As anticipated in our earlier blog entry, on September 17, 2014, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) implemented new restrictions on the export, reexport and transfer (including in-country transfer) of items subject to the Export Administration Regulations (“EAR”) to certain major Russian energy and defense sector companies by adding those companies to the Entity List. BIS also has amended the EAR to impose licensing requirements on the export, reexport, and transfer (including in-country transfer) of certain EAR items for “military end uses” or “military end users” in Russia and other military-related items classified under the EAR.
1. Energy Sector Controls
BIS has added the following five Russian energy companies to the Entity List in Supplement 4 to EAR Part 744:
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Gazprom OAO;
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Gazpromneft;
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Lukoil OAO;
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Rosneft; and
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Surgutneftegas.
A specific license from BIS is now required for the export, reexport, or transfer (including in-country transfer) of any item subject to the EAR, including “EAR99” items, to any of these companies if either (1) it is known that such items are for use directly or indirectly in exploration for, or production of, oil or gas in Russian deepwater (greater than 500 feet), Arctic offshore locations, or shale formations in Russia, or (2) it cannot be determined if the item will be used in such projects. BIS will review license applications with a presumption of denial if such projects have the potential to produce oil.
As a reminder, items subject to the EAR include U.S.-origin items wherever located, items being exported from the United States, foreign-produced items incorporating above de minimis (for Russia, 25%) U.S. controlled content by value, and certain foreign direct products of U.S. technology controlled for national security (NS) reasons. The licensing restriction applies to any person (U.S. or non-U.S.) engaged in targeted exports/reexports or transfers of items subject to the EAR.
2. Defense Sector Controls
a. Entity List Designations
BIS also added the following five Russian defense companies to the EAR’s Entity List:
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Almaz-Antey Air Defense Concern Main System Design Bureau;
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Tikhomirov Scientific Research Institute of Instrument Design;
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Mytishchinski Mashinostroitelny Zavod OAO; Kalinin Machine Plant, JSC; and
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Dolgoprudny Research Production Enterprise.
A specific license from BIS is now required for the export, reexport, or transfer (including in-country transfer) of any item subject to the EAR, including EAR99 items, by any person to these five defense companies, regardless of the end use. BIS will review all license applications for these companies with a presumption of denial.
b. Military End-Use Controls
BIS has amended EAR § 744.21 to impose a licensing requirement on the export, reexport, or transfer (including in-country transfer) of the following:
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Items listed in Supplement 2 to EAR Part 744 where it is known that the item is intended, whether wholly or in part, for a “military end use” or a “military end user” in Russia.
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Items classified under any 9×515 or “600 series” Export Control Classification Number (“ECCN”), including items described in a “.y” paragraph of a 9×515 or “600 series” ECCN, to any end user in Russia.
For purposes of these restrictions, a “military end use” means (i) incorporation into an item described on the U.S. Munitions List of the International Traffic in Arms Regulations or the Wassenaar Arrangement Munitions List, (ii) incorporation into items classified under ECCNs ending in ‘‘A018’’ or ‘‘600 series’’ ECCNs, or (iii) for the use, development, or production of items described in (i) or (ii). A “military end user” means the national armed services (i.e., the army, navy, marine, air force, or coast guard), the national guard and national police forces, government intelligence or reconnaissance organizations, or any person or entity whose actions or functions are intended to support “military end uses.”
License applications for exports, reexports, and transfers triggering these restrictions will be reviewed by BIS to determine whether the proposed transaction would make a material contribution to Russian military capabilities and would result in advancing the country’s military activities contrary to the national security interests of the United States. If BIS determines that such a contribution would be made, the application will be denied.
3. Some Takeaways and Questions
As with previous rounds of Russia-related controls imposed by the U.S. government, these latest measures present significant compliance challenges to companies doing business in or with Russia involving items subject to the EAR, especially non-U.S. companies that may not have familiarity with U.S. reexport controls. To avoid running afoul of the new controls summarized above, suppliers of equipment to or for oil and gas projects in Russia should conduct reasonable due diligence that, depending on the nature of the transaction, may need to involve one or more of the following key inquiries: whether the items to be supplied are subject to the EAR; whether the parties involved include any of the targeted entities; and whether the project falls within the scope of the targeted activities. Importantly, for companies on the Entity List, a licensing requirement is imposed if the company is not only a buyer but also an intermediate consignee, ultimate consignee, or end user. This would impact transactions involving equipment subject to the EAR sold to a non-Russian party if it is known or suspected that the equipment will be used in projects in which Gazprom OAO, Gazpromneft, Lukoil OAO, Rosneft, or Surgutneftegas are involved. These inquiries would, of course, need to be pursued in addition (or in parallel) to those necessary to ensure compliance with the earlier rounds of Russia-specific export controls implemented by BIS.
