BIS Hits Russia and Belarus with Sweeping New Export Control Restrictions

Pillsbury - Global Trade & Sanctions Law

On February 24, 2022, the U.S. Department of Commerce, Bureau of Industry and Security (BIS) issued a final rule effective immediately imposing sweeping export control restrictions against Russia in response to Russia’s invasion of Ukraine.  On March 2, 2022, BIS issued another final rule effective immediately imposing the same export restrictions against Belarus in response to Belarus’s role enabling Russia’s invasion of Ukraine.  These actions are part of a larger set of recent sanctions and export control restrictions imposed by the U.S., UK, EU, Japan, and other allies.  Please see our prior posts available here, here, here, here, here, and here discussing recent sanctions and export control developments against Russia.

The final rules make significant changes to the U.S. Export Administration Regulations (EAR) as applied to Russia and Belarus – including (1) expanding licensing requirements for exports, reexports, and transfers to or within Russia or Belarus, which are generally subject to a policy of denial, (2) restricting the use of license exceptions, (3) creating two new foreign direct product rules, and (4) expanding ‘military end use’ and ‘military end user’ restrictions for Russia and Belarus.

Additionally, BIS made significant changes to License Exception AVS and ENC as applied to Russia and Belarus, which are further discussed below.  Of importance, aircraft registered in, owned, or controlled by, or under charter or lease by Russia or a national of Russia are no longer permitted to use License Exception AVS.

The final rules contain a limited savings clause which applies only in connection with non-U.S.-made items now subject to control under either of the two new foreign direct product (FDP) rules.  For such items, shipments may proceed provided they are en route aboard a carrier pursuant to actual orders by March 26, 2022.  For all other items, license requirements entered into effect for items not already shipped as of February 24, 2022, with respect to Russia and March 2, 2022, with respect to Belarus.

  1. Expanded Licensing Requirements for Russia and Belarus

The rule expands licensing requirements for the export, reexport, or transfer to or within Russia or Belarus of any item subject to the EAR and specified in Export Control Classification Numbers (ECCNs) in Categories 3 – 9 of the CCL, excluding deemed exports and deemed reexports.  This includes certain microelectronics, computers, telecommunications items, products and software with encryption functionality, sensors, navigation equipment, avionics, marine equipment, and aircraft components that were not previously subject to licensing requirements for Russia or Belarus.  License exceptions, subject to the restrictions discussed below, may be available.

Most license applications will be subject to a policy of denial, with limited exceptions.  For example, certain applications related to safety of flight, maritime safety, humanitarian needs, government space cooperation, civil telecommunications infrastructure, government-to-government activities, and to support limited operations of partner country companies in Russia and Belarus will be reviewed on a case-by-case basis.  The case-by-case review policy will be used to determine whether a transaction will benefit the Russian or Belarusian government or defense sector.

  1. Restrictions on the Use of License Exceptions

Previously available license exceptions are now restricted for Russia and Belarus.  Only limited sections of the following license exceptions are now available:

  • AVS (Section 740.15 of the EAR) – for non-U.S. airlines operating regularly scheduled flights into and out of Russia excluding any aircraft registered in, owned, or controlled by, or under charter or lease by Russia or a national of Russia;
  • ENC (Section 740.17 of the EAR) – for encryption items, but only for civil end-users that are wholly-owned U.S. subsidiaries, foreign subsidiaries of U.S. companies that are joint ventures with other U.S. companies, joint ventures of U.S. companies with companies headquartered in countries from Country Groups A:5 and A:6, the wholly-owned subsidiaries of companies headquartered in countries from Country Groups A:5 and A:6, or joint ventures of companies headquartered in Country Groups A:5 and A:6 with other companies headquartered in County Groups A:5 and A:6;
  • CCD (Section 740.19 of the EAR) – for consumer communication devices, but not if they are destined for government end users in Russia or Belarus or certain individuals associated with the government in Russia or Belarus;
  • TMP (Section 740.9 of the EAR) – for items for use by the news media;
  • GOV (Section 740.11 of the EAR) – for certain government activities;
  • TSU (Section 740.13 of the EAR) – for software updates to civil end users that are subsidiaries of, or joint ventures with, companies headquartered in the United States or partner countries; and
  • BAG (Section 740.14 of the EAR) – for baggage, excluding firearms and ammunition.
  1. New Foreign Direct Product Rules for Russia and Belarus

BIS created two new foreign direct products rules aimed at Russia and Belarus.  The first rule (the “Russia/Belarus FDP Rule”) targets non-U.S. made products that are exported to Russia or Belarus, while the second rule (the “Russia/Belarus-MEU FDP Rule”), is an even more expanded application of the traditional FDP rule targeting Russian and Belarusian ‘military end users.’

Background on the Direct Product Rule

Under the traditional “national security” direct product rule outlined in Section 734.9 of the EAR, a non-U.S. made item is subject to the EAR when the non-U.S. made item is:

  • (i) the direct product of U.S. technology or software that is controlled for national security (NS) reasons (or a major component of a plant that is the direct product of NS-controlled technology or software),
  • (ii) the resulting non-U.S. made item is also controlled for NS reasons, and
  • (iii) the non-U.S. made item is destined to a destination listed in Country Group D:1, E:1, or E:2.

In May 2020, BIS expanded the direct product rule as applied to parties on the Entity List that have a “Footnote 1” designation, which is currently limited to the Chinese company Huawei and its designated affiliates.  This was the first time BIS expanded the FDP rule to capture certain lesser controlled U.S.-origins software and technology, which therefore made the rule applicable in a much broader array of circumstances.

Russia/Belarus FDP Rule

Key aspects of the Russia/Belarus FDP Rule, which is located in Section 734.9(f) of the EAR, are outlined below:

  • The rule would apply to exports globally if there is knowledge the item is ultimately destined for Russia or Belarus.  This is intended to address situations involving multi-step manufacturing processes that occur in more than one country.
  • Under the Russia/Belarus FDP Rule, a non-U.S. made item is subject to the EAR if it:
    • is a direct product of U.S. software or technology in any ECCN within Categories 3-9 of the CCL (or a major component of a plant that is the direct product of such technology or software); and
    • is destined to any destination if there is knowledge the item is destined to Russia or Belarus, or will be incorporated into or used in the production or development of any part, component, or equipment produced in or destined to Russia or Belarus.
  • The Russia/Belarus FDP rule does not apply to non-U.S. made items that would be designated as EAR99.

Russia/Belarus-MEU FDP Rule

The Russia/Belarus-MEU FDP Rule is more extensive than the Russia/Belarus FDP Rule and applies to items ultimately destined for entities on the Entity List with a Footnote 3 designation.  Key aspects of the Russia/Belarus-MEU FDP Rule, which is located in Section 734.9(g) of the EAR, are outlined below:

  • Under the Russia/Belarus-MEU FDP Rule, a non-U.S. made item is subject to the EAR if it:
    • is a direct product of anyS. software or technology in any ECCN on the CCL (or a major component of a plant that is the direct product of such technology or software); and
    • is destined to any destination if there is knowledge the item will be incorporated into or used in the production or development of any part, component, or equipment produced, purchased, or ordered by a Footnote 3 entity or where the Footnote 3 entity is a party to the transaction.
  • Unlike the Russia /Belarus FDP Rule, the Russia/Belarus-MEU FDP Rules applies to non-U.S. made items that are designated as EAR99 except for food or medicine designated as EAR99 unless for Russian or Belarusian government end users or state-owned enterprises.
  • Unlike the Russia/Belarus FDP Rule, if an item is subject to the EAR based on the new Russia/Belarus-MEU FDP Rule, there are no available license exceptions.
  • Footnote 3 Designation: BIS moved all 45 Russian entities from the MEU List to the Entity List and designated such entities with a Footnote 3 notation.  These parties are now generally subject to a license requirement for all items subject to the EAR and are also subject to the Russia/Belarus-MEU FDP Rule.  Additionally, the Ministry of Defence of the Russian Federation and the Ministry of Defence of the Republic of Belarus are now on the Entity List which, per their entity list designations, include the national armed services, national guard, national police, and government intelligence or reconnaissance organizations.

Partner Country Exclusions

BIS added an important exclusion from the Russia/Belarus FDP Rule and the Russia/Belarus-MEU FDP Rule for exports or reexports from partner countries who have committed to implementing substantially similar export controls on Russia and Belarus under their own domestic laws.  Currently, the license requirements for the Russia/Belarus FDP Rule and Russia/Belarus-MEU FDP Rule do not apply to exports or reexports from all European Union members, as well as Australia, Canada, Japan, New Zealand, and the United Kingdom (“Excluded Countries”).

Note that BIS is also applying the partner country exclusion to its de minimis rule.  Pursuant to this rule, a non-U.S. made item can be subject to the EAR if it incorporates more than a de minimis percentage of “controlled” U.S.-origin content.  As a result of the new rule, all items in Categories 3-9 of the CCL are now “controlled” for Russia and Belarus.  However, BIS states that for purposes of a de minimis calculation, U.S.-origin content that is solely controlled for Anti-Terrorism (AT) reasons or are 9A991 are not counted as controlled content if the non-U.S. made item is being exported or re-exported from an Excluded Country.

  1. Expanded Russia and Belarus ‘Military End Use’ and ‘Military End User’ Controls

BIS added Belarus as subject to the ‘military end use’ and ‘military end user’ controls under § 744.21 of the EAR.  Additionally, the rules expand the scope of the ‘military end use’ and ‘military end user’ controls under § 744.21 of the EAR to apply to all items subject to the EAR instead of the narrower subset of items identified in supplement no. 2 to Part 744.  Accordingly, a license is required for all items subject to the EAR if at the time of export, reexport, or transfer, there is knowledge that the item is intended for a military end use or a military end user in Russia or Belarus.

There are exceptions for food and medicine classified as EAR99 that are not for a Russian or Belarusian government end user or state-owned enterprise.

The situation in Ukraine continues to develop. We will continue to monitor and update.

Note that the EU, the UK, Canada and other countries have adopted their own restrictions on exports to Russia and Belarus.  It is therefore important to review the regulations of all relevant jurisdictions.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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