U.S. President Biden Imposes Export Controls on Russia and Belarus

The full alert is available for download with footnotes here.

A. Introduction:

The Biden administration, in coordination with U.S. partner countries, has imposed stringent export controls against Russia and Belarus to respond to Russia’s military operation in Ukraine.

On February 24, 2022, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) announced new export control measures under the Export Administration Regulations (“EAR”) against Russia (hereafter, “Russia Tranche 1”). On March 3, 2022, BIS also announced that the latest export control measures imposed on Russia would extend to Belarus (hereafter, “Belarus Measures”). Also, on March 3, 2022, the Biden administration announced additional export controls on oil and gas extraction equipment on Russia (hereafter, “Russia Tranche 2”). Note that while Russia Tranche 1 and the March 3, 2022, action against Belarus are essentially the same, Russia Tranche 2 (so far) does not apply to Belarus.

Major takeaways from the latest export controls implemented under Russia Tranche 1, and the Belarus Measures include: (1) a new license requirement for Commerce Control List (“CCL”) Categories 3 – 9, (2) two new Foreign-Direct Product (“FDP”) Rules, (3) country exclusion for countries with similar export control regimes, (4) restrictions related to the so-called Donetsk People’s Republic (“DNR”) and Luhansk People’s Republics (“LNR”) regions of Ukraine, and (5) the expansion of the existing Russia “military end use” and “military end user” control scope. For Russia Tranche 2, BIS (1) significantly expanded the export controls on the Russian industry sector sanctions by adding new prohibitions, and (2) added 91 new entities to the Entity List.

All companies engaged in exports or reexports to, or transfers within Russia or Belarus will need to examine the new controls imposed by the BIS thoroughly. In the following sections, we will provide a summary, with references to the specific provisions being updated.

B. Export Controls Under Russia Tranche 1 and Belarus Measures:

b-I. New License Requirement for CCL Categories 3 – 9:

The BIS implemented a new licensing requirement for Russia and Belarus on items subject to the EAR and classified under any Export Control Classification Number (“ECCN”) in Categories 3 - 9 of the CCL. According to Commerce’s Fact Sheet, 58 new ECCNs were added because of the latest action. For the items that are covered under Categories 3 – 9 of the ECCN, the categories are broad and encompass a wide array of products that may not necessarily be strategic to the Russian economy:

• Category 3 – Electronics Design Development and Production
• Category 4 – Computers
• Category 5 Part 1 – Telecommunications
• Category 5 Part 2 – Information Security (including most software containing encryption functionality)
• Category 6 – Sensors and Lasers
• Category 7 – Navigation and Avionics
• Category 8 – Marine
• Category 9 – Aerospace and Propulsion

In some cases, the export controls applies to materials that are not necessarily critical to Russian national security. As an example of how far-reaching the controls are, in the electronics category, all electronic test equipment (ECCN 3A992.a) now requires a license. Furthermore, items such as inflatable boats, life jackets, compasses, wetsuits, masks, fins, and weight belts are also subject to a license requirement.

b-I-A. Licensing Policy of Denial:

The items requiring a license under the new export control measures (i.e., Categories 3 through 9 of the ECCN) will be reviewed under a licensing policy of denial, the effect of which is that an entity is restricted from exporting or importing controlled items because its license will either be revoked or denied—unless an exception is made. Furthermore, the final rule also provides for certain limited exceptions, which will be reviewed on a case-by-case basis to review whether or not granting an exception “would benefit the Russian or Belarusian government or defense sector.” The scope of these exceptions includes the following:

• Applications related to safety of flight
• Applications related to maritime safety
• Applications to meet humanitarian needs
• Applications that support government space cooperation
• Applications for items destined to 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 Group A:5 and A:6 in supplement no. 1 to part 740 of the EAR countries, the wholly-owned subsidiaries of companies headquartered in countries from Country Group A:5 and A:6 in supplement no. 1 to part 740, joint ventures of companies headquartered in Country Groups A:5 and A:6 with other companies headquartered in Country Groups A:5 and A:6
• Applications for companies headquartered in Country Groups A:5 and A:6 to support civil telecommunications infrastructure
• Government-to-government activities
• Russian or Belarusian companies of the following categories:
  • 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 Country Group A:5 and A:6 in supplement no. 1 to part 740 countries
  • Wholly-owned subsidiaries of companies headquartered in Country Group A:5 and A:6 in supplement no. 1 to part 740 countries, or
  • Joint ventures of companies headquartered in Country Group A:5 and A:6 with other companies headquartered in Country Groups A:5 and A:6

b-I-B. Limited License Exceptions:

In addition to the case-by-case approach described above, the final rule also provides certain EAR license exceptions for products covered under the new export control measures against Russia and Belarus. However, the EAR license exceptions have been significantly restricted. The permitted license exceptions include the following:

• Certain sections of License Exception TMP for items for use by the news media, § 740.9(a)(9);
• License Exception GOV, § 740.11(b);
• License Exception TSU for software updates for civil end-users, provided those civil end-users are subsidiaries or joint ventures of companies headquartered in the United States or a country or countries from Country Groups A:5 or A:6, § 740.13(c);
• License Exception BAG, excluding firearms and ammunition (paragraph (e)), § 740.14;
• License Exception AVS, § 740.15 (a) and (b);
• License Exception ENC, excluding Russian “government end users” and Russian state owned enterprises (SOEs), § 740.17; and
• License Exception CCD, § 740.19.

b-II. New Russia Foreign-Direct Product (“FDP”) Rules:

BIS has also created two new FDP rules: (1) Russia/Belarus FDP Rule, which focuses on reexports and transfers involving Russia and Belarus, and (2) Russia/Belarus-MEU FDP Rule, which focuses on the Russia and Belarus military end-users (“MEUs”) newly listed on the Entity List.

b-II-A. Russia/Belarus FDP Rule:

The Russia/Belarus FDP Rule establishes that a foreign-produced item located outside the U.S. is subject to the EAR “if it meets both the product scope in paragraph (f)(1) of this section and the destination scope in paragraph (f)(2).” The final rule sets out two product scopes in paragraph (f)(1):

• Direct product of U.S.-origin technology or software specified in any ECCN in product groups D or E in Categories 3, 4, 5, 6, 7, 8, or 9 of the CCL; or
• Produced by any plant or major component of a plant that itself is a direct product of U.S.-origin technology or U.S.-origin software and specified in any ECCN in product groups D or E in Categories 3, 4, 5, 6, 7, 8, or 9 of the CCL.

Under the destination scope in paragraph (f)(2), the final rule states that the “foreign-produced item meets the destination scope of the Russia FDP rule if there is ‘knowledge’ that the foreign-produced 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’ not designated EAR99 and produced in or destined to Russia or Belarus.” Here, EAR99 are items not listed on the CCL.

b-II-B. Russia/Belarus-MEU FDP Rule:

While the Russia/Belarus-MEU FDP Rule is similar to the Russia/ Belarus FDP rule, it is more extensive. Specifically, the Russia/Belarus-MEU FDP Rule establishes that the foreign-produced item located outside the U.S. is subject to the EAR “if it meets both the product scope in paragraph (g)(1) of § 734.9 and the destination scope in paragraph (g)(2).”

• The final rule sets out two product scopes in paragraph (g)(1):
  • Direct product of technology or software subject to the EAR and specified in any ECCN in product groups D or E in any category of the CCL.
  • Produced by a plant or major component of a plant that itself is a direct product of U.S.-origin technology or U.S.-origin software subject to the EAR and specified in any ECCN in product groups D or E in any category of the CCL.
• In addition, under the destination scope in paragraph (g)(2), the final rules state that EAR would apply if there were “knowledge” that:
  • Foreign-produced item will be incorporated into, or will be used in the production or development of any part, component, or equipment produced, purchased, or ordered by any entity with a footnote 3 designation in the license requirement column of the Entity List; or
  • Any entity with a footnote 3 designation in the license requirement column of the Entity List is a party to any transaction involving the foreign-produced item, e.g., as a purchaser, intermediate consignee, ultimate consignee, or end-user.

Note that BIS transferred 47 entities from its MEU List to the Entity List, and designated them with the above-mentioned “footnote 3” designation. Footnote 3 states that “For this entity, ‘items subject to the EAR’ includes foreign-produced items that are subject to the EAR under § 734.9(g) of the EAR. See §§ 746.8 and 744.21 of the EAR for related license requirements, license review policy, and restrictions on license exceptions.” As noted above, § 734.9(g) applies to the Russia/Belarus-MEU FDP rule.

Also, BIS added two new Russian military end-users to the Entity List “footnote 3” designation, for a total of 49 entities with a footnote 3 designation. The updated Entity List can be found at the following: https://www.bis.doc.gov/index.php/policy-guidance/lists-of-parties-of-concern/entity-list.

b-III. Partner Country Exclusion:

As part of the coordinated effort with partner countries, the BIS has identified countries that are “committed to implementing substantially similar export controls as part of their domestic sanctions.” These partner countries will not be subject to the Russia/Belarus and Russia/Belarus-MEU FDP rules (i.e., Exclusion from license requirements under paragraphs (a)(2) and (3)). The following countries have been identified by BIS: Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Malta, Netherlands, New Zealand, Poland, Portugal, Romania, Slovakia, Slovenia, South Korea, Spain, Sweden, and the United Kingdom.

b-IV. Restrictions Related to the Crimea region of Ukraine and the Covered Regions of Ukraine:

In furtherance of the U.S. sanctions imposed pursuant to Section 1 of Executive Order 14065, which was announced by President Biden on February 21, 2022, the BIS amended the EAR by “imposing a license requirement for the export and reexport to the Covered Regions of Ukraine, and the transfer within the Covered Regions of Ukraine, of all items subject to the EAR, other than food and medicine designated as EAR99 and certain software for internet-based personal communications.”

BIS notes that the latest export restriction on the “Covered regions of Ukraine” is similar in scope to the export prohibition related to the Crimea region of Ukraine, which was imposed by President Obama in 2014 to address the Russian occupation of Crimea. The “Covered Regions of Ukraine” would include the “land territory in the DNR and LNR regions, as well as any maritime areas over which sovereignty, sovereign rights, or jurisdiction is claimed based on occupation of (Crimea), or purported sovereignty (DNR and LNR) over, those land territories.”

b-V. Expand “military end use” and “military end user” controls:

The final rule states that scope of the “military end use” and “military end user” will be amended to cover all items “subject to the EAR” with the following exceptions: (1) food or medicine designated as EAR99, or (2) ECCN 5A992.c and 5D992.c unless for Russian “government end users” and Russian state-owned enterprises.

C. Export Controls Under Russia Tranche 2

There are two separate final rules that were announced by BIS on March 3, 2022. The first Rule covers any expanded licensing requirement for oil related goods, and the second rule covers expands ads new entities to the Entity List.

c-I. More Controls on the Russian Industry Sector:

Under the first final rule for Russia Tranche 2, BIS expanded the scope of the general prohibition by adding “an additional license requirement for exports, reexports or transfers (in-country) of any item subject to the EAR listed in new supplement no. 4 to part 746 to and within Russia.” It is important to note that, unlike the existing prohibition, the prohibition under new paragraph (a)(1)(ii) does not include a “knowledge” requirement. The new items covered under the prohibition under supplement no. 4 to part 746 (including their HTS Code, HTS Description, Schedule B, and Schedule B Description) are listed in the final rule.

Consistent with the Russia Tranche 1 rules, Russia Tranche 2 also shifts the licensing policy under paragraph (b)(1) to a more restrictive policy of denial. On a case-by-case basis, the BIS will review the license if the application is “for export, reexport, or transfer (in-country) of items that may be necessary for health and safety reasons.” VIS further explains that safety reasons would include safety of flight and maritime safety.

c-II. Additions to the Entity List:

The second rule adds 91 new parties in 10 countries to the Department of Commerce’s Entity List. The rule states that “The entities listed below have been involved in, contributed to, or otherwise supported the Russian security services, military and defense sectors, and military and/or defense research and development efforts.” For the new entities added, please see the final rule.

D. Conclusion:

The scope and complexity of the latest export control measures against Russia and Belarus underscore the critical nature of establishing an appropriate compliance program. The National Security and Sanctions Team at Curtis closely monitors all export controls and sanctions measures pertaining to Russia and Ukraine. If there are any questions or concerns, please contact Jason Wright, Jacques Semmelman, Ana Amador, and John Taishu Pitt.

Attorney advertising. The material contained in this Client Alert is only a general review of the subjects covered and does not constitute legal advice. No legal or business decision should be based on its contents.