Regulatory intelligence for US exporters

Russia Export Applications Expected to Drop, Compliance to Grow More Challenging

The U.S.’s new Russia export controls could lead to a short-term spike in license applications, but volumes will likely taper off later this year as businesses divest from Russia, said Nazak Nikakhtar, a former senior U.S. export control official.

The Bureau of Industry and Security last week introduced two new foreign direct product rules to cover certain exports to Russia, which could substantially cut the country’s military from acquiring certain foreign-produced goods made with U.S-origin content (see 2202240069). In its announcement, BIS said it expects the rules to result in at least another 2,000 additional license applications per year. BIS processed just over 40,000 license applications last year (see 2202100020).

Nikakhtar, a trade lawyer at Wiley and former BIS acting undersecretary, said BIS may see a short-term increase in license applications as companies continue filling their existing contracts in Russia. But she also said those numbers will eventually fall as more sanctions and export controls are announced and wind-down periods come to a close (see 220307003).

“I think over the course of the next six months, you're not going to see that many license applications as businesses” communicate to distributors “that I really can't transact with you,” Nikakhtar said in a recent interview. "There may be a license here or there to finalize what my obligations are,” she added. “But over the next several months, you would actually see, overall, far fewer license applications for exports to Russia.”

Although many companies may ultimately choose to exit the Russian market, the U.S. has announced a number of temporary carve-outs and general licenses to allow certain activities to continue, especially for sanctions issued by the Office of Foreign Assets Control. While the exemptions are meant to mitigate unintended consequences on industry, they also can make compliance more challenging, said Elyse Martin, an Akin Gump sanctions lawyer and former OFAC official.

Martin, speaking during a March 7 webinar hosted by the law firm, said many of the sanctions imposed so far against Russia aren't full blocking sanctions and include “a substantial number” of general licenses. “When a person is sanctioned without much by way of allowances, when they're blocked, it's easy to understand for everyone that they're off limits,” Martin said. But “this scalpel and not hammer approach often means significant compliance challenges for those in the private sector."

She said companies should read any Russia-related exemption or wind-down period “very carefully,” especially if they intersect with other U.S. authorities, such as sanctions used in combination with export controls. “Sometimes the breadth of the prohibition or any exclusions from the GL are not obvious on the face of the document,” Martin said.

Companies should also conduct “more frequent screening” to ensure they’re complying with the sanctions, she said. “We've reached now a point where longstanding compliance controls in place with respect to Russia may not be sufficient,” Martin said, pointing to the rapid pace new sanctions are being announced. Over the last two weeks, the Biden administration has sanctioned Russian military entities, state-owned companies, banks, oligarchs and government officials, and placed export controls on a broad portion of the Commerce Control List, including oil refinery equipment and certain foreign-produced technologies (see 2202240069, 2203020072, 2202280043, 2203030073 and 2203040020).

“We have some clients that are coming to us essentially on a transaction-by-transaction or trade-by-trade basis,” Martin said.

As more sanctions are announced, Russia-related compliance will likely grow more challenging and expensive, Martin said. “More frequent screening and more expensive diligence and analysis may be required, both to know who you're dealing with and who they're beneficially owned by,” she said, “and also to ascertain whether the sanctions analysis has changed since you last looked at this.”

Even with the pace of sanctions, Martin said OFAC has been helpful, responding “quickly and nimbly” to requests for guidance. “It's hard from the OFAC and the government side of the table to be able to anticipate all of the impacts and results that flow from sanctions,” Martin said. But “despite the U.S. government's continued ratcheting up of pressure on Russia, this does not mean that OFAC’s doors are closed.”