LawFlash

Update: US Department of Commerce Imposes Restrictions on Russia

February 24, 2022

The United States, in concert with Western allies, has imposed sweeping sanctions on Russia in response to President Vladimir Putin’s action in Ukraine. In addition to a full suite of sanctions administered by the US Department of Treasury/Office of Foreign Assets Controls (OFAC), the US Department of Commerce has issued amendments to the Export Administration Regulations (EAR) that impose new restrictions on exports, re-exports, and retransfers of items subject to the EAR to Russia (and releases in Russia), established policies of denial for license applications, and transferred military end users to the Entity List.

These actions are designed to protect US national security and foreign policy interests and limit Russian access to products, technology, software, materials, and equipment that is not indigenously developed in Russia. The EAR amendments complement the OFAC sanctions on Russia and both are likely to have a widespread effect on global businesses. The changes require careful evaluation before proceeding with any sales, procurement, or other business transactions involving Russia. The EAR changes became effective on February 24, 2022, upon public release in the Federal Register.

New Licensing Requirements

The Bureau of Industry and Security (BIS) amended the EAR to institute several new requirements that fall into four categories:

  • Establishment of new licensing requirements for Russia for items that previously did not require a license—both Commerce Control List-based licensing and development of covered regions;
  • Revisions to the Foreign Direct Product Rule (FDPR);
  • Implementation of a new Russia Military End-User Direct Product Rule (Russia-MEU-FDPR); and
  • Russia Military End-Use/End-User Requirements.

Although BIS will review a limited number of applications on a case-by-case basis, most license applications will be subject to a presumption of denial.

In general, the amendments require licenses before companies may export, re-export, or transfer any item controlled on the EAR Commerce Control List (CCL) in Categories 3–9 to Russia. This impacts microelectronics, telecommunications items, sensors, navigation equipment, avionics, and aircraft components critical to the Russian economy. In addition, comprehensive export, re-export, and transfer restrictions were imposed on the Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR) regions of Ukraine. As a result, exports of all items subject to the EAR, including EAR99 items, to DNR and LNR, like Crimea, are prohibited.

Licenses are also required before exporting any item subject to the EAR to a military end-use or end-user in Russia, which includes EAR99 items. The regulation, however, includes several exceptions. Licenses would not be required for:

  • Food and medicine designated as EAR99; and
  • Items classified as ECCN 5A992.c or 5D992.c, so long as they are not for Russian government end users or Russian state-owned enterprises.

The military end use/end user regulations, 15 CFR 734.21 and 734.22 (for military-intelligence end use/end user), already outline enhanced diligence requirements and note that the military end use/military end user lists are not exclusive. It is therefore prudent to continue an enhanced diligence process to verify the bona fides of any parties related to Russia and address the new licensing requirements—“knowing your customer” takes on a renewed importance.

The amendments also impact foreign-produced items. Foreign-produced items require licenses if they are destined for Russia and:

  • Are the direct product of certain US origin software or technology subject to the EAR; or
  • Are produced by certain plants or major components thereof which are themselves the direct product of certain US origin software or technology subject to the EAR.

These restrictions also apply if the foreign produced products will be incorporated into or used in the production or development of any part, component, or equipment produced in or destined to Russia. This rule, however, does not as of February 28 apply to foreign produced items that would be designated as EAR99 on the CCL.

Designation of Certain Russian Military End Users as Entity List Parties

In addition to new licensing requirements, BIS transferred 49 military end users to the Entity List, imposing additional restrictions regarding the transactions that can occur without licenses. The Entity List designations include a new “footnote 3.” This designation identifies the Russian Military End User that would require licenses if there is knowledge that the item to be exported, re-exported, or retransferred will be incorporated into or used in the production or development of any part, component, or equipment produced, purchased, or ordered by any entity with a footnote 3 designation on the Entity List. This requirement applies even for EAR99 items.

However, although license applications can be submitted, BIS notes that the licenses are approached with a presumption of denial. The likelihood of obtaining licenses for these transactions remains low. 

Exclusions to the Russia FDPR and Russia-MEU FDPR Regulations

In alignment with the EAR’s focus on multilateral controls, BIS excluded partner countries from the Russia FDPR and Russia-MEU FDPR because these countries are adopting or have expressed the intent to adopt substantially similar measures against Russia. While the concept of excluding restrictions on partners and allies is not new, it is a notable development that BIS has extended the benefits of exclusions from the new licensing restrictions to countries that have not yet implemented limitations similar to the United States. The impact of this approach may be felt for transactions that result in exports to countries that do not currently have in place similar restrictions to the EAR. Those countries may, under their current laws, continue business with Russia and Russian companies. The impact on these changes remains to be seen.

The excluded countries currently include Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, New Zealand, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.

Other EAR Changes

In addition to the new licensing requirements, BIS amended the EAR to restrict use of EAR license exceptions for exports, re-exports, and retransfers to Russia. Parties may use the following license exceptions only in the enumerated circumstances:

  • TMP: May only be used for items for use by the news media
  • GOV: May only be used for limited exports associate with the international space station
  • TSU: May only be used for software updates to civil end users that are subsidiaries of or joint ventures with companies headquartered in the United States or a partner country
  • BAG: May be used for baggage, excluding firearms and ammunition
  • AVS: May only be used for aircraft flying into and out of Russia
  • ENC: May only be used for entities that are not Russian government end users or Russian state-owned enterprises
  • CCD: May only be used to send consumer communication devices to entities other than government end users or individuals associated with the Russian government

We understand that the Department of Commerce is considering a number of actions up to and including revocations of existing licenses for Russian entities. We continue to monitor the situation and will provide an update should the Department take more definitive action.

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Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Ukraine Task Force
Giovanna M. Cinelli
Joanna Christoforou
Bruce Johnston
Grigory Marinichev
Michael Masling
Kenneth J. Nunnenkamp
Georgia M. Quenby
Christina Renner
Melanie Ryan
Vasilisa Strizh
Carl A. Valenstein
Alexey Chertov
Jiazhen (Ivon) Guo
Katelyn M. Hilferty
Nicola Kelly
Christian Kozlowski
Daniel Lopez Rus
Charles C. Rush
Eli Rymland-Kelly