Overview
On April 12, 2024, in a coordinated action the Department of the Treasury’s Office of Foreign Assets Control (OFAC) in the United States and the Foreign, Commonwealth, and Development Office, HM Treasury, and Department for Business and Trade (DBT) in the United Kingdom announced expanded sanctions targeting certain Russian metals, including limiting the use of in-scope metals on the two largest global metal exchanges and in over-the-counter derivatives trading by imposing new regulations on the activities of U.S. persons and persons subject to UK sanctions jurisdiction. The United States also added restrictions related to the importation of certain Russian metals produced after a certain date (but not items made from those metals).
To implement this policy, OFAC issued a new determination under Executive Order (E.O.) 14068, as amended by E.O. 14114, prohibiting the importation and entry into the United States, including importation for admission into a foreign trade zone located in the United States, of Russian-origin aluminum, copper, and nickel that was produced on or after April 13, 2024 (“covered metals”) (the “Metals Import Determination”). OFAC issued a complementary determination under E.O. 14071 that prohibits the exportation, reexportation, sale, or supply to any person located in the Russian Federation of (1) warranting services for covered metals on a global metal exchange and (2) services to acquire the covered metals as part of the physical settlement of a derivative contract (the “Metals Services Determination”). OFAC simultaneously issued guidance in the form of five new, Russia-related Frequently Asked Questions (“FAQs”) and two amended Russia-related FAQs.
The UK government has implemented this policy through an amendment to an existing general trade licence for acquisition of metals, which extends the UK’s existing ban on the import, acquisition, supply, and delivery of Russian metals falling within 19 separate Commodity Codes to the acquisition of warrants relating to those metals on a global metal exchange when they were produced on or after April 13, 2024. The UK government has issued guidance in the form of updates to DBT’s notice to importers 2953 and the statutory guidance on the UK’s Russian sanctions regime. As a result of the actions of the U.S. and UK governments, metal exchanges, like the London Metal Exchange (“LME”) and Chicago Mercantile Exchange (“CME”), will be prohibited from accepting Russian metals within the scope of these measures, including aluminum, copper, and nickel, that were produced on or after April 13, 2024. In response to the action, the LME and CME blocked all trading in metals covered by the measures.
The stated objective of this coordinated action is to reduce the revenues that Russia earns from metals covered by the sanctions while limiting market disruption by exempting from the new import and trading prohibitions in-scope Russian metals that were produced prior to April 13, 2024. The joint action also fulfills the G7 Leaders’ Statements in December 2023 and February 2024 committing to take further actions to reduce Russia’s revenues from metals.
U.S. Sanctions
As mentioned above, the Metals Import Determination prohibits the importation into the United States of covered metals, except to the extent provided by law, or unless licensed or otherwise authorized by OFAC. The Metals Services Determination prohibits the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a U.S. person of the following categories of services to any person located in the Russian Federation: warranting services for covered metals on a global metal exchange; and services to acquire covered metals, as part of the physical settlement of a derivative contract (collectively, “Covered Metals Acquisition Services”).
OFAC also issued new and amended Russia-related Frequently Asked Questions, as follows:
- FAQ 1168 reiterates that the importation into the United States of aluminum, copper, and nickel of Russian Federation origin that was produced prior to April 13, 2024 is not prohibited, nor is the provision of Covered Metals Acquisition Services related to aluminum, copper, and nickel of Russian Federation origin that was produced prior to April 13, 2024.
- FAQ 1169 provides guidance to U.S. persons, including U.S. global metal exchanges, on the scope of prohibited activities and how to maintain compliance. More specifically, to ensure compliance with the Metals Services Determination, U.S. global metal exchanges should not accept covered metals and should also halt the warranting of covered metals on the exchanges; remove brands that produce covered metals from their list of accepted brands; abstain from adding additional brands of covered metals to their list of accepted brands; cease to provide clearing services for covered metals; and halt acting as central counterparties to the trade of covered metals. U.S. persons are also prohibited from providing services to acquire covered metals as part of a physically settled derivative contract (i.e., the expiration of the contract results in a transfer of ownership of the physical commodity, as opposed to a cash settled derivatives contract in which the derivative expires directly into cash on the maturity date of the trade). In addition, a U.S. trader that is a counterparty to a derivative contract cannot take physical delivery of covered metals when it comes time to settle that contract, even if the importation of the metal would not be into the United States. Market participants and traders may reasonably rely on the Certificate of Analysis and Certificate of Origin of the relevant Russian metal, or other documentation available to them in the ordinary course of business, with respect to the date of production, but should exercise caution if they have reason to believe such documentation has been falsified or is otherwise erroneous.
- FAQ 1170 provides that for purposes of new directives, OFAC anticipates publishing regulations defining “aluminum” as it is defined at Chapter 76 of the Harmonized Tariff Schedule of the United States (“HTSUS”), “nickel” as it is defined at HTSUS Chapter 75, and “copper” as it is defined at HTSUS Chapter 74.
- FAQ 1171 and amended FAQ 1019 make clear that the new restrictions do not impact metals that have been incorporated or substantially transformed into a new product. They clarify that the term “Russian Federation origin” excludes “any Russian Federation origin good that has been incorporated or substantially transformed into a foreign-made product.”
- FAQ 1172 confirms that the new restrictions do not impose a new prohibition on banks acting as intermediaries for payments to Russian metals. It clarifies that the processing, clearing, or sending of payments related to covered metals by a U.S. bank on behalf of non-U.S. persons is not prohibited by the Metals Services Determination where the bank: (1) is operating solely as an intermediary; and (2) does not have any direct relationship with the person providing a service covered by the Metals Services Determination (i.e., the person is a non-account party) as it relates to the relevant transaction. While the Metals Services Determination thus does not impose any new prohibitions or requirements relating to the processing, clearing, or sending of payments by intermediary banks, U.S. banks are still prohibited from providing any Covered Metals Acquisition Services directly or indirectly to a person located in Russia.
OFAC made a minor change to FAQ 1128 to include Covered Metals Acquisition Services as one of the categories of services that U.S. persons are prohibited from providing to persons in Russia pursuant to E.O. 14071.
UK Sanctions
The United Kingdom has administered sanctions on certain, specified Russian metals since December 15, 2023, pursuant to Chapter 4CB of The Russia (Sanctions) (EU Exit) Regulations 2019 (Russia Regulations). Unless otherwise authorized, these sanctions target:
- the import into the United Kingdom of metals that are consigned from or originate in Russia;
- the direct or indirect acquisition of metals that originate from or are located in Russia (regardless of whether the person acquiring the metals intends to bring them into the United Kingdom); and
- the direct or indirect supply or delivery of metals from a place in Russia to a third country (i.e., a country other than the United Kingdom, Isle of Man, or Russia).
The metals falling within the scope of these sanctions are identified in Schedule 3BA of the Russia Regulations as aluminium, antimony, beryllium, bismuth, cadmium, cobalt, copper, chromium, gallium, germanium, hafnium, indium, lead, magnesium, manganese, molybdenum, nickel, niobium (columbium), rhenium, tantalum, thallium, tin, tungsten, vanadium, zinc, zirconium, and articles thereof (including waste and scrap), as well as cermets, miscellaneous articles of base metal, and tools / implements / cutlery / spoons / forks wholly or partially of base metal.
On December 13, 2023, DBT issued a general trade licence authorizing the direct or indirect acquisition of a warrant on a global metal exchange by LME Clear Limited, the LME, global metal exchange members, and the clients of global metal exchange members that otherwise would be prohibited under the metals sanctions, subject to certain conditions. As part of the recent coordinated action with the U.S. government, the general trade licence was amended at 23:59 (BST) on April 12, 2024 to:
- prevent UK persons and non-UK persons in the United Kingdom from acquiring, on a global metal exchange, a warrant relating to Russian metal that was produced on or after April 13, 2024; and
- allow UK persons and non-UK persons in the United Kingdom to take physical delivery outside the United Kingdom of metals that were under warrant on a global metal exchange before April 13, 2024.
The effect of the expanded UK sanctions on Russian metals is twofold. First, they prohibit the acquisition of Russian warrants for metals covered by the sanctions that are produced on or after April 13, 2024. Second, they divide Russian warrants for metals covered by the sanctions that were produced before April 13, 2024, into two types:
- Russian metals on warrant at the end of April 12, 2024 – trade in these warrants can continue on global metal exchanges and these metals can be taken off warrant and re-warranted on a global metal exchange by UK persons or anyone located in the United Kingdom. Once taken off warrant, these metals also can be moved and taken delivery of outside the United Kingdom. However, they remain banned for import into the United Kingdom; and
- Russian metals warranted on or after April 13, 2024 – A UK person, or anyone located in the United Kingdom cannot cancel or withdraw these warrants in order to take physical delivery of the metal, or change the location of the metal.
A Russian metal is produced before April 13, 2024, if the warrant being acquired was issued before that time or the date of production of the metal can be demonstrated through a Certificate of Analysis or other equivalent evidence, provided that the person acquiring the warrant does not know, or have reasonable cause to suspect, that the metal was produced on or after April 13, 2024.
While the general trade licence automatically applies to persons covered by it, the conditions of the licence require a person to notify DBT within 30 days of first acting under the authorization of the licence. Additionally, persons that cancel or withdraw (or that request or order the cancellation or withdrawal of) a warrant acquired under the licence on or after April 13, 2024 are required to keep certain records relating to that activity (e.g., details of the licence user, the unique warrant reference, date of acquisition, details of the cancellation / withdrawal, and evidence the metal was produced before April 13, 2024).
The UK government intends to keep the availability of the general trade licence under review, including in response to ongoing monitoring of trade flows and trade practices, and may elect to vary, revoke or suspend the licence at some future time.
Conclusion
The joint U.S.-UK action is a further demonstration of the coordination on sanctions policy related to Russia among the United States and its allies, including through implementation of G7 leadership statements. It also illustrates the continued use of targeted sanctions that seek to maintain a balance between reducing Russian revenues and impacts on global and national markets. Although the joint U.S.-UK action prohibits trading in certain Russian metals on the two largest global metal exchanges and in over-the-counter derivatives trading, it does not impact aluminum, copper, nickel, or other metals covered by the sanctions that were produced and warranted before April 13, 2024. The importation into the United States of Russian aluminum, copper, or nickel produced before April 13, 2024, as well as products made with Russian metals, also is not prohibited. As a result, not all aluminum, copper, and nickel from Russia will be affected by the restrictions. Nor do the new prohibitions apply to cover titanium or platinum group metals, such as platinum and palladium, which may have been exempted due to supply chain sensitivities. We expect to see these elements of sanctions policy – coordination and targeting – continue, with companies needing to keep compliance measures up to date as the rules and restrictions change and increase in complexity over time.
For advice on the new U.S. and UK restrictions, please contact a member of Steptoe’s Economic Sanctions practice group.
