How to make choices in the Russian market has become a topic that all Chinese companies with Russian-related businesses must face.

On June 12, 2024, on the eve of the G7 summit in Italy, the U.S. Department of Commerce, the U.S. Department of the Treasury and the U.S. State Department simultaneously issued a new round of export controls, embargoes and economic sanctions against Russia. Subsequently, in the joint communiqué of the G7 summit issued on June 14, the G7 member states jointly reiterated that they would comprehensively strengthen sanctions and embargoes against Russia, especially focusing on third countries that provide substantial support to the Russian military-industrial complex and assist in circumventing sanctions. As Russia's most important trading partner, China's economic and trade exchanges with Russia have been under the spotlight since the outbreak of the Russian-Ukrainian war in 2022. As the Western world's sanctions on Russia are increasingly tightened, how to make choices in the Russian market has become a topic that all Chinese companies with Russian-related businesses must face.

 

 

1. Export Control and Embargo

 

BIS's adjustments to the Export Administration Regulations ("EAR") can be divided into the following three categories:

 

Additions: A large range of new items embargoed to Russia in Appendix 4 and Appendix 6 of Section 746 of the EAR, new export license requirements for software classified under EAR99 to Russia, four new entities, and eight addresses included in the Entity List for the first time;

Restrictions: Further restrict the scope of items applicable to the Consumer Communications Device License Exception ("CCD") in Russia, and clarify BIS's subsequent power to further restrict and abolish specific license exceptions;

Integration: All sections of Section 746 of the EAR related to the Russian embargo will be integrated, including Section 746.5 (formerly the Russian and Belarusian industrial sanctions section), Section 746.8 (formerly the Russian and Belarusian sanctions section), and Section 746.10 (formerly the Russian and Belarusian luxury goods sanctions section), and the licensing requirements and exceptions will be integrated into Section 746.8 of the EAR to improve the overall clarity of the rules.

The following have a major substantive impact:

 

(1)Expansion of Prohibited Items

Currently, under Section 746 of the EAR, there are five lists, namely Appendix 2, Appendix 4, Appendix 5, Appendix 6 and Appendix 7, which directly involve Russia's relevant embargo measures. The specific embargo purposes and scope of application are different, as follows:

 

Appendix	Category	Applicable situations	Applicable standards for controlled items	Licensing Policy
Appendix 2	Russian/Belarusian industry sanctions (petrochemicals)	The embargo requirements under Section 746 apply when it is known that the listed items are being or are being designated for use in Russian deepwater (depths greater than 500 feet), Arctic offshore, or Russian shale oil and natural gas projects, or when it is not possible to determine whether they are being used in such projects.	Not applicable to Direct Product Regulation (FDPR)	The licensing policy will be denial, except for the following cases where case-by-case approval is applied (the assessment criteria are whether the items and industries are in the interests of the United States and Russia/Belarus and their defense industries): 1. The items are used for necessary health and safety purposes; 2. The items are owned by companies that are not headquartered in categories D: 1, D: 5, E: 1, 2, and such companies are reducing or closing all operations in Russia and Belarus 3. The items are mainly used for agricultural or medical purposes; 4. The issuance of a replacement license to address new licensing requirements after the HTS code related to the previously issued licensed item is included in Appendix 6 to Section 746.
Appendix 4	Russian/Belarusian Industrial Sanctions	Any of the listed items is exported, re-exported or transferred within Russia/Belarus	Not applicable Russia  FDPR	The licensing policy will be denial, except for the following cases where case-by-case approval is applied (the assessment criteria are whether the items and industries are in line with the interests of the United States and Russia/Belarus and its defense industry): 1. Used for aviation safety; 6. Items are used for necessary health and safety purposes; 7. Items are used to meet humanitarian needs; 8. Items are owned by companies that are not headquartered in D: 1, D: 5, E: 1 or E: 2, and such companies are reducing or shutting down all operations in Russia and Belarus; 9. Items are mainly used for agricultural or medical purposes; 6. Issuing a replacement license to address new licensing requirements after the HTS code related to the previously issued licensed item is included in Appendix 6 to Section 746.
Appendix 5	Russian luxury goods embargo	Any of the listed items are used for export, re-export or transfer within Russia/Belarus; any of the listed items are provided to persons who are included in the SDN list due to Russia/Belarus related sanctions.	Not applicable Russia FDPR	The licensing policy will be denial, except for the following cases where case-by-case approval is applied (the assessment criteria are whether the items and industries are in line with the interests of the United States and Russia/Belarus and its defense industry): 1. For flight safety; 3. The use of items meets humanitarian needs; 3. The items are owned by companies that are not headquartered in D: 1, D: 5, E: 1 or E: 2, and such companies are reducing or shutting down all operations in Russia and Belarus; 4. Issuing a replacement license to address new licensing requirements after the tax number of the item with the original license is newly included in the control catalog.
Appendix 6	Russian/Belarusian industry sanctions (biochemical)	Any of the listed items are used for export, re-export or transfer within Russia/Belarus	Applicable to Russian FDPR	The licensing policy will be denial, except for the following cases where case-by-case approval is applicable (the assessment criteria are whether the items and industries are in line with the interests of the United States and Russia/Belarus and its defense industry): 1. For aviation safety; 2. Items are used for necessary health and safety purposes; 3. Items are used to meet humanitarian needs; 4. Items are owned by companies that are not headquartered in D: 1, D: 5, E: 1 or E: 2, and such companies are reducing or shutting down all operations in Russia and Belarus; 5. Items are mainly used for agricultural or medical purposes;
Appendix 7	Russia/Belarus/Iran Industrial Sector Sanctions (Machinery, Drones)	Any of the listed items are used for export, re-export or transfer within the country to Russia, Belarus or Iran	Applicable to Russian FDPR	Except for humanitarian reasons, civil aviation safety, and U.S. national security interests, license denial may apply

 

The expansion of BIS's prohibited items is mainly concentrated on the revision of Appendix 4, with a total of 522 new six-digit HTS code corresponding items, involving 19 chapters of the Harmonized Tariff Schedule of the United States, namely:

Chapter	Chapter Name
Chapter 25	Salt; Sulphur; Earth and Stone; Plaster, Lime and Cement
Chapter 26	Ore, Slag and Ash
Chapter 27	Mineral Fuels, Mineral Oils and Their Distilled Products; Asphalt Substances; Mineral Waxes
Chapter 72	Iron and Steel
Chapter 73	Iron and Steel Products
Chapter 74	Copper and Its Products
Chapter 75	Nickel and Its Products
Chapter 76	Aluminium and Its Products
Chapter 78	Lead and Its Products
Chapter 79	Zinc and Its Products
Chapter 80	Tin and Its Products
Chapter 81	Other Base Metals, Ceramic Metals and Their Products
Chapter 82	Base Metal Tools, Utensils, Cutlery, Spoons, Forks and Parts thereof
Chapter 83	Miscellaneous Articles of Base Metal
Chapter 86	Railway and Tramway Locomotives, Rolling Stocks and Parts thereof; Railway or Tramway Track Installations and Fittings and Parts thereof; All Kinds of Mechanical (including Electromechanical) Traffic Signalling Equipment
Chapter 87	Road Vehicles other than Railways and Tramways and Parts and Accessories thereof
Chapter 89	Vessels, Boats and Floating Structures
Chapter 93	Weapons, Ammunition and Parts and Accessories thereof
Chapter 96	Miscellaneous Articles

 

At the same time, BIS added a new subsection (h) to Appendix 6 of Section 746 of the EAR, which included riot control agents in the prohibited category. A total of 10 chemical substances were added to the prohibited category, and the corresponding CAS codes were listed to clarify the scope of control, namely:

CAS Number	Chemical name
CAS 404-86-4	Capsaicin (trans-8-methyl-N-vanillyl-6-vinylamide)
CAS 19408-84-5	Dihydrocapsaicin (dihydrocapsaicin novanillamide)
CAS 2444-46-4	Synthetic capsaicin (N-vanillyl nonanamide)
CAS 58493-48-4	Homocapsaicin (N-aryl-9-methyldec-7-(E)-enamide)
CAS 20279-06-5	Homodihydrocapsaicin (N-vanillyl-9-methyldecylamide)
CAS 28789-35-7	Nordihydrocapsaicin (N-vanillyl-7-methyldecylamide)
CAS 2142-68-9	O-chloroacetophenone
CAS 99-02-5	3-chloroacetophenone
CAS 18270-61-6	A-chlorobenzylidenemalononitrile
CAS 37794-87-9	cis-N-[4-(cyclohexylmethyl)cyclohexyl]-acetamide

 

The export, re-export and transfer of the above-mentioned items to Russia/Belarus and within Russia will be affected by the relevant restrictions under Section 746 of the EAR. The 10 new categories of chemicals listed in Appendix 6 will also be subject to the Russian FDPR. For example, if the equipment and processes involved in their production and preparation are related to specific US-origin technologies and software, they will be subject to US export control regulations even if they are produced outside the United States. It should be noted that although the relevant items under Appendix 4 are not currently affected by the Russian FDPR, that is, a large number of products produced outside the United States will not be directly affected by the US adjustment to Appendix 4, BIS is currently considering integrating the three lists of Appendix 2, Appendix 4 and Appendix 6 into one list. At that time, the integrated list may be uniformly subject to the Russian FDPR, which will inevitably greatly expand BIS's jurisdiction over items produced outside the United States and bring huge compliance risks to non-US companies that are exporting relevant items to Russia.

 

(2)Additional embargo requirements for specific EAR99 software

So far, the U.S. Department of Commerce's embargo on Russia has not involved large-scale technologies and software under EAR99. However, this time, BIS added subsection (a)(8) to Section 746.8 of the EAR to set embargo requirements for specific software (EAR99 designated software), and the relevant restrictions will take effect on September 16, 2024. The software involved mainly covers the following types:

 

Enterprise resource planning software (ERP)

Customer relationship management software (CRM)

Business intelligence software (BI)

Supply chain management software (SCM)

Enterprise data warehouse software (EDW)

Computerized maintenance management system (CMMS)

Project management software

Product life cycle management software (PLM)

Building information modeling software (BIM)

Computer-aided design software (CAD)

Computer-aided manufacturing software (CAM)

ETO manufacturing software (ETO)

 

The above-mentioned related software are all indispensable software for office automation management (OA) at present, and they play a vital role in the production and daily management of various industries. Considering the current market share of mainstream OA software, the relevant restrictions are bound to have a significant impact on the production and operation of Russian domestic enterprises. In addition, it should be noted that, given that the U.S. Treasury Department had issued administrative decisions under Presidential Executive Orders No. 14024 and No. 14071 on May 8, 2022, respectively, to include Russia's accounting, trust, company establishment services, and management consulting industries in the field of industry sanctions, and this time it issued an administrative decision under Presidential Executive Order No. 14071 to comprehensively restrict Americans from directly or indirectly providing specific information technology and software services to Russia, BIS's software embargo measures are actually linked to OFAC's relevant sanctions, which is also an important manifestation of the recent strengthening of law enforcement cooperation between the relevant departments of U.S. export control and economic sanctions. On March 21 of this year, BIS issued a final rule on additional export controls for specific sanctioned entities due to the difference between the standards of controlled items under EAR and the standards of U.S.-origin items controlled under sanctions, and uniformly required the application of additional restrictions to 11 sanctioned items including Presidential Executive Order No. 14024. It is expected that similar follow-up enforcement coordination mechanisms will appear frequently. Not only will the Ministry of Commerce make corresponding policy adjustments, but from the perspective of the Ministry of Finance, OFAC will also refer to the corresponding control lists of BIS, such as the Common High Priority Items List, in identifying sanctions on Russian-related industries to determine whether the business of the relevant entities in Russia poses a risk of providing significant support to specific Russian industries. Therefore, even if the products involved in the business of the relevant enterprises in Russia may not meet the standards for controlled items under the EAR, the sanctions risks that may arise from providing such items to Russia cannot be ignored.

 

(3)Narrowing the scope of application of the CCD license exception to Russia

Under the original CCD license exception, BIS conditionally authorized the supply of personal consumer electronic products to embargoed countries and regions such as Russia and Cuba. This is also an important legal basis for major domestic and foreign consumer electronic product suppliers to continue to supply products to the Russian market. However, since the relevant parts of the relevant electronic products are often universal, especially when exported in the form of loose parts, there is a greater risk of diversion. Therefore, BIS has narrowed the scope of application of the CCD license exception in this rule adjustment, and adjusted the expression structure of consumer electronic products under the original CCD license exception, restricting the application of the CCD license exception to the export of some consumer electronic products to Russia.

It is particularly important to note that in this new revision, in addition to narrowing the limits on the CCD license exception, BIS also clearly stated that BIS has the right to make additional revisions to Section 740.2 of the EAR "Restrictions on All License Exceptions". For the purpose of protecting the national security or foreign policy interests of the United States, all BIS license exceptions may be modified, suspended or revoked in whole or in part without notice, and may require the suspension of export, re-export or domestic transfer at any stage of the transaction, including requiring the return of goods in transit or requiring the relevant goods to be unloaded at any port of call. In view of this, if the relevant transaction has a connection point that is subject to the jurisdiction of the EAR in whole or in part, enterprises should pay attention to the potential risk points of end-users and end-uses under the relevant transaction arrangements, especially the possibility of the transfer of items, and be sure to make clear provisions in the contract for the potential commercial risks of the inability to deliver goods due to government intervention, so as to prevent the compliance and commercial risks that may be brought to specific transactions by BIS based on the control of end-users and end-uses to the greatest extent.

 

2. Economic sanctions

 

At the same time as the new BIS export control embargo on Russia was released, the U.S. Treasury Department also released a new round of economic sanctions against Russia. Specifically, they include:

 

Issued an administrative decision on restrictions on information and software services transactions under Presidential Executive Order No. 14071;

Updated sanctions compliance guidance for foreign financial institutions, emphasizing the secondary sanctions risks of transactions involving Russia;

Jointly announced economic sanctions against more than 300 entities with the U.S. State Department, and included such entities in the SDN list.

In addition, the new sanctions also issued 6 new general licenses, 8 new FAQs, and revised 10 FAQs.

Among them, the main ones with greater substantive impact include the following:

 

(1) Administrative decision on information and software services sanctions

The U.S. Treasury Department’s new administrative decision on restrictions on the provision of information and software services to Russia under Presidential Executive Order No. 14071 will prohibit Americans or from the United States from providing the following information and software services to Russia:

IT consulting and design services;

Providing IT support services and cloud services for enterprise management software and design and manufacturing software.

Obviously, the software-related services restricted in this executive decision are highly overlapped with the specific EAR99 software embargo imposed by the U.S. Department of Commerce on Russia. As mentioned earlier, this reflects the trend of linkage between the U.S. Treasury Department and the Department of Commerce in future law enforcement involving Russia.

In addition, although Executive Order No. 14071 is different from Executive Order No. 14024 and does not have secondary sanctions, according to OFAC's Q&A No. 1188, indirect provision of related IT and software services to entities in Russia, such as involving U.S. connection points, will still be regulated by Executive Order No. 14071. For example, if a Chinese company purchases restricted management software from a U.S. company, but shares the relevant software with its subsidiaries or partners in Russia, it will also violate the ban under Executive Order No. 14071. For companies that purchase and operate software uniformly by the headquarters but have business involving Russia, special attention should be paid.

 

(2)Update of Foreign Financial Institution Sanctions Compliance Guidelines

OFAC has updated the Foreign Financial Institution Sanctions Guidelines issued in December 2023 in conjunction with Executive Order No. 14114, emphasizing the risks of Russian-related transactions to foreign financial institutions. In this update, OFAC cited the updated Q&A No. 1151 and the newly released Q&A No. 1181 to update the definition of "Russian military-industrial base" restricted in Executive Order No. 14114 to cover the following entities and industries:

 

All entities sanctioned by Executive Order No. 14024;

Entities conducting business activities in Russian technology, defense and related materials, construction, aerospace and manufacturing;

Entities supporting the direct or indirect sale, supply or transfer to the Russian Federation of 29 items listed in the annex to the directive under Executive Order No. 14024 of December 22, 2023, including CNC machine tools, semiconductor manufacturing equipment, data acquisition systems, inertial navigation systems, etc.

This means that the definition of "Russian military-industrial base" has been further expanded, and transactions involving specific entities, specific industries and specific items are subject to a high risk of secondary sanctions. At the same time, in the updated sanctions guidelines, OFAC non-exhaustively lists the following activities that may expose foreign financial institutions to sanctions risks, including:

 

Maintaining accounts, transferring funds or providing other financial services (such as payment, trade financing, insurance) for any person and entity sanctioned under Executive Order No. 14024 (including Russian financial institutions sanctioned under Executive Order No. 14024), unless there are license exceptions or authorized transactions (mainly transactions for the supply of agricultural products, agricultural equipment, medicines, medical equipment, etc.);

For any other person or entity that supports the Russian military-industrial base (including those doing business in designated industries) in or outside Russia.

Opening accounts, transferring funds or providing other financial services (such as payment, trade financing, insurance) to individuals and entities (including individuals and entities);

Directly or indirectly facilitating the sale, supply or transfer of certain specific items to Russia, and importers or companies that ship these specific items to Russia;

Helping companies or individuals evade US sanctions on the Russian military-industrial base, including:

 

- Proposing to establish alternative or opaque payment mechanisms;

- Changing or deleting customer names or other relevant information in payment fields;

- Obfuscating the true purpose of the payment or the parties involved;

- Taking measures in other ways to hide the ultimate purpose of the transaction in order to evade sanctions.

 

And it is particularly emphasized that small and medium-sized financial institutions that conduct large-scale trade with Russia will be at great risk of sanctions involving services related to the Russian military-industrial base.

In view of this, OFAC requires relevant foreign financial institutions to take corresponding risk control measures based on actual conditions. In the guidelines, OFAC's non-exhaustive list of risk control measures include:

 

Screen each transaction participant against the relevant sanctions list (such as the SDN list) to prevent the provision of any services to entities sanctioned by Presidential Executive Order No. 14024, except for licensed transactions such as food, agriculture, medicine, energy and telecommunications;

Review its own customer base to determine whether there are any customers involved in specific industries in Russia, or customers who do business with entities sanctioned by Presidential Executive Order No. 14024, or any customers who may be involved in the sale, supply or transfer of specific items to Russia or to jurisdictions previously identified as having a higher risk of assisting in evading Russian sanctions;

Communicate compliance expectations to customers based on specific risks, including informing customers not to use their accounts to engage in business involving Russia's military-industrial base. This may also include sharing lists of specific items with clients, particularly those engaged in import/export activities, manufacturing, or any other related business lines;

Sending questionnaires to clients known to operate or export specific items based on specific risks to better understand their counterparties;

Using information provided by public information and past transaction activities, and proactively investigating suspected circumvention behavior, including using information obtained during the anti-financial crime compliance investigation process, using information provided by the United States and its global correspondent banks, business service providers, or public data (such as trade and customs data);

Obtaining statements from high-risk clients where appropriate to prove that they do not conduct business in specific Russian industries, do not sell or transfer specific items to Russia, or otherwise conduct any transactions involving the Russian military-industrial base;

Taking appropriate mitigation measures for any client or counterparty that engages in high-risk activities or does not respond to inquiries for suspicious activity information, including limiting accounts, limiting the types of activities allowed, liquidation, and listing clients or counterparties as internal “do not onboard” or “do not process” process) watch list;

Incorporate risks related to the Russian military-industrial base into sanctions risk assessments and customer risk rating criteria, including updating specific jurisdiction risk assessments as appropriate;

Implement enhanced trade finance controls related to specific items, including monitoring documentary transactions to collect information.

For foreign financial institutions that have adopted effective compliance programs, the greatest risk may be that they provide correspondent banking services to financial institutions that continue to engage in significant transactions involving Russia ("high-risk foreign financial institutions"). The guidance specifically provides an example of a high-risk foreign financial institution: a small bank in a certain country with close trade relations with Russia has a large number of customers in the import, export and microelectronics industries that continue to do business with Russia. The bank maintains business relationships with several Russian banks on the SDN list and trades with Russia in local currency. Activities conducted through the bank's foreign correspondent banking relationships show that the bank has established connections with Russia on many occasions, there is a large amount of suspected shell company activities, and other general signs of suspicious activities, such as wire transfers involving high-risk jurisdictions without a clear business purpose. Upon discovering relevant suspicious matters, the relevant financial institutions should immediately terminate the relevant business transactions, including correspondent banking services, for high-risk foreign financial institutions.

Finally, based on the series of compliance guidance previously issued by the U.S. Department of Treasury, Department of Commerce, and Department of State, OFAC once again emphasized in this guidance the importance of identifying Russian sanctions evasion, especially the use of third-party intermediaries and transshipment points to circumvent restrictions. OFAC recommends that foreign financial institutions incorporate risk-based control measures into their internal compliance systems, pay attention to "red flag" situations, and allocate compliance resources to higher-risk areas, such as products, services, business scopes, and jurisdictions that are most likely to be used to facilitate activities involving Russia's military-industrial base.

The best practices for sanctions compliance programs suggested by this updated guide include:

 

Training specific employees on sanctions risks and common “red flag warnings”, including compliance personnel, front-line employees, senior management, and business department (such as underwriters, relationship managers) personnel, especially requiring specific employees to pay attention to situations where customers should seek guidance from employees on how to comply with bank policies, but instead ask employees to provide assistance in circumventing sanctions;

Ensure that any risks or issues discovered are promptly reported to the appropriate level (such as the Senior Risk Committee);

Communicate clearly and frequently with U.S. and other correspondent banks on their due diligence and information requirements;

In the counter- The money laundering risk control system incorporates information from the Financial Crimes Enforcement Network (“FinCEN”) and OFAC sanctions evasion warnings and recommendations, with particular attention paid to the following red flag warning points: customers doing business with newly established Russian companies or newly established companies in third countries known to be possible transit points for exports to Russia; customers or counterparties allegedly engaged in the production or import and export of precision items but without any business history or network presence; customers or counterparties using atypical payment terms and methods (such as large cash payments, frequent or last-minute changes to end users or payees, or payments through third countries not involved in the transaction).

 

(3)Additions to the SDN List

In this new sanctions measure, the U.S. Treasury Department and the State Department jointly imposed sanctions on more than 300 entities in and outside Russia, including 46 Chinese entities.

As for the Chinese entities sanctioned this time, the main reasons include two categories:

Participating in the Russian sanctions evasion procurement network to transfer highly sensitive items to Russia, such as drone parts, integrated circuits and other electronic components, optical fibers and lasers, static converters, transformers, inductors, tantalum capacitors, multilayer ceramic capacitors, etc.;

Directly providing products to support Russia's sanctioned industries, such as providing industrial machine tools, microelectronics and equipment for drone manufacturing, defense-related equipment, etc.

Here, it is necessary to remind Chinese companies that the two key presidential executive orders related to Russian sanctions, Executive Order No. 14024 and Executive Order No. 14114, both have clear secondary sanctions effect. This also means that if the relevant Chinese companies engage in sanctionable activities stipulated in these two presidential executive orders, even if there is no U.S. connection point, the U.S. Treasury Department and the State Department can still consider that the relevant Chinese companies have provided substantial support to specific Russian sanctioned industries and entities and include the relevant Chinese companies in the SDN list. Since the beginning of this year, OFAC has explicitly added secondary sanctions marks to Chinese companies that have been included in the SDN list due to Presidential Executive Order No. 14024, which also means that the consequences of sanctions on related companies will not only affect their US dollar-related businesses, but even their domestic RMB businesses may be affected. Chinese companies should not underestimate the impact of Russian sanctions on their overall business, otherwise the consequences may be disastrous.

In addition, although the new additions to the SDN list do not involve Chinese financial institutions, since December last year, OFAC has conducted an investigation into foreign financial institutions supporting Russian business, and several financial institutions have received warning letters from OFAC. It is expected that in the recent update of sanctions measures, Chinese financial institutions may be included in the sanctions list due to Presidential Executive Order No. 14114.

 

 

Faced with the complex geopolitical situation, has our international trade been affected to varying degrees?

 

The Russian market is a blue ocean for Chinese companies. However, due to the constraints of technology, sanctions and payment systems, the Russian-speaking market is full of great opportunities, challenges and uncertainties.

The petrochemical industry is a pillar industry in Russia. Russia faces Western technological blockades and isolation. For example, first-line European and American brands have collectively withdrawn from the Russian market, and Russian demand has faced great difficulties.

Their purchasing power and payment ability have weakened. The way out is to have in-depth industrial cooperation with friendly countries, such as sending samples and drawings to develop products and accessories, in order to effectively solve the problems faced by Russian petrochemical, power plants and other equipment maintenance and productivity.

 

 

Petrochemical pumps, chemical pumps, power plant and ship engines and their accessories are affected by payment and sanctions, becoming barriers to Sino-Russian trade in such products.

This is mainly reflected in the following aspects:

 

1. International sanctions

Due to the international sanctions faced by Russia, the trade of these equipment is subject to many restrictions. Western countries (such as the United States and the European Union) have imposed a variety of economic and trade sanctions on Russia, restricting the export of certain high-tech and industrial equipment, including key equipment for petrochemicals, chemicals, power plants and ships. The specific impacts of sanctions include:

① Prohibition or restriction of the export of certain technologies and equipment.

② Imposition of secondary sanctions on foreign companies that trade with Russian companies or individuals.

③ Prohibition of specific financial transactions, affecting the payment and settlement process.

 

2. Payment and financial sanctions

Sanctions generally affect the ability of Russian companies to make payments through the international financial system. For example:

① Some major Russian banks are excluded from the SWIFT international payment system, making cross-border payments more complicated and expensive.

② The assets of companies or individuals on the sanctions list may be frozen, limiting their ability to conduct international transactions.

③ Foreign exchange controls and currency fluctuations also increase the complexity and risk of transactions.

 

3. Alternative suppliers and localization

Faced with sanctions and payment barriers, Russian companies may:

①Look for alternative suppliers, especially from countries that are not involved in sanctions, such as China, India, etc.

②Increase localized production and reduce dependence on imported equipment by developing domestic industrial chains.

 

4. Legal and compliance risks

Companies need to comply with complex legal and compliance requirements to ensure that they do not violate international sanctions. This increases the legal costs and risks of transactions.

 

5. Economic and political factors

In addition to sanctions, Russia's economic conditions and political factors also affect trade barriers. Economic sanctions have exacerbated Russia's economic difficulties, leading to currency depreciation and increased economic uncertainty. These factors will affect the purchasing power and investment capabilities of companies.

In summary, the trade of petrochemical pumps, chemical pumps, and engines for power plants and ships in the Russian market does face multiple obstacles, mainly due to international sanctions and related payment restrictions. Companies need to carefully evaluate these risks and find viable solutions to meet these challenges.

 

 

Outlook on the follow-up trend of sanctions against Russia

 

Although the Biden administration has carried out three rounds of large-scale sanctions against Russia this year and Chinese companies have been included in the sanctions list in each round, the U.S. Congress is still dissatisfied with the current executive branch's "restraint" on Chinese companies in the issue of sanctions against Russia. Both the Senate and the House are currently working on formulating more Russia-related sanctions bills against China to put pressure on the executive branch. On April 17 this year, then-Wisconsin Congressman Mike Gallagher led the introduction of the NO LIMITS Act (H.R. 8043) in the House of Representatives, requiring specific Chinese companies with business activities in Russia to immediately withdraw from the Russian market, otherwise they will be sanctioned; and the current Chairman of the Senate Foreign Affairs Committee Ben Cardin also recently stated that he is drafting a bill related to China, which includes some content related to sanctions against Russia. The relevant content "will be consistent with our requirements, that is, requiring the executive branch to take more effective measures to prevent relevant entities from circumventing sanctions, especially circumventing sanctions related to Russia." Considering that this year is an election year in the United States, under the pressure of Congress, the executive branch may take more radical measures against China in the second half of the year on Russia-related sanctions. It is expected to include:

 

Add more Chinese companies to the SDN list. Since 2022, the scale of Chinese companies listed in the SDN list has become larger and larger. This time alone, the Chinese companies included in the list include not only the first-level subsidiaries of large central enterprises, but also a number of listed companies and their main subsidiaries. Judging from the past public statements of the U.S. Treasury Department, the U.S. government has a lot of evidence of Chinese companies' business related to specific industries in Russia, but for various reasons, it still maintains a certain restraint when adding Chinese companies to the SDN list. However, with the increasing pressure from Congress, coupled with the election pressure in the election year, OFAC's subsequent frequency of adding Chinese companies to the sanctions list may further accelerate;

 

The industries involved in the companies included in the SDN list will be further expanded. At present, the Chinese companies added to the SDN list are mainly concentrated in highly sensitive industries such as electronics, industrial machine tools, and aircraft parts that are marked by the US Treasury Department as involving Russia's military-industrial base. However, in fact, according to the relevant administrative decisions of Executive Order No. 14024, other related industries in Russia, including accounting, transportation, and management consulting, also face the risk of industry sanctions. Especially for the transportation industry, the US media has repeatedly claimed that some Chinese automakers' vehicles are at risk of supporting Russian military operations. Congress has also highlighted the concern about China's auto industry's exports to Russia in legislation such as the Unlimited Act and congressional investigations. At the same time, OFAC has sanctioned a Finnish truck parts supplier in its sanctions in February this year. With the above-mentioned public opinion and policy preparation, the transportation industry may be the next focus of Russia's sanctions; Sanctions linkage with allies further strengthens law enforcement. Since the outbreak of the Russian-Ukrainian war, the United States has continued to urge its allies to take a concerted step in sanctions against third countries, including China, involving Russia. After the G7 summit, the countries have issued a joint communiqué on the follow-up law enforcement and anti-circumvention measures for sanctions involving Russia, expressing their determination to act in unison in the future. On June 13, the UK included five Chinese companies with Russian-related businesses on its sanctions list; the EU is considering adding secondary sanctions to the current ban on re-exports in the latest round of sanctions against Russia, in order to sanction third-country companies that re-ship goods originating from the EU to Russia. As Western countries increasingly coordinate sanctions on Russia, China, which is engaged in Russian-related business, may face the risk of Russian-related sanctions from multiple jurisdictions in the future.