U.S. Considering Sanctions Against Russia in Response to a Possible Invasion of Ukraine

Among the options being contemplated by the U.S. government in response to Russia’s buildup of its military forces at Ukraine’s borders are new economic sanctions against Russian officials, financial institutions and industries. Under consideration as part of these sanctions is the use of a novel, and used only once before, export control measure known as the Foreign Direct Product Rule (FDPR).
 
The FDPR expands the jurisdictional reach of the U.S. Export Administration Regulations (EAR), which regulate the export and transfer of U.S. origin items and foreign made items comprised of a threshold level of U.S. origin content. Pursuant to the FDPR, foreign produced items are covered under U.S. regulations if they are produced from U.S. technology and software controlled for national security reasons. In other words, such foreign origin items still are covered by the FDPR if produced from U.S. regulated technology or software.    
 
The U.S. previously applied the FDPR against Huawei, a Chinese telecommunications company. In 2020, in response to Huawei’s threats to U.S. national security, economic integrity and supply chain security, the U.S. implemented the FDPR to limit the company’s ability to procure microchips, a critical component for telecom systems and devices, i.e., smartphones and tablets, etc. Because many microchips are produced from U.S. technology that is controlled for national security reasons, the restrictions applied to chip manufacturers outside of the U.S. that supplied Huawei. As a result of this action, Huawei was unable to procure the microchips needed to manufacture its products and reportedly lost as much as 30% of its revenue in 2021, falling behind its competitors. Huawei continues to be adversely impacted by FDPR.
 
Similarly, the U.S. is working with its allies to develop a version of the FDPR that would force companies in other countries manufacturing microchips from exporting these products to Russia should an invasion of Ukraine proceed. This action would disrupt the flow of crucial components to industries the Russian government considers critically important including civil aviation, maritime and high technology. Further, the ban could be extended to deprive Russia of consumer products such as smartphones, tablets, video games and many other electronic products incorporating semiconductors. Such actions would hamper strategically important areas of the Russian economy, stunt economic growth, as well as reign in the country’s ambitions in high tech areas such as artificial intelligence and quantum computing. Russia does not have a domestic industry capable of manufacturing high end semiconductors required for advance computing, relying instead on imports from countries such as Taiwan, Japan and South Korea. However, these countries manufacture semiconductors using, in many instances, U.S. controlled technology and, therefore, could be prevented from exporting such semiconductors to Russia pursuant to the FDPR. This leaves Russia extremely vulnerable and could have a far-reaching impact (including driving up consumer prices in Russia) if the FDPR were to be applied.
 
Whether the threat of these sanctions will have any impact on the decisions of Russia’s leadership regarding military action in Ukraine remains to be seen. However, the FDPR is an arrow in the U.S.  quiver that it could employ in an effort to influence and curtail Russia’s aggressive behavior. NATO and western allies of the U.S. are also considering similar sanctions modeled after the FDPR.
 
Foundries manufacturing semiconductors and exporters of such products should assess their export and supply chain activities to determine if they may be impacted by potential U.S. sanctions against Russia, including the implementation of the FDPR, review the Export Control Classification Number of their products against the Commerce Control List and determine whether their activities directly or indirectly involve a targeted party or country, in this case, Russia.

 

How BDO can help

BDO can assist companies, both domestic and foreign, review, analyze and interpret new export controls and sanctions regulations which may be issued with little or no advance notice and develop and/or update export/import compliance programs globally to incorporate 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. Such actions are more important than ever as this highly regulated and scrutinized area will be under increased scrutiny due to concerns about the potential aggressive activities of state actors.
 
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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