customer?
SHORT ANSWER:
The short answer is that this is too broad a question to answer with a simple, bright-line analysis. Some payments may be legal while others may be blocked. Whether your payment is blocked may depend on the identity of the customer who is paying you. If your payment is blocked, then if your transaction is subject to a general license then it may be legal to treat the payment as a winding-up activity that is permitted under the applicable general license. The current general licenses for winding-up are only good through the end of March 25 (12:01 am eastern daylight time on March 26, 2022) so if you think you need to take advantage of one, then you should do it immediately!
LONGER ANSWER:
BIS has imposed sanctions effective February 24, 2022 on exports to Russia; but it appears that the transaction in this fact pattern was completed before those sanctions took place so there does not appear to be a question about whether the prior export was legal.
The Treasury Department has taken a number of steps to sanction Russia, just in the month of February – and this does not even consider the prior sanctions that were imposed in response to other Russian actions. Here is a summary of the February 2022 Treasury actions (taken from the Treasury website):
- Financial services sector determination. On February 22, 2022, the Secretary of the Treasury, in consultation with the Secretary of State, issued a determination pursuant to E.O. 14024 that authorizes sanctions against persons determined to operate or to have operated in the financial services sector of the Russian Federation economy.
- Correspondent or payable-through account and payment processing prohibitions. On February 24, 2022, the Office of Foreign Assets Control (OFAC) issued Directive 2 under E.O. 14024, “Prohibitions Related to Correspondent or Payable-Through Accounts and Processing of Transactions Involving Certain Foreign Financial Institutions” (Russia-related CAPTA Directive), which prohibits U.S. financial institutions from: (i) the opening or maintaining of a correspondent account or payable-through account for or on behalf of foreign financial institutions determined to be subject to the prohibitions of the Russia-related CAPTA Directive; and (ii) the processing of transactions involving foreign financial institutions determined to be subject to the prohibitions of the Russia-related CAPTA Directive. Annex 1 to the Russia-related CAPTA Directive identifies Public Joint Stock Company Sberbank of Russia and other foreign financial institutions owned 50 percent or more by this bank as subject to these prohibitions, which become effective on March 26, 2022.
- Blocking certain Russian financial institutions. OFAC designated specified Russian financial institutions pursuant to E.O. 14024, including the State Corporation Bank for Development and Foreign Economic Affairs Vnesheconombank (VEB), VTB Bank Public Joint Stock Company, Public Joint Stock Company Bank Financial Corporation Otkritie, Promsvyazbank Public Joint Stock Company, Sovcombank Open Joint Stock Company, Joint Stock Commercial Bank Novikombank, and several of these financial institutions’ subsidiaries. As a result, all property and interests in property of these entities in the possession or control of U.S. persons, including U.S. financial institutions, or within U.S. jurisdiction, are blocked and must be reported to OFAC. In addition, all property and interests in property of any entity that is owned, directly or indirectly, individually or in the aggregate, 50 percent or more by one or more blocked persons are also blocked. Accordingly, U.S. persons, including U.S. financial institutions, are prohibited from transacting with these entities unless exempt or authorized by OFAC.
- Expanding sovereign debt prohibitions to include the secondary market. On February 22, 2022, OFAC issued Directive 1A under E.O. 14024, “Prohibitions Related to Certain Sovereign Debt of the Russian Federation” (Russia-related Sovereign Debt Directive), replacing and superseding Directive 1 under E.O. 14024 of April 15, 2021, to extend existing sovereign debt prohibitions to cover participation in the secondary market for ruble or non-ruble denominated bonds issued after March 1, 2022 by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation.
- New debt and equity restrictions involving certain Russia-related entities. On February 24, 2022, OFAC imposed additional debt and equity restrictions involving Russia-related entities by issuing Directive 3 under E.O. 14024, “Prohibitions Related to New Debt and Equity of Certain Russia-related Entities” (Russia-related Entities Directive), to prohibit certain dealings by U.S. persons, or within the United States, in new debt of longer than 14 days maturity or new equity of Russia-related entities determined to be subject to the prohibitions of the Russia-related Entities Directive. OFAC determined on February 24, 2022 that the entities listed in Annex 1 to the Russia-related Entities Directive, which include certain major Russian state-owned enterprises and large privately owned financial institutions, are subject to the prohibitions of this directive for new debt or equity issued on or after March 26, 2022.
- General Licenses (GLs). OFAC issued several Russia-related General Licenses authorizing certain transactions otherwise prohibited by E.O. 14024.
Under these sanctions programs, payment for prior sales becomes subject to two different questions.
- First, is there a standard that prevents me from getting paid?
- Second, is there a standard that interferes with the banking system getting my money to me?
Depending on the details of your transaction (including the identify of your customer, there may be OFAC restrictions on getting your funds; however there are general licenses that have been issued for winding-up certain types of transactions and activities. These general licenses last through March 26 and are intended to permit an orderly wrap-up to transactions, so they might affect your transaction if payments for prior exports would otherwise be blocked; but only certain transaction models get general licenses so you will need to study them carefully.
The current list of blocked parties is likely to be supplemented with additional names. President Biden’s Executive Order 14024 from last year authorizes the sanctioning of instrumentalities of the Russian Federation, so any company that is identified as an instrumentality is potentially subject to being added to the sanctions list.
One potential example is Aeroflot. The Russian Federation owns a 57.3% stake in Aeroflot. Because Executive Order 14024 authorizes the sanctioning of instrumentalities of the Russian Federation, it is possible that Aeroflot could be named in future sanctions [this is a hypothetical – they are not yet named in OFAC sanctions!!]. If they were so-named as a blocked party, then such a designation could inhibit transaction in that any funds of theirs that would come into the United States would be blocked.
There are some aviation companies that have already been identified as being subject to export sanctions programs, like these:
- Avia Group LLC
- PJSC Beriev Aircraft Company
- Sukhoi Civil Aircraft
- Sukhoi JSC
- Russian Aircraft Corporation MiG
- United Aircraft Corporation
- KONTSERN AVIAPRIBOROSTROENIE OAO
- JSC Scientific Research Institute of Aircraft Equipment (NIIAO)
- Public Joint Stock Company United Aircraft Corporation
And don’t get confused about programs – there is another BIS list of blocked entities that names Russian aviation businesses to whom exports are limited.
Certain Russian banks are is being removed from the SWIFT system, which is the normal agency that banks use for accomplishing cross-border financial transactions. The new banking limits could be even more of an impediment to getting paid, if your customer keeps it money in a bank that has been among those listed in the the Treasury Department sanctions.