In the months following Russia's invasion of Ukraine, many Western companies withdrew their products from Russian markets.1 In response, the Russian government has authorized a wide range of consumer, industrial, and technology products for "parallel import," permitting Russian businesses to import products that are not licensed for sale or distribution in Russia without obtaining permission from the rights holder.

Many companies may view parallel imports of their products as implicating commercial and possibly contractual concerns, but few may be aware that recent changes in U.S. export controls against Russia could raise meaningful compliance implications for both U.S. and non-U.S. companies in this context.

In this Client Update, we outline recent developments in U.S. export controls that significantly expand the scope of items captured by restrictions targeting Russia, and the increased risks presented by Russia's approach to parallel imports. We then discuss the steps that companies should consider taking to mitigate the risks and protect themselves in the aggressive sanctions and trade controls enforcement environment.

Expanded Export Restrictions on Russia2

U.S. export controls historically have applied primarily to military goods and those nonmilitary goods, software, and technology that could have military applications or raise national security concerns. These non-military items are regulated under the Export Administration Regulations ("EAR"), which set restrictions on transferring controlled items to certain jurisdictions or end-users or for certain end-uses.

The recent export controls targeting Russia have extended licensing requirements to luxury goods and certain commercial and industrial items that were not previously controlled for export. They also have barred the unlicensed export to, or transfer within, Russia of all items controlled under the EAR, including items that did not previously require a license for export to Russia. As a result, many companies that historically did not face U.S. export compliance obligations are now more likely to be subject to them.

New Restrictions on Luxury Goods

Effective March 11, 2022, the U.S. Commerce Department's Bureau of Industry and Security ("BIS") amended the EAR to impose restrictions on the export, reexport, and in-country transfer of identified "luxury goods" (i) to or within Russia, or (ii) to specified Russian oligarchs and "other malign actors" targeted by U.S. sanctions, wherever located.3

Each restricted "luxury good" is identified by the good's number and description in the Census Bureau's Schedule B for filing export shipment information through an interdepartmental system maintained by U.S. Customs and Border Control.4 Covered goods include, among others, (i) alcohol and tobacco products; (ii) perfume, makeup, and skincare products; (iii) handbags and luggage; (iv) furs, skins, feathers, silk, silk products, carpets, and textiles; (v) high-end clothing and athletic gear, generally defined as items valued at more than $300; (vi) jewelry, watches, and metals; and (vii) vehicles and engines.

These goods are subject to a licensing requirement (with a presumption that a license will be denied) so long as they are subject to the EAR, which means, for this purpose, that the goods are of U.S. origin (wherever located) or located in the United States (regardless of origin). For U.S.-origin items outside the United States, the restrictions apply both to U.S. persons and to non-U.S. persons dealing with these goods.

New Restrictions on Commercial and Industrial Items

Since the annexation of Crimea in 2014, BIS has maintained a prohibition on export, reexport, and in-country transfer of certain items subject to the EAR if those items were intended to be used in exploration or production of Russian energy resources.

In May and September 2022, BIS greatly expanded this restriction by establishing new licensing requirements (subject to a presumption that a license will be denied) for a wide range of items not previously subject to specific controls under the EAR. For the purposes of these restrictions, most of the items are identified by their Harmonized Tariff Schedule codes, as supplemented by Schedule B codes from the Census Bureau. They include, among others, (i) industrial and machinery equipment; (ii) power transmission equipment; (iii) diodes and semiconductor devices and processors; (iv) chemicals; and (v) motors, engines, pumps, and generators.

Commercial and industrial items restrictions apply analogously to the luxury goods restrictions: they extend to any person dealing with goods subject to the EAR, meaning U.S.-origin goods (wherever located) and goods located in the United States (regardless of origin).

Embargo on All Items Controlled under the EAR

In addition to the above, BIS has imposed a broad embargo on the export, reexport, or in-country transfer to or in Russia of any items specifically controlled under the EAR, thereby restricting any transfers of those items to Russia.5 The EAR controls not only physical goods, but also software and technology, and the embargo is likely to capture a broad range of technology products, including computer hardware and software. This includes goods made outside the United States so long as they include more than a de minimis amount of controlled U.S.-origin goods or software (generally over 25% for commodities). In other words, if an item produced outside the United States incorporates controlled U.S. goods or software that constitutes more than 25% of the item's total value, that item may itself become subject to the EAR and the broad embargo against Russia.

New "foreign direct product" rules targeting Russia further extend the reach of U.S. export controls to certain items produced outside the United States if those items are the "direct product" of (i.e., produced by the use of) controlled software or technology or are the "direct product" of equipment that is itself the "direct product" of controlled U.S.-origin software or technology.6 Among the more important classes of products captured by these restrictions are semiconductors manufactured outside the United States in factories that use U.S.-controlled software or technology, or equipment produced from such software or technology, for fabrication, testing or other production activities.

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Footnotes

1. See, e.g., New York Times, Companies Are Getting Out of Russia, Sometimes at a Cost (Oct. 14, 2022), https://www.nytimes.com/article/russia-invasion-companies.html.

2. Nearly all of the measures discussed in this Client Update also apply to Belarus, which has been targeted for its support and assistance to Russia's military.

3. See BIS, 87 Fed Reg 14785 (Mar. 16, 2022), 15 CFR 746.10.

4. See 15 CFR 746, Supplement No. 5.

5. In addition, BIS maintains a broad embargo on all items intended for Russian military end-uses or end-users. See 15 CFR 744.21(a)(2).

6. More stringent "foreign direct product" rules apply if a party to the proposed transaction is identified in the EAR as a Russian military end-user

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.