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:
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.
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.”
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.
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:
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.
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:
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.
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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