US Significantly Expands Export Sanctions on Russia and Belarus; Simultaneously Adds to Entity List and Tariffs

The US continues to increase economic sanctions on Russia and Belarus. February 27 saw multiple actions expanding sanctions, including restrictions on exports of a large swath of equipment and consumer goods, Office of Foreign Assets Control designations, and visa restrictions. The Bureau of Industry and Security, in particular, emphasized that its action is focused on “aligning” with controls previously imposed by allies and partners in Europe.

After consulting with European partners, the US Commerce Department announced significant changes to export control-based sanctions on Russia and Belarus. In a rule published February 27 (the BIS Rule), the Commerce Department’s Bureau of Industry and Security (BIS) announced that, effective February 24, the United States:

• Expanded the scope of products, equipment, parts, components, accessories and attachments that require license for export or reexport to, or transfer within, Russia
• Expanded the reach of export restrictions to include Belarus
• Switched to the use of the HTS-6 Code for determining which items would be subject to these sanctions, from previously relying on the HTS Description to make that determination

These changes represent a significant expansion in both the scope of goods subject to these sanctions and the challenges exporters will face in determining whether the sanctions apply to their items. For exporters who have continued to engage in permissible business with entities in Russia, and thus implemented measures to ensure compliance with existing sanctions, the changes will not only require a reexamination of existing actions, but also alteration of how these determinations are (or were) made. While the BIS Rule touts that it will be “easier to align the [Export Administration Regulations’] controls with those of US allies and partners,” it creates numerous challenges for US exporters. The rule is likely to result in continued, extensive “overcompliance” as exporters lean away from any activity that might run afoul of these rules.

CHANGING TO HTS-6

The BIS Rule, in an apparent bow to “partners and allies,” now requires US exporters (as well as foreign producers under the de minimis and foreign direct product rules, foreign reexporters, and foreign transferors) to exclusively use the HTS-6 Code (meaning the first six digits of the Harmonized Tariff Schedule of the United States classification) when determining whether an item is subject to these sanctions, for any items destined for Russia or Belarus, rather than the Schedule B Number. Given that US exporters routinely classify their items at the 10-digit Code level, this change in methodology will not only capture many more items, but also will require a change in perspective by US exporters, who may not be as familiar with using the HTS-6 Code approach.

The BIS announcement asserts that the HTS-6 Codes in use by allies and partners are “equivalent” to the HTS-6 Codes that will now be applied under the new sanctions rule. As a practical matter, this is likely the case in many instances, as it is the 8- and 10-digit references that distinguish the precision in the US system. Further, it does not require any reclassification by US exporters, since the HTS-6 Codes are simply the first six numbers of the HTS-8 or HTS-10 codes already in use. BIS also believes that by moving to the HTS-6 Codes, exporters will be prevented from “identifying an item at the 8- or 10-digit level as a way to try to evade” existing controls. This suggests that BIS may be reacting to efforts by some exporters to reclassify their items following enactment of the original restrictions.

The BIS Rule expresses the intent that this change will capture a much broader swath of goods than might otherwise have been eligible for export to Russia, indicating that the “items added include a variety of electronics, industrial machinery, and equipment.” To that end, the measure is intended not only to “align” with partner’s actions, but also to further limit Russian and Belarusian “access to items that enable Russia’s military capabilities and sources of revenue.”

REORIENTING THE ANALYSIS

While the change to the HTS-6 Code from the HTS-8 or HTS-10 Codes acts to expand the scope of items covered by the sanctions, BIS also elected to alter the primary manner for determining whether an item is subject to these restrictions. The BIS Rule requires a further change in the way that US exporters make these determinations. Before this new rule, in the existing Russia sanctions rules, BIS had directed exporters to focus on the HTS Description when assessing whether an item was subject to the sanctions. The HTS description was “determinative in identifying the items that require a license” under the Russia sanctions.

The BIS Rule abandons that approach, however, and now directs US exporters to rely on the HTS-6 Code, which “will control for determining the license requirement” under these regulations. Even if an item could meet the HTS Description, the HTS-6 Code “will control.” Conversely, if an item fits within the HTS-6 Code but does not appear to meet the HTS Description, it is controlled. BIS describes this change as one that is “preferable from a consistency and precision perspective.”

Perhaps more notable, BIS anticipates this will make enforcement “easier” by simplifying the analysis for items that require a license under these sanctions. Unlike the prior regulations, both BIS and the exporter will be readily able to discern which products are subject to these restrictions, as the HTS-6 Code represents the highest-level analysis and is rarely the point at which disagreement occurs.

OTHER CHANGES

The BIS Rule includes a number of other changes, some conforming and some additive to the sanctions scope in place, but all of which impact compliance. These include the following:

• In a more administrative change (but an expansion as well), the BIS Rule also further aligns the controlled items listed in Supplement No. 2 to part 746 with those in Supplement No. 4 to part 746. Previously, the Supp. 2 items list had not included the reference to parts, components, accessories, and attachments that was in Supp. 4. The BIS Rule expands the Supp. 2 list to include those additional items. Supp. 2 was also amended to refer to Belarus as well as Russia.
• The United States has recognized that several partners and allies have committed to implementing substantially similar export controls on Russia and Belarus, and, in recognition of that commitment, Supplement No. 3 to part 746 includes a list of countries to which licensing requirements on foreign-produced items do not apply. This rule adds Taiwan to the existing list of 36 excluded countries.
• The BIS Rule adds 322 HTS-6 Codes to Supp. 4 of part 746, corresponding to a variety of electronics, industrial machinery, and equipment that will now require a license for the export or reexport to, and transfer within, Russia or Belarus.
• The rule clarifies that the controls extend to transfers (in-country) in addition to exports and reexports to Russia and Belarus. This will likely have limited impact, as most exporters were treating in-country transfers as licensable.
• To Supp. No. 5, the BIS Rule adds 276 “luxury goods” items. Why BIS felt it was necessary to refer to all of these as “luxury goods” is unclear, but may have to do with the desire to continue the impression that the sanctions are not meant to target average Russian citizens. Nonetheless, the sanctions now require licenses to provide fairly ordinary household items to Russia or Belarus, including, for example: air conditioners, refrigerator-freezers, cooking appliances, dishwashers, washing machines, dryers, coffee makers, and toasters; communication items like smartphones and other telephones, modems, radio/television and related items; electronics such as computers, calculators, keyboards, scanners, magnetic media entry devices, magnetic disk drives, storage units, and ATMs; and certain types of spark ignition and compression ignition piston engines and turbojet and other aircraft parts. The carveout for items controlled under Export Control Classification Number (ECCN) 5A992 or 5D992 (mass-market encryption commodities and software as classified in accordance with EAR § 746.17(b)) applies to the luxury goods sanctions, so that no separate license requirement is imposed on the excluded goods when they include these mass market items.
• Supp. 6’s list of chemical and biological weapons–related EAR99 items that require a license to or within Russia and Belarus was expanded to “better align” with US allies’ and partners’ controls on these items. The BIS Rule also adds explanatory notes to Supp. 6 to “facilitate understanding of the controls” by, for instance, clarifying the definition of parts, components, and accessories to include consumables. Supp. 6 does not include HTS-6 codes, so exporters will need to carefully review the specific descriptions to determine whether their products are controlled.
• Not surprisingly, given the reports that Iran has provided drones to Russia and other assistance, the BIS Rule establishes a new list in Supplement 7 to part 746, imposing licensing requirements on generally low-tech EAR99 items, including semiconductors destined for Iran, regardless of US person involvement.
• The rule also creates a new Iran Foreign Direct Product Rule for certain identified items. The Supplement, which designates restricted exports by HTS-6 Code, will allow the BIS to monitor such exports, which were previously not as restricted, despite expansive sanctions against Iran.
• The BIS Rule also revises the Russia/Belarus Foreign Direct Product Rule to include EAR99 items found in unmanned aerial vehicles (UAVs) containing parts and components with US-origin markings as an effort to ensure that US products are not provided to Iran for use in the manufacture of UAVs to then be used by Russia in Ukraine.

Through two final rules also published on February 27, BIS added 86 entities located in Canada, China, France, Luxembourg, the Netherlands, and Russia to the Entity List for acting contrary to US national security and foreign policy, including aiding Russia’s defense sector and supporting Russia’s continued operations in Ukraine. See the two rules: Additions of Entities to the Entity List and Additions of Entities to the Entity List; Revisions of Entities on the Entity List.

OFAC AND STATE ALSO TAKE ACTION

In addition to the expansive actions under the BIS Rule, other US government agencies joined in the flurry of sanctions activity. The Department of Treasury’s Office of Foreign Assets Control (OFAC) took the following actions:

• Added 83 entities and 22 individuals to the Specially Designated Nationals and Blocked Persons (SDN) List under Executive Order 14024. Reliance on Executive Order 14024 means that the designations have secondary sanctions application
• Designated a number of additional Russian financial institutions, making it that much more difficult to make payments in Russia without violating US sanctions
• Issued two new general licenses to allow wind-down operations and rejection of transactions (GL 60) and wind-down of some securities and derivatives transactions (GL 61) involving some of the designated financial institutions
• Amended existing general licenses to ensure conforming effects, including:
  • Updating GL 8F to add certain of the newly-sanctioned financial institutions to the authorization to process energy-related transactions
  • Revising GL 13D to extend the authorization for US persons to pay certain taxes and fees and receive certain authorizations from the Central Bank of the Russian Federation, the National Wealth Fund, and the Ministry of Finance, provided the transactions are “ordinarily incident and necessary to day-to-day operation in Russia”
  • Clarified in FAQ 1118 that the payment of an “exit tax” prior to divestment of Russian assets is not authorized, as it is not considered ordinarily incident and necessary to the wind down of activities in Russia. Notably, OFAC clarifies that a license may be required for “US persons whose divestment will involve an ‘exit tax.’” US sellers involved in transactions involving Russian assets should be mindful of this clarification, as a US license may be required for the payment of a Russian or Belarusian exit tax, even if a non-US entity makes the payment.
• Expanded Russian sectoral sanctions to include Russia’s metals and mining sector, with explicit clarification that the action also includes secondary sanctions for non-US persons. OFAC indicates that it will soon publish regulations defining the metals and mining sector to include “any act, process, or industry of extracting, at the surface or underground, ores, coal, previous 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.” It is unclear at this time how expansive this definition will be in application and whether it will apply to, for instance, minerals or gases extracted in Russia, but sold elsewhere. No automatic sanctions appear to arise as a result of this particular action. Rather, OFAC now has a legal basis to sanction individuals and entities operating within this sector. US entities sourcing natural resources will need to exercise increased caution and ensure that no one in their supply chain is a sanctioned entity through designation or ownership.

The US Department of State also participated in the sanctions action, announcing visa restrictions on 1,219 members of Russia’s military, and designating three Russian military officials for gross human rights violations, making them and their immediate family members ineligible for entry into the United States. Relying on Executive Order 14024, the Department of State also designated individuals and entities complicit in Russia’s actions in Ukraine, entities involved in expanding Russia’s future energy production and export capacity, individuals and entities in Russia’s advanced technology sector, and entities that develop and operate Russia’s nuclear weapons.

PRESIDENTIAL ACTION

The White House also joined in. President Biden issued two relevant proclamations on February 24. The first imposed additional tariffs on Russian-origin imports in an effort to reduce US reliance on Russia. The import duties will affect over 100 metals, minerals, and chemical products valued at approximately $2.8 billion, and will (1) double duties from 35% to 70% for most Russian metals and metal products and (2) increase duties to 35% for many other Russian goods.

The White House’s second action announced that beginning March 10, 2023, duty rates under Section 232 will increase to 200% for Russian aluminum and aluminum derivatives, as well as for aluminum and aluminum derivatives in which any amount of primary aluminum used to manufacture the articles is smelted or cast in Russia. This action comes on the heels of the US Court of Appeals sustaining broad presidential powers under Section 232 to implement “continuing” measures to address the national security risks cited in the 232 determination. Whether these particular tariffs will be challenged is unclear, but they further test the limits of the Congressional 232 delegation of authority to the executive branch.

The supply chain implications of these actions are significant. While importers have had to be vigilant to ensure that they are not engaging with sanctioned Russian suppliers, these new measures dramatically increase the compliance risks and require further diligence to ensure that goods and materials entering the US are not and do not include Russian-origin merchandise, even when dealing with non-Russian suppliers. This risk is now even greater when dealing with countries that are not actively participating in the implementations of sanctions against Russia.

These actions collectively represent a dramatic increase in the economic sanctions levied against Russia and Belarus for their continued actions in Ukraine and an increase to a greater level the potential for penalties on those who would facilitate and participate in evasion efforts.

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