Posted By Administration,
Thursday, October 9, 2014
Updated: Tuesday, October 7, 2014
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by Melissa Miller Proctor, Esq., Sandler, Travis and Rosenberg, P.A.
Last month, both the United States and the European Union continued their pressure on Russia by expanding the scope of existing economic sanctions and imposing new trade restrictions. Questions galore have been pouring in from retailers, manufacturers, importers and exporters as to the impact that these new requirements will have on their current dealings with Russia and the Ukraine. In line with previous articles on this topic, the following provides an overview of the latest trade restrictions and will hopefully dispel the myth that U.S. and European companies may no longer deal in or with Russia.
As of September 12, 2014, with regard to the sanctions imposed by the United States, the following trade restrictions are currently in place:
- The U.S. Commerce Department's Bureau of Industry and Security ("BIS") amended the Export Administration Regulations ("EAR") by adding ten new Russian firms to its Entity List. Designation on the Entity List generally triggers a license requirement for the export, reexport or foreign transfer of all items subject to the EAR (including items classified as EAR99) to designated Russian entities – applications for such licenses will be subjected to a policy of denial by the BIS. Five of the newly added Russian firms are defense companies. The remaining five firms operate in Russia's energy sector; however, the BIS narrowed the licensing requirements for these energy firms such that an export or reexport license is required only when the shipper knows or has reason to know that the item will be used 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 that have the potential to produce oil. It is unlikely that U.S. companies marketing consumer products are dealing with these newest additions to the Entity List. More importantly, provided that U.S. companies are actively screening their customers, orders, and supply chain partners against the various U.S. restricted parties lists, any inadvertent dealings with designated Entity List firms should already be blocked.
- The BIS also amended the EAR by imposing export and reexport license requirements on certain items destined to Russia when those items are intended for a military end use or military end users (i.e., the shipper at the time of export knows or has reason to know that their products will be received by such end users or put to a military end use in Russia). The only items that are subject to this restriction are identified in Supplement No. 2 to Part 744 of the EAR, which includes certain: numerically controlled machine tools; oscilloscopes and transient recorders; computers and telecommunications equipment; sensors and lasers; etc. Most U.S. companies marketing consumer products (rather than those covered by this restriction) will not be impacted by this new restriction.
- The EAR was amended to prohibit the export, reexport or transfer of certain integrated circuits for spacecraft and related items, as well as items classified in a 600-Series Export Control Classification Numbers ("ECCNs"), which consist of Wassenaar Arrangement items and other munitions items that do not warrant control as defense articles under the International Traffic in Arms Regulations ("ITAR") – clearly these are not the types products with which most U.S. companies operating in consumer goods markets are concerned.
- As reported earlier this summer, the BIS rolled out what it refers to as the Russian Industry Sector Sanctions in Part 746.5 of the EAR. These sanctions prohibit the export or reexport of certain items where the shipper knows (i.e., has actual or constructive knowledge) or has been informed by the BIS that they will be used 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 that have the potential to produce oil. The specific items that are covered by the new sanctions are identified by their Harmonized System classifications in Supplement No. 2 to Part 746.5 or are classified in certain ECCNs. Again, this restriction should not be relevant for U.S. consumer goods companies unless they are marketing these specific items and know (or have reason to know) that the end user in Russia will be putting these products to the above described oil and gas activities.
- Like the BIS, the U.S. Treasury Department's Office of Foreign Assets Control ("OFAC") also implemented new restrictions on Russia. OFAC added five Russian defense companies to its Specially Designated Nationals (SDN) Lists. U.S. persons are prohibited from dealing with SDNs without prior authorization from OFAC as well as with any firm that is owned or controlled by designated SDNs (i.e., 50% or more owned by one or more SDNs in the aggregate). However, companies that have implemented sound restricted parties list screening processes should already be blocking potential dealings with SDNs and other prohibited parties.
- In addition, OFAC also published a series of Directives that prohibit U.S. persons from providing financing or otherwise dealing in certain new debt or equity with Russian companies designated on the Sectoral Sanctions Identification List ("SSIL"). U.S. persons are also prohibited from providing, exporting or reexporting any U.S. origin or non-U.S. origin goods, services, or technology to designated SSIL energy sector firms in Russia in support of exploration or production of deepwater, Arctic offshore, or shale projects in Russia or maritime areas claimed by Russia. Prohibited parties here include firms that are 50% or more owned by one or more designated SSIL firms in the aggregate. It should be noted that designated SSIL firms are not SDNS and OFAC does not prohibit or restrict other transactions with these targets, such as normal trade related activities that fall outside the scope of the proscribed oil exploration or production activities referenced above. Thus, U.S. companies that do not engage in these activities will not likely feel any impact by these restrictions with regard to their dealings with Russia – unless, of course, an SDN is somehow involved.
Jumping across the pond, the European Union announced a new round of sanctions against Russia that also became effective on September 12, 2014. Under the current EU trade restrictions on Russia, EU companies may not:
- Sell, supply, transfer, or export dual-use items (or provide related technical assistance, financing, financial assistance, and brokering services) to any Russian party listed in Annex IV of Council Regulation 960/204
- Provide certain services that are necessary for deepwater oil exploration and production, arctic oil exploration and production, or shale oil projects in Russia
- Provide financing and financial assistance regarding the supply of items described on the EU Common Military List
- Sell, supply, transfer, or export dual-use goods and technology if they are destined for a military end use or military end user in Russia
- Sell, supply, transfer or export technologies to Russia (or provide technical assistance, brokering or financial assistance) relating to certain oil and gas exploration and production commodities – the covered technologies are identified by their Harmonized Systems tariff classifications
- Sell, supply, transfer or export arms to Russia
- Deal in certain new loans or equity involving designated Russian financial and energy firms
- Import products into the EU from Crimea or Sevastopol
The latest EU restrictions on Russia should have little or no impact at all on most European retailers and manufacturers. First, these companies are not likely dealing in the types of proscribed goods and activities described above. Plus, European companies, like their U.S. counterparts, should already be blocking potential dealings with prohibited Russian individuals and firms as part of their customer, order and supply chain partner screening processes. With regard to the restriction on imports of goods from Crimea or Sevastopol into the EU, this prohibition will not apply to goods that are accompanied by a valid certificate of origin from a recognized Ukrainian government authority.
Thus, both U.S. and European companies that deal in Russian consumer markets will largely be unaffected by the latest round of sanctions, provided that they are screening and are not otherwise engaging in the narrow scope of goods and activities described above. As a best practice and safety precaution, many companies have started requesting end use certifications from their Russian customers and distributors to substantiate that their products will not be used by any prohibited end users or in any prohibited end uses described above. As advised previously, companies should continue their vigilance in monitoring the situation with Russia and the Ukraine and keeping abreast of new developments as they arise.
Melissa Miller Proctor is a Partner with Sandler, Travis and Rosenberg, P.A., resident in the firm's Arizona office. With significant experience in export controls, customs laws and regulations, and international trade, Melissa works closely with clients to expand their markets while ensuring their regulatory compliance. She may be reached at (480) 305-2110 or via e-mail at firstname.lastname@example.org.
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