Yesterday (February 24^th) as part of the broader response to Russia’s invasion of Ukraine – the White House announced strict export controls as part of the Biden Administration’s strategy to “squeeze Russia’s access to finance and technology for strategic sectors of its economy for years to come.” (President Biden’s remarks are found here.) Those controls are part of a Final Rule “Implementation of Sanctions Against Russia Under the Export Administration Regulations (EAR)” (unpublished PDF version is found here) which, although unpublished, is effective immediately. The net effect is to make it much harder to export many kinds of products, technologies and software to Russia.

Note that the new export control measures announced by the Bureau of Industry and Security (BIS) are different from, and in addition to, the prohibitions and restrictions levied by the Office of Foreign Asset Control (OFAC) on Russian financial institutions and individuals.

The new export control measures in the Final Rule are intended to protect U.S. national security and foreign policy interests by:

• Imposing new Commerce Control List (CCL)-based license requirements for Russia, covering all Export Control Classification Numbers (ECCNs) in Categories 3-9 of the CCL. Some of the items were not previously subject to license requirements.
• On top of the new license requirements, implementing a more stringent review policy of denial for export, reexport, or transfer (in-country) of items that require a license for Russia means that licenses will be significantly harder (if not impossible) to obtain.
• For Russia exports, reexports, and transfers (in-country), restricting the use of EAR license exceptions to certain sections of the following:
• TMP (Temporary Imports, Exports, Reexports, and Transfers in Country), for items for use by the news media;
• GOV, for certain government activities;
• TSU (Technology and Software Unrestricted), for software updates to civil end users that are subsidiaries of, or joint ventures with, companies headquartered in the United States or partner countries;
• BAG (Baggage), for baggage, excluding firearms and ammunition;
• AVS (Aircraft, Vessels, and Spacecraft), for aircraft flying into and out of Russia;
• ENC (Encryption Commodities, Software, and Technology), for encryption items, but not if they are destined for Russian ‘government end users’ and Russian state-owned enterprises; and
• CCD (Consumer Communication Devices), for consumer communication devices, but not if they are destined for government end users or certain individuals associated with the government.
• Expanding the scope of existing Russia “military end use” and “military end user” controls, so they now cover all items subject to the EAR. This change will have significant effects on production of civil aircraft, which had been allowed to proceed previously.
• Adding two new “Foreign Direct Product” (FDP) rules that control certain foreign-produced items: the “Russia FDP Rule” and the “Russia-MEU FDP Rule”. The practical effect is to bar many third-country suppliers from shipping items such as semiconductors and other advanced electronics to Russia, items that are essentially inputs to Russia’s key technology sectors.
  
  The “Russia FDP Rule” establishes controls over: (i) the direct product of certain U.S.-origin software or technology subject to the EAR; or (ii) produced by certain plants or major components thereof which are themselves the direct product of certain U.S.-origin software or technology subject to the EAR. The Russia FDP rule does not apply to foreign-produced items that would be designated as EAR99 (items not listed on the CCL), which includes many consumer items used by the Russian people.
  
  ​​​​The “Russia-MEU FDP Rule” is more extensive than the Russia FDP rule and applies to foreign-produced items that are: (i) the direct product of any software or technology subject to the EAR that is on the CCL; or (ii) produced by certain plants or major components thereof which are themselves the direct product of any U.S.-origin software or technology on the CCL. These restrictions apply to all items, including those designated EAR99, with certain exceptions, and impose a license requirement for Russian military end users with an Entity List Footnote 3 designation.
• 49 new entities are designated under Footnote 3 to the Entity List. A license is required to export, reexport, or transfer (in-country) all items subject to the EAR (including foreign-produced items under the Russia-MEU FDP rule) to these entities, with limited exceptions. Footnote 3 also applies to the Russian Ministry of Defence, including the Armed Forces of Russia, wherever located. License applications for footnote 3-designated entities will be reviewed under a policy of denial in all cases.
• Excluding from the Russia and Russia-MEU FDP rules certain Partner Countries that are adopting or have expressed intent to adopt substantially similar measures. Exports, reexports, and transfers (in-country) from the following countries are not subject to these rules: 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.

BIS is targeting primarily the defense, aerospace, and maritime sectors with these new export controls. Notably missing from any additional sanctions or controls are the oil & gas, and mining sectors.

The Final Rule also revises § 746.6 of the EAR (Embargoes and Other Special Controls – Crimea Region) to include the so-called Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR), so that the existing license requirements will also apply to these covered regions of the Ukraine. Exports, reexports, and transfers (in-country) to the DNR and LNR will now be treated the same as those to Crimea. In essence, the occupied Ukrainian territories will now be treated as restrictively as if they were part of Iran or North Korea.

BIS cites the Export Control Reform Act of 2018 (50 U.S.C. §§4801-4852) as the authority for the Final Rule. Formal publication will be in the March 3, 2022, Federal Register.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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