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.
The Bureau of Industry and Security (BIS) amended the EAR to institute several new requirements that fall into four categories:
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:
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:
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.
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.
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.
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:
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.
Our lawyers have long been trusted advisers to clients navigating the complex and quickly changing global framework of international sanctions. Because companies must closely monitor evolving government guidance to understand what changes need to be made to their global operations to maintain business continuity, we offer this centralized portal to share our insights and analyses. To receive the latest updates, subscribe to our Ukraine Conflict: How to Maintain Global Business Continuity mailing list.
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
Kenneth J. Nunnenkamp
Carl A. Valenstein
Jiazhen (Ivon) Guo
Katelyn M. Hilferty
Charles C. Rush