As flagged in our initial blog, the US Department of Commerce’s Bureau of Industry and Security (“BIS”) published on February 24, 2022 a public inspection copy of a final rule (“Final Rule”), effective immediately (subject to a very limited savings clause), that implements a sweeping series of export control measures under the Export Administration Regulations (“EAR”) against Russia. The press release regarding these new controls can be found here.
The controls are a result of multi-laterally coordinated efforts among the United States, EU, Japan, Australia, United Kingdom, Canada, and New Zealand. Please refer to our separate blogs on expanded EU, Japan, and Singapore export controls. The stated targets of the new EAR controls are Russia’s defense, aerospace, and maritime sectors, as well as its access to technological inputs and key sectors of its industrial base.
Key Takeaway: All companies engaged in exports or reexports to, or transfers within, Russia will need to carefully consider the new controls imposed by the Final Rule. Any party engaging in transactions with commonly available encryption items and other items typically subject to only a low level of export controls will be affected. In some circumstances, the new controls apply even to EAR99 items subject to the EAR, such as with Entity List parties and transactions subject to one of the new foreign-direct product rules. Parties exporting EAR99 items subject to the EAR may also need to consider screening for military end users/end uses in Russia given the Final Rule’s expansion of the military end user/end use (“MEU”) provisions of the EAR.
The principal changes to the EAR implemented by the Final Rule can be divided into the following five categories and we summarize each below:
- License requirement for items in Commerce Control List (“CCL”) Categories 3-9, with a licensing policy of denial (except in limited cases) and limited license exceptions available;
- Creation of two new Foreign-Direct Product (“FDP”) Rules for Russia;
- Transfer of Russian MEUs, and addition of Russian parties, to the Entity List;
- Expanded MEU restrictions; and
- Comprehensive export, reexport, and transfer controls for the so-called Donetsk People’s Republic (“DNR”) or Luhansk People’s Republic (“LNR”) regions of Ukraine (“Covered Regions of Ukraine”).
License Requirement for CCL Categories 3-9 – Section 746.8(a)(1) of the EAR
Exports, reexports, and transfers (in-country) of all items subject to the EAR and classified in CCL Categories 3-9 now require a license to Russia (excluding deemed exports and reexports), subject to limited license exceptions and a licensing policy of denial (except in limited cases). CCL Categories 3-9 include many items that are not particularly sensitive from an export controls perspective and did not previously require a license to Russia, such as telecommunications items and low-level encryption items.
Licensing Policy of Denial
Items requiring a license under these new controls will be reviewed under a licensing policy of denial, except that the following license applications will be reviewed by BIS on a case-by-case basis to determine whether the transaction would benefit the Russian government or defense sector:
- related to safety of flight or maritime safety;
- to meet humanitarian needs;
- in support of government space cooperation;
- for companies headquartered in Country Groups A:5 and A:6 to support civil telecommunications infrastructure;
- involving government-to-government activities;
- companies in Russia that are:
- wholly-owned US subsidiaries;
- foreign subsidiaries of US companies that are joint ventures with other US companies;
- joint ventures of US companies with companies headquartered in Country Group A:5 and A:6;
- wholly-owned subsidiaries of companies headquartered in Country Group A:5 and A:6;
- 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.
Limited License Exceptions
Only the following EAR license exceptions are available:
- License Exception TMP for items for use by news media;
- License Exception GOV;
- License Exception TSU for software updates for civil end users that are subsidiaries or joint of ventures of companies headquartered in the United States or country or countries from Country Groups A:5 and A:6
- License Exception BAG, excluding firearms and ammunition;
- License Exception AVS; and
- License Exception ENC, excluding Russian “government end users” and Russian state owned enterprises (“SOEs”); and
- License Exception CCD.
While companies should evaluate applicability of these license exceptions, of particular note are that License Exception ENC continues to be available for exports and reexports to, and transfers in, Russia except in transactions involving Russian government end users (defined in Part 772 of the EAR) or SOEs (undefined in the EAR). Notably, encryption items classified in Export Control Classification Numbers (“ECCNs”) 5A992 or 5D992.c are now controlled to Russia and License Exception ENC does not apply to such items. As a result, companies will need to evaluate whether they can rely on another license exception, such as License Exceptions TSU and CCD, which will provide relief in some cases.
De Minimis Considerations
The fact that more items are now controlled to Russia also means that US-origin items classified in CCL Categories 3-9 incorporated into foreign items must be counted as controlled to Russia except for transactions meeting the following two conditions:
- Items controlled for Anti-Terrorism (“AT”) reasons only (i.e., controlled in 9A991 or in an ECCN that only lists AT in the reason for control paragraph) and which is not excluded in the “Scope” column of Russia Exclusions List (Supplement No. 3 to Part 746 of the EAR (currently nothing is excluded)), listing countries that BIS has determined are committed to implementing substantially similar export controls on Russia under their domestic law; and
- the foreign item will be exported from a country listed in Russia Exclusions List.
New Russia FDP Rules – Sections 734.(9)(f) and (g) of the EAR
The Final Rule creates two new FDP rules: one focused on reexports and transfers involving Russia (“Russia FDP Rule”) and one focused specifically on Russian military end users (“MEUs”) newly listed on the Entity List (“Russia-MEU FDP Rule”). .
Russia FDP Rule
The Russia FDP Rule imposes an EAR licensing requirement for reexports, export from abroad, or transfers of foreign-produced items not designated as EAR99 that are:
- the direct product of US-origin technology or software subject to the EAR specified in any ECCN in product groups D and E in CCL Categories 3-9; or
- produced by any plant or major component of a plant that itself is the direct product of US-origin technology or software subject to the EAR specified in any ECCN in product groups D and E in CCL Categories 3-9.
The license requirement applies if there is “knowledge” that the foreign-produced item is destined to Russia or will be incorporated into or used in the production or development of any part, component, or equipment not designated as EAR99 and produced in or destined to Russia.
Exports or reexports of items caught by the Russia FDP Rule from countries listed on the Russia Exclusions List do not require a BIS license because BIS has determined that these countries are committed to implementing substantially similar export controls on Russia under their domestic law, unless a limit to the exclusion is described in the Scope column in Supplement No. 3 to this part (currently no limits to Scope are included). This would appear to avoid dual-licensing requirements for items caught by the Russia FDP Rule and exported to Russia from a country listed on the Russia Exclusions List.
The licensing policy, and license exceptions available, for items caught by the Russia FDP Rule are the same as those applicable to items subject Russia licensing requirements for items in CCL Categories 3-9, as described above.
Russia-MEU FDP Rule
The Russia-MEU FDP Rule imposes an EAR licensing requirement for reexports, export from abroad, or transfers of foreign-produced items that are:
- the direct product of technology or software subject to the EAR specified in any ECCN in product groups D and E of any CCL category; or
- produced by any plant or major component of a plant that itself is the direct product of US-origin technology or software subject to the EAR specified in any ECCN in product groups D and E of any CCL category.
The end-user scope of the Russia-MEU FDP Rule is similar in its functioning to the Huawei FDP rule in the EAR and applies where there is “knowledge” that:
- the foreign-produced item will be incorporated into, or 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 Entity List (i.e., Russian MEUs); or
- any entity with a footnote 3 designation is a party to any transaction involving the foreign-produced item, e.g., as a purchaser, intermediate consignee, ultimate consignee, or end-user.
There are currently 45 entities on the Entity List (previously listed on the MEU List) with a footnote 3 designation.
As with the Russia FDP Rule, exports and reexports from countries on the Russia Exclusions List are not subject to a BIS license requirement. License applications for foreign-produced items caught by the Russia-MEU FDP Rule are subject to policy of denial in all cases. With the exception of two parties (JSC Central Research Institute of Machine Building (JSC TsNIIMash) and JSC Rocket and Space Centre – Progress) which are eligible for License Exception GOV, no Entity List party with a footnote 3 designation is eligible for any license exception.
Expanded MEU restrictions – Section 744.21 of the EAR
The Final Rule also expands the scope of existing Russia MEU restrictions in Section 744.21 of the EAR to cover all items subject to the EAR (including EAR99 items), except for EAR99 food and medicine or mass-market encryption items (unless intended for Russian “government end users” or Russian SOEs).
Transfer of Russian MEUs to the Entity List – Supplement No. 4 to Part 744 of the EAR
As a result of the expansion of MEU restrictions to cover all items subject to the EAR, BIS removed Russian entities previously listed on the MEU List and placed them on the Entity List. BIS also added International Center for Quantum Optics and Quantum Technologies LLC and SP Kvant (parties not previously listed on the MEU List) to the Entity List for “acquiring and attempting to acquire US-origin items in support of nuclear explosive activities, unsafeguarded nuclear activities, and safeguarded and unsafeguarded nuclear fuel-cycle activities for Russia.” License applications involving parties on the Entity List are subject to a policy of denial.
Comprehensive export, reexport, and transfer controls for Covered Regions of Ukraine – Section 746.6 of the EAR
In furtherance of the US sanctions imposed pursuant to Executive Order 14065 (described in our prior blog post here), the Final Rule imposes a BIS 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. These new export controls in respect of the Covered Regions of Ukraine are similar to existing EAR controls in respect of the Crimea and only apply to the “Covered Regions of Ukraine,” defined to include the land territory of 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.
Both BIS and the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) have licensing jurisdiction in respect of the Covered Regions of Ukraine. BIS license applications involving the Covered Regions of Ukraine are subject to a policy of denial, except for license applications in respect of activities authorized under OFAC’s Ukraine related General Licenses, which are reviewed on a case-by-case basis. Certain limited license exceptions are available for the Covered Regions of Ukraine.