BIS Announces Extensive Restrictions on Export of Tech Products to Russia

Following the release of our Trade Alert of February 21, 2022, the U.S. imposed initial economic sanctions on Russia targeting certain financial institutions and individuals as a result of Russia’s escalating aggression against Ukraine. The U.S. government indicated that additional comprehensive sanctions would be imposed if Russia encroached further on Ukraine’s territory. Following Russia’s large-scale invasion on February 24, President Biden expanded the economic sanctions, and the U.S. Commerce Department (through the Bureau of Industry and Security (BIS)) also announced major trade restrictions that will affect Russia’s ability to import sophisticated technologies originating in the U.S. or based on U.S. technologies. BIS is implementing expanded export controls, which include new license requirements and foreign direct product rules (FDPRs) specific to Russia and to “military end users” (MEUs) to severely restrict Russia’s access to technologies and other essential items needed to support its military, defense and intelligence capabilities.
 
BIS stated in its press release: “[t]hese controls primarily target Russia’s defense, aerospace, and maritime sectors and will cut off Russia’s access to vital technological inputs, atrophy key sectors of its industrial base, and undercut its strategic ambitions to exert influence on the world stage.” According to the agency, these export control measures constitute the most comprehensive application of its export authority on U.S. items, including technology, as well as on foreign items produced using U.S. equipment, software and blueprints, targeting a single nation. The export control rules are effective as from February 24, 2022, with regulations to be published in the Federal Register on March 3.
 
The export control measures—which represent one tranche of the U.S. response to Russia’s actions—consist of a revision of the Commerce Control List (CCL) by adding controls to Export Control Classification Numbers (ECCNs) and requiring licensing for tangible goods and technology destined for Russia, as well as the establishment of two new FDPRs.

New licensing requirements

BIS is implementing new license requirements for the export, re-export or transfer to or within Russia of any item subject to the Export Administration Regulations (EAR, the U.S. export control rules that, e.g., govern the export and transfer of U.S.-origin items and foreign-made items comprised of a threshold level of U.S. origin content). Specifically, the licensing measures expand and control access to specific types of technology and associated data that are included in categories 3 through 9 of the CCL. These categories cover electronics, computers, telecommunications items, information security, sensors and lasers, navigation and avionics, marine equipment and aircraft components. The measures also cover all categories of the CCL if the items are destined for military end users in Russia.
 
Significantly, BIS is adopting a presumptive policy that all export license applications for such items destined to Russia will be denied. However, requests will be reviewed on a case-by-case basis to ascertain whether a transaction that meets the criteria would benefit the Russian government or defense sector and to avoid any unintended consequences of the sanctions. As a result of these changes, many items that did not previously require a license for export to Russia based on the ECCN classification (such as certain parts and components) are now subject to licensing. However, such license applications will be subject to a policy of denial.

New FDPRs

As noted above, BIS is adding two new FDPRs in the EAR. Pursuant to the FDPR, foreign produced items are covered under U.S. regulations if they are produced outside the U.S. from U.S. technology and software controlled for national security reasons. In other words, foreign origin items are within the scope of the FDPR if produced from U.S. regulated technology or software.
 
The first new FDPR is specific to the entire country of Russia. This rule restricts Russia’s access to foreign-produced items that are the direct product of specific U.S.-origin technology that are subject to the EAR or produced by certain plants (or major components thereof) that are the direct product of U.S.-origin technology where the parties involved have knowledge that the foreign-produced item will ultimately be destined to Russia, or will be incorporated into or used in the production or development of any part, component, or equipment produced in or destined to  Russia. Some exceptions will apply. License requirements will apply to these items, and applications will be subject to a general policy of denial but will be reviewed on a case-by-case basis and certain exceptions will be available.
 
The second new FDPR targets Russian “military end users” or MEUs, which applies in conjunction with the new Russia FDPR. The MEU FDPR establishes a license requirement for foreign-produced items that meet certain product scope and destination requirements and are intended for Russian military end users or if there is knowledge that the item will be incorporated into or used in the production or development of a part, component or equipment produced, purchased or ordered by a Russian military end user. The new MEU FDPR applies to anything subject to the EAR. Exceptions are available only in very limited situations (e.g., certain countries that have committed to implementing substantially similar export controls on Russia are excluded from licensing requirements.) Such items will also be subject to a policy of denial for all license applications.

Comments

BIS’ Russia-specific export control measures are designed to restrict the export of high-tech items Russia needs for its defense, aerospace and maritime industries. The new restrictions place controls and licensing requirements on many items that previously were not subject to control when destined for Russia. Affected items include semiconductors, computers, telecommunications equipment, information security equipment, lasers and sensors, many of which are produced from U.S. technology that is controlled for national security reasons.
 
Under the FDPR, restrictions will be applicable to manufacturers that supply such products to entities in Russia. The new sanctions will prevent the Russian industrial sector from procuring components needed to manufacture products that are vital to its security and economy. The U.S. actions, together with actions taken by other countries, is intended to dramatically reduce the availability of high-tech products needed by Russia. The impact of the export controls and other measures could be severe and long-lasting because without access to these products, Russia will fall behind in industrial areas, including aviation, marine and high technology.
 
Other countries, including Australia, Canada, Japan, New Zealand, the UK, and all of the G-7 nations are implementing a raft of measures targeting Russia’s financial, energy and transport sectors, as is the European Union. This will disrupt the flow of crucial components to industries the Russian government considers critically important and will facilitate global enforcement of the new sanctions aimed at military end users.
 
The additional export restrictions imposed by the U.S. will impact manufacturers and technology companies that supply products containing U.S.-origin software or technical data or just the software/technical data alone that are controlled for national security reasons or are classified in categories 3 through 9 of the CCL – or any other category if the items are destined for military end users in Russia. Any of these items that are destined for Russia or to military end users in Russia will now require an export license that will be subject to a presumptive policy of denial. BIS estimates that the new license requirements will result in more than an additional 2,000 license applications annually.
 
Given the global focus on the situation in Ukraine and the sanctions being imposed against Russia by the U.S. and many other governments, companies should take immediate action to ensure that their products and technology are not being used in the direct or indirect manufacture of products destined for Russia and, if products are destined for Russia, an appropriate license is procured to the extent such license application will be approved given the new restrictions. Companies that do not adhere to these new export restrictions may be subject to severe consequences.

How BDO can help

BDO can assist companies manufacturing products with U.S. technology that is controlled for national security reasons or classified in CCL categories 3 through 9 and exporters of such products to assess their export and supply chain activities in light of the new U.S. sanctions against Russia (including the implementation of the FDPR). BDO can also review the Export Control Classification Number of producers’/exporters’ products against the CCL and determine whether their activities directly or indirectly involve Russia.
 
Further, BDO can assist U.S. and foreign companies review, analyze and interpret the new export controls and sanctions and develop and/or update export/import compliance programs globally to incorporate the new requirements. This focus will help exporters, corresponding importers of record on the receiving end of an export transaction and manufacturers navigate the myriad of export controls imposed by the U.S. government, including those enforced by the Departments of State, Commerce and Treasury.
 
Our services include: 

• Export/Import Compliance Assessments
• Compliance with Economic Sanctions
• Commodity Jurisdiction Requests
• Export Control Classification Number Ruling Requests
• Export License Applications
• Export Classification Reviews
• Supply Chain Planning
• Other Administrative Filings with U.S. Customs, State, Commerce and Treasury

 

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