On February 24, 2023, the US government announced a range of new export controls, sanctions, and tariffs to coincide with the first anniversary of Russia’s ongoing war against Ukraine. These actions by the US Department of Commerce, Bureau of Industry and Security (BIS), the US Department of the Treasury, Office of Foreign Assets Control (OFAC), the US Department of State, and the White House reflect the continued efforts of the US – in coordination with its allies – to impose costs on Russia for the war.
Each successive round of US export controls and sanctions presents new compliance challenges, against the backdrop of heightened enforcement risk resulting from aggressive, well-coordinated US government actions. US and non-US entities and individuals who engage in transactions related to Russia or Belarus should pay close attention to this complex and evolving regulatory framework. Additionally, entities and individuals exporting to Iran should take note of the expanded scope of the US Export Administration Regulations (EAR) under a new Iran Foreign Direct Product (FDP) Rule.
I. Export Controls
Effective February 24, 2023, BIS published new export, reexport, and in-country transfer control regulations to counter Russia’s invasion of Ukraine by: (1) amending and expanding industrial, chemical, and luxury good sector export and reexport controls targeting Russia and Belarus; (2) adding additional persons to the EAR Entity List; and (3) promulgating new controls related to Iranian Unmanned Aerial Vehicles (UAVs) utilized by Russia. The policy goal is to undermine the Russian and Belarusian industrial bases and counteract their ability to continue to support the war in Ukraine. The information below should be reviewed by exporters, reexporters, and transferors of any commodity, software, or technology (collectively, “items”) that is “subject to the EAR” under Part 734 of those regulations. Financial institutions, including non-US financial institutions, should also consider their risks under the EAR when financing trade with or to Russia that involves items subject to the EAR.
A. Expanded Industrial Sector And Luxury Good Sanctions
1. Revisions to the Sanctions under Supplement No. 2 to Part 746:
- BIS’s rule changes now make clear that the restrictions on exports, reexports and in-country transfers for the hydrocarbon industry items listed in Supplement No. 2 apply equally to Belarus and Russia (which was the case before these amendments). That is, such items require a license for export or reexport to or transfer within Russia or Belarus.
- In addition, these sanctions will apply controls to items based solely on Harmonized Tariff Schedule (HTS)-6 Code and HTS Descriptions found in the United States International Trade Commission Harmonized Tariff Schedule of the United States (2023), and remove all references to Schedule B numbers in this Supplement (as well as supplement numbers discussed below).
- BIS’s stated goal for this change is to promote understanding by exporters and reexporters because US allied partner countries are generally using importation codes equivalent to HTS-6 Codes and HTS descriptions, with an intention that the EAR’s controls will align with those implemented by such partners.
- In making these changes, six applicable HTS-6 codes, 841350, 841360, 842139, 843049, 843139, and 847989, are now identified under Supplement No. 2.
- Notably, as is already the case for Supplement No. 4 to Part 746 (discussed below), the amendments now make clear that controls apply to any “parts,” “components,” “accessories,” and “attachments” defined under Part 772 that are modified or designed for the items in Supplement No. 2. Thus, controls may apply to other items, even if not listed, and in many cases, such items are not specifically identified by HTS Code or HTS Description. However, BIS does make clear that such controls do not include any “part” or minor “component” that is a fastener (e.g., screw, bolt, nut, nut plate, stud, insert, clip, rivet, pin, washer, spacer, insulator, grommet, bushing, spring, wire, or solder).
- Finally, BIS is adding a new paragraph (b) to Supplement No. 2 to Part 746, which addresses the following:
- Specifies that the items identified in the HTS-6 Code column are the items that are subject to the license requirement under § 746.5(a)(1)(i), thus making clear that the HTS-6 Code governs the analysis in determining the license requirement.
- That is, if an exporter “knows” an item is classified under an HTS-6 Code in Supplement No. 2, but does not believe that its item matches the corresponding HTS Description in Supplement No. 2, the HTS-6 Code will control for determining the license requirement.
- Similarly, if a person believes an item could potentially meet the description of more than one HTS Description, the HTS-6 Code will control because the HTS Description furnished is intended to assist exporters with their US Automated Export System (AES) filing responsibilities, but is not determinative of whether an item is controlled.
- Clarifies that the license requirements extend to HTS Codes at the 8- and 10-digit level when those HTS-8 and HTS-10 codes begin with the HTS-6 Codes as their first 6 numbers. In this way, BIS’s policy goal is to prevent an exporter from identifying an item at the 8- or 10-digit level as a way to try to evade these controls. In other words, if the 8- or 10-digit code for the item begins with or matches one of the HTS-6 Codes with the first six digits specified in the table, then the item will require a license, if the item is subject to the EAR (and no exclusion applies).
- Specifies that the items identified in the HTS-6 Code column are the items that are subject to the license requirement under § 746.5(a)(1)(i), thus making clear that the HTS-6 Code governs the analysis in determining the license requirement.
2. Expansion of Russian Industry Sector Sanctions under Supplement No. 4 to Part 746:
- BIS has amended Supplement No. 4 to Part 746 by adding 322 new HTS-6 Code entries corresponding to 322 industrial items that will require a license for export or reexport to or transfer within Russia or Belarus under § 746.5(a)(1)(ii).
- According to BIS, these items include a variety of electronics, industrial machinery, and equipment.
- As discussed above in the subsection on Supplement No. 2, these amendments to Supplement No. 4 will solely utilize the HTS Code and HTS Description, with the HTS Code determinative of whether controls apply (rather than HTS Description), and also remove all Schedule B numbers from the table.
- The complete list of 322 new HTS-6 Codes added to Supplement No. 4 is available at this link.
3. Expansion of Russian Industry Sector Sanctions under Supplement No. 6 to Part 746:
BIS amended and expanded chemical sector-related export, reexport, and transfer (in country) controls applicable to Russia and Belarus for items that require a license under § 746.5(a)(1)(iii).
Among other changes, such as by utilizing EAR-defined terms “components,” “parts,” and “accessories” and adding the term “n.e.s.” (not elsewhere specified), the amendments clarify the scope of control parameters by doing the following:
- Including “thiafentanil” as an additional controlled chemical;
- Adding the words “isolated or purified” before the references to nucleotides “and” oligonucleotides as controlled;
- Adding the words “isolated or purified” before amino acids, peptides, and proteins;
- Adding new paragraphs to control reagents and materials for oligonucleotide synthesis, n.e.s. and resins, reagents, and materials for peptide synthesis;
- Removing the term “fermenters” because fermenters are already listed elsewhere, with other technical changes;
- Adding controls for: (1) “microarrays”; (2) “ultracentrifuges”, including for biological sample separation capabilities; (3) “microreactors, n.e.s.”; (4) “solid and liquid aerosol generating equipment, n.e.s.”; (5) “laboratory milling equipment, “components,” “parts,” and “accessories, n.e.s.”; and (6) “peptide synthesizers, “components,” “parts,” and “accessories”;
- Clarifying that: (1) Polymerase chain reaction instruments are covered under the scope of controls, which US allied partners’ controls may reference as “qPCR”; and (2) “components,” “parts,” and “accessories” include consumables, which are within the scope of the control parameters.
- Revising Technical Note 1 to paragraph (f)(23) to align with EU List X.B.X.001 that “continuous flow reactors” consist of plug and play systems, in which reactants are continuously fed into the reactor and the resultant product is collected at the outlet.
4. Expansion of “Luxury Goods” Sanctions under Supplement No. 5 to Part 746:
- BIS has expanded the scope of sanctions applicable to “Luxury Goods” by adding 276 additional entries to Supplement No. 5 to Part 746. This includes certain spirits, tobacco products, clothing items, jewelry, vehicles, and antique goods.
- These items, which will continue to be identified by Schedule B number, along with 2-digit chapter heading and 10-digit Schedule B commodity descriptions, will require a license for export or reexport to or transfers within Russia or Belarus and for designated Russian and Belarusian oligarchs and malign actors worldwide under § 746.10(a)(1) and (2).
- The new Schedule B numbers are available at this link:
5. Changes to Supplement No. 3 to Part 746 of the EAR:
- Taiwan is now being added to Supplement No. 3 to Part 746 as fully participating in allied partner export controls against Russia and Belarus.
- This supplement lists jurisdictions excluded from certain license requirements of §§ 746.7 and 746.8, including under the FDP rules in § 734.9. In addition, US content that is controlled under § 746.8(a)(1) and incorporated into foreign-produced items exported from these jurisdictions is not considered “controlled” for purposes of the EAR’s de minimis calculation as set forth in Supplement No. 2 to Part 734 of the EAR, provided that certain criteria are met.
- These exceptions are for countries that have committed to implementing substantially similar export controls (partially or fully) on Russia and Belarus under their domestic laws. Previously, Supplement No. 3 as originally issued in March 2022, included 32 countries, but since that time, South Korea, Iceland, Liechtenstein, Norway, and Switzerland had been added and now Taiwan is included.
6. Additional Technical and Ministerial Changes include:
- Clarification that § 744.7 (restricting exports and reexports to or for the use of aircraft and vessels) extends to transfers (in-country);
- Clarification that the exclusion for items controlled under ECCN 5A992 or 5D992 under § 746.8 also applies to “Luxury Goods Sanctions” license requirements under § 746.10(a)(1); and
- Conforming changes to the licensing policies under §§ 746.5, 746.8, and 746.10 and addition of a case-by-case license review policy for applications for the disposition of items needed as part of companies curtailing or closing all operations in Russia or Belarus.
7. Savings Clause
For the changes discussed above, shipments of items removed from eligibility for a License Exception or export, reexport, or transfer (in-country) without a license (NLR) that were en route aboard a carrier to a port of export, reexport, or transfer (in-country), on February 24, 2023, pursuant to actual orders to or within a foreign destination, may proceed to that destination under the applicable License Exception or as NLR, provided the delivery is completed no later than on March 27, 2023.
B. Entity List (EL) Designations
A total of seventy-six entities were added to the EL for allegedly acting contrary to the national security or foreign policy interests of the United States. These entities are now included under the destination of Russia.
Five entities (3DiVi, AO Papilon, IT-Papillon OOO, OOO Adis, and Papilon Limited Liability Company) were added for their alleged involvement in activities that are contrary to the foreign policy interests of the United States under § 744.11, including for: (1) providing support for Russia’s filtration operations in occupied areas of Ukraine and (2) using biometric technology in suppressing Ukrainian resistance and enforcing loyalty among the Ukrainian population in occupied areas. For these, BIS now imposes a license requirement for all items subject to the EAR and will review license applications under a presumption of denial.
Five entities (Joint Stock Company Elektron Optronik, Joint Stock Company Zelenograd Nanotechnology Center, Public Joint Stock Company Kremny, Technopark Skolkovo Limited Liability Company, and VisionLabs Limited Liability Company) were added for allegedly acquiring and attempting to acquire US-origin items in support of activities contrary to US national security and foreign policy interests under § 744.11. As such, BIS now imposes a license requirement for all items subject to the EAR and will review license applications under a policy of denial.
The remaining sixty-six Russian entities have been added to the EL for purportedly acquiring and attempting to acquire US-origin items in support of Russia’s military. These efforts have contributed to all such entities being designated under § 744.11 and each entity qualifies as a military end user (MEU) under § 744.21 of the EAR. Such entities are receiving a footnote 3 designation and the Russia/Belarus MEU FDP rule set forth in § 734.9(g) will apply. Five of the entities (Federal State Budgetary Scientific Institution Research and Production Complex Technology Center, Joint Stock Company Research and Production Association Named After S.A. Lavochkina, Joint Stock Company Research and Production Association of Measuring Equipment, Joint Stock Company Scientific Research Institute of Industrial Television Rastr, and Joint Stock Company State Missile Center Named After Akademika V.P. Makeveva (GRTS Makevev)) have a license requirement for all items subject to the EAR, but License Exception GOV is available for use pursuant to § 740.11(b)(2) and (e) and the license review policy for them is a policy of denial for all items subject to the EAR other than food and medicine designated as EAR99 and for items for US Government-supported use in the International Space Station (ISS), which will be reviewed on a case-by-case basis. The other sixty-one entities are added with a license requirement for all items subject to the EAR and a license review policy of denial.
Additionally, BIS has modified the existing EL entries for four entities by revising their aliases, addresses, and license requirement. The license requirement is being revised to read “Policy of denial” as these entities have purportedly acquired and/or attempted to acquire US-origin items in support of Russia’s military.
A savings clause does apply to the EL additions and modifications, but only where items removed from eligibility for a License Exception or NLR are: (1) exported, reexported, or transferred (in-country), (2) pursuant to actual orders; and (3) en route aboard a carrier to a port on or as of February 24, 2023.
C. Iranian-Related UAVs
BIS has determined that certain components of Iranian-origin UAVs have been found on the battlefield in Ukraine, in some cases with US-branded parts and components. Therefore, BIS is promulgating new export control measures intended to address the use of Iranian UAVs by Russia in its ongoing war against Ukraine: These controls include:
- Imposing license requirements for certain items designated EAR99, i.e., not included on the Commerce Control List (CCL), Supplement No. 1 to part 774 of the EAR, including semiconductors among other items, that are destined for Iran (under §746.7) or Russia or Belarus (under §746.8), regardless of whether a US person is involved in the transaction. Prior to this rule change, BIS had regulated all items on the CCL for export, reexport, or transfer to or in Iran, but generally had not regulated EAR99 items, although OFAC imposes a comprehensive embargo on exports from the United States or by US persons of any good, service, or technology to Iran or the Government of Iran.
- Establishing a new list, now included as Supplement No. 7 to Part 746, that identifies these EAR99 items by HTS-6 Code to enable BIS and other US government agencies to track and quantify these exports (where applicable), which as explained above, will require a license before export, reexport, or transfer to or in Iran, Russia, or Belarus. The controls apply to items specifically described in Supplement No. 7 to part 746, as well as any modified or designed “components,” “parts,” “accessories,” and “attachments” for such items listed in the supplement, regardless of the HTS Code or HTS Description.
- Creating a new “Iran Foreign Direct Product (FDP) Rule” specific to Iran under § 734.9(j) for items in certain categories of the CCL and EAR99 items identified in the new Supplement No. 7. This rule is targeted at Iran’s UAV activities of concern. Notably, this rule establishes jurisdiction over foreign-produced items that are the direct product of US-origin software or technology classified in Categories 3 through 5 and 7 of the CCL, or are produced by a plant or major component of a plant which itself is the “direct product” of such controlled software or technology. The product scope is limited to foreign-produced items identified in Supplement No. 7, including items designated EAR99, and to items classified in any ECCN in Categories 3 through 5 or 7 of the CCL.
- Revising the existing Russia/Belarus FDP rule in §§ 734.9(f)(1)(i)(B) and (f)(1)(ii)(B) to cover EAR99 items. More specifically, the amendments now expand the product scope of the Russia/Belarus FDP rule to include items identified in new Supplement no. 7, even if such items are designated EAR99, when they meet the FDP criteria under paragraph (f). This change is being implemented with a goal to assure that US products are not available for controlled shipment that could be utilized in the manufacture of UAVs destined for use by Russia in Ukraine, because US Government investigations have found Iranian UAVs containing parts and components branded US-origin.
These controls are in addition to BIS’s action on January 31, 2023, which added seven Iranian entities involved in the manufacture of UAVs to the EL as Russian MEU, including on FDP-controlled items under the Russia/Belarus MEU FDP rule.
II. Economic Sanctions
A. Mining and Metals Determination
Pursuant to Executive Order (EO) 14024, Sec. 1(a)(i), OFAC issued a determination identifying the mining and metals sector as a sanctionable sector of the Russian economy. The determination does not itself add any parties to the SDN List, but it serves as notice that anyone who operates, or has operated, in the metals and mining sector without authorization from OFAC can be sanctioned. The determination took immediate effect and was the basis for four of the SDN designations announced on February 24.
OFAC published guidance on the determination, in the form of Frequently Asked Question (FAQ) 1115, broadly defining the metals and mining sector to include “any act, process, or industry of extracting, at the surface or underground, ores, coal, precious stones, or any other minerals or geological materials in the Russian Federation, or any act of procuring, processing, manufacturing, or refining such geological materials, or transporting them to, from, or within the Russian Federation.” Further guidance (FAQ 1117) states that the determination “authorizes sanctions on any person determined to operate or have operated in the metals and mining sector” of the Russian Federation. The same FAQ notes that for non-US persons, transacting with mining sector parties designated under 14024 is also sanctionable; though not if US persons would otherwise be authorized to engage in such transactions (for example, newly expanded General License (GL) 8F authorizes certain transactions related to energy).
FAQ 1117 clarifies that OFAC does not intend to impose sanctions under the determination for certain safety-related activities involving Russia’s metals and mining sector. the FAQ describes those activities as follows:
provision of goods or services […] solely for the safety and care of personnel, protection of human life, prevention of accidents or injuries, maintenance or repair necessary to avoid environmental or other significant damage, or activities related to environmental mitigation or remediation. Examples of such goods include personal protective equipment, safety devices, ventilation systems, and alarm systems; examples of such services include rescue and accident response services, cleaning, safety inspections, and services necessary for use of the goods described above.
It is important to note that existing sanctions already apply to the metals and mining sector, including, for example, the prohibition on new investment in Russia by US persons under EO 14071 and the prohibition on US persons’ dealing with entities owned 50 percent or more by sanctioned parties.
B. Additions to the SDN List
OFAC and the State Department have in this round of sanctions added scores of entities and individuals to the SDN List. The designations focused primarily on persons in the financial services and defense supply chain sectors. A number of Russian officials were also added to the SDN list.
OFAC added a number of financial institutions – including wealth management related entities and specified individuals – to the SDN List. Credit Bank of Moscow – one of the few large Russian banks which had yet to be added to the SDN list – was one of the notable additions. In conjunction with these bank-related designations, OFAC published GL 60 authorizing specific “wind-down” activities involving many of the newly listed banks through 12:01 am eastern daylight time, May 25, 2023; and GL 61 which authorizes transactions incident and necessary to the divestment or transfer, or the facilitation of the divestment or transfer, of debt or equity of certain of the listed banks to non-US persons, also through 12:01 am eastern daylight time, May 25, 2023. Notably, GL 60 authorizes US financial institutions to reject, rather than block, funds transfers involving the newly designated banks specified in the GL, through 12:01 am eastern daylight time, May 25, 2023, where the designated bank is an originating, intermediary, or beneficiary financial institution.
GL 8F (see above), pertaining to energy-related transactions, was expanded to authorize transactions involving certain of the newly designated banks. Businessman Aleksandr Yevgenyevich Udodov, who is tied to the Russian elite and alleged to engage in illicit financial dealings, was also listed, along with companies linked to him.
Additionally, OFAC also targeted alleged sanctions evaders, including Swiss businessman Walter Moretti, and a network of companies and associates who work with him. OFAC alleges that Moretti and this network “covertly procured sensitive Western technologies and equipment for Russian intelligence services and the Russian military, including hydraulic presses, armament packages, and armor plating” as well as “equipment for Russia’s nuclear weapons laboratories.”
In complementary efforts OFAC and the State Department also designated extensive lists of entities and individuals reported to be involved or connected to military supply chains, including various state-owned entities, arms dealers, and persons involved in the Ukraine war effort, as well as technology and electronics companies that produce or import for the defense sector.
OFAC and State also designated entities operating in the aerospace and marine sectors; both of which had previously been identified in sector determinations made under EO 14024.
The State Department also designated, pursuant to EO 14024, several Russian civil nuclear entities as well as entities involved in nuclear weapons development and operation. In addition, the State Department targeted dozens of senior executive officials, including government ministers and regional governors; and imposed visa restrictions on 1,219 members of the Russian military pursuant to Section 212(a)(3)(C) of the Immigration and Nationality Act, and further entry restrictions on three commanders (Artyom Igorevich Gorodilov, Aleksey Sergeyevich Bulgakov, and Aleksandr Aleksandrovich Vasilyev) alleged to have been involved in gross human rights violations.
These designations described above are illustrative and do not cover all designated parties. Moreover, entities that are owned 50 percent or more by designated persons or entities are also subject to these sanctions restrictions. For a complete list of newly designated parties, GLs and FAQs, please consult OFAC’s full update.
C. Clarification of General License 13D on Administrative Transactions
OFAC also issued FAQ 1118 to clarify the scope of the general license authorizing certain administrative transactions involving Russia’s Central Bank, National Wealth Fund, and Ministry of Finance. The general license was also reissued as GL 13D, extending its expiration date until June 6, 2023. FAQ 1118 states that GL 13D does not authorize the payment of a so-called “exit tax” that has reportedly been imposed on persons divesting their assets in Russia. OFAC explained that GL 13D authorizes only transactions that are ordinarily incident and necessary to day-to-day operations in Russia, and that OFAC does not consider the exit tax to be such a transaction. The FAQ states that US persons whose divestment from Russia will involve an exit tax payment may need to apply to OFAC for a specific license.
III. Tariffs on Aluminum and Other Goods
In addition to the substantial export control and sanctions measures described above, the White House also announced on February 24, 2023 the imposition of substantial tariff changes for certain imports into the United States from Russia. The most significant tariff change was a new 200% tariff to be imposed on imports into the United States of Russian aluminum and aluminum products. This substantial tariff was grounded in a “Section 232 proceeding” which allows for tariffs to be imposed following certain findings related to US national security, pursuant to section 232 of the Trade Expansion Act of 1962, as amended (19 U.S.C. 1862). In the Section 232 proceeding, the US Department of Commerce had made a determination on January 19, 2018 that that aluminum articles “are being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States.”
The United States had already imposed a 10% tariff on aluminum products from many countries in March of 2018 in response to that determination. In addition to that earlier tariff increase, the United States is now also increasing tariffs directed at Russian aluminum products. Specifically, on February 24, President Biden issued a proclamation imposing the following tariffs on Russian aluminum products: (1) a 200 percent ad valorem tariff on aluminum articles that are the product of Russia and derivative aluminum articles that are the product of Russia beginning on March 10, 2023; and (2) a 200 percent ad valorem tariff on aluminum articles where:
- any amount of primary aluminum used in the manufacture of the aluminum articles is smelted in Russia, or the aluminum articles are cast in Russia, and
- derivative aluminum articles where any amount of primary aluminum used in the manufacture of the derivative aluminum articles is smelted in Russia, or the derivative aluminum articles are cast in Russia.
These new duties will be imposed beginning on April 10, 2023.
In addition to the Section 232-related tariffs, President Biden also issued a proclamation increasing tariffs on certain Russian metals, minerals, and chemical products pursuant to the Suspending Normal Trade Relations with Russia and Belarus Act. Pursuant to the proclamation, most Russian metals will have a 70% tariff, while a number of other Russian imports into the United States will have increased tariffs of 35%. The White House reported in a fact sheet that these imports subject to the increased tariffs are worth approximately $2.8 billion to Russia.
For assistance in interpreting and complying with the complex array of US trade controls and sanctions related to Russia and Belarus, please contact a member of Steptoe’s export controls or economic sanctions practice groups.