In a continuing rise of sanctions against Russia, the US Commerce Department's Bureau of Industry and Security (BIS) issued a final rule, effective August 6, 2014, amending the Export Administration Regulations (EAR) and imposing further export controls against Russia's energy sector. These trade-focused sanctions add to the several rounds of primarily financial sanctions already imposed by the US Treasury Department's Office of Foreign Assets Control (OFAC). (For more information on the OFAC sanctions, see "New sectoral sanctions and new SDNs: US expands Ukraine-related sanctions" and "The Ukraine crisis sanctions update: Are the sanctions matching the rhetoric?")

The new export control sanctions:

  • Expand license requirements, and restrictions, on commodities for use in Russia's energy sector—particularly for exploration or production from deepwater (greater than 500 feet), Arctic offshore or shale projects.
  • Add a Russian state-owned company (United Shipbuilding Corporation) to the BIS Entity List, effectively prohibiting this company from receiving any US-origin commodities, even from non-US sources.
  • Revoke Russia’s favorable licensing policy for items controlled for National Security reasons.

On March 24, 2014 in Executive Order 13662 the President announced his intention to expand sanctions to certain sectors of the Russian economy including the financial services, energy, metals and mining, engineering and defense and related materiel sectors. While sanctions have been imposed on individuals, companies and financial transactions carried out by specific institutions, these new sanctions are the first to target a sector (in this case the energy sector) of the Russian economy.

Change to the License Requirements and Review Policy for Russia

The BIS rule establishes a new provision of the EAR entitled "Russia Energy Industry Sector Sanctions"(§ 746.5). This new provision imposes controls and a BIS license requirement (and a presumption of denial) on

"the export, reexport, or transfer (in-country) of any item subject to the EAR listed in Supplement No. 2 to this part [746] and items specified in ECCNs 0A998, IC992, 3A229, 3A231, 3A232, 6A991, 8A992, and 8D999 when the exporter, reexporter, or transferor knows or is informed that the item will be used directly or indirectly in Russia's energy sector for exploration or production from deepwater (greater than 500 feet), Arctic offshore, or shale projects in Russia that have the potential to produce oil or gas or is unable to determine whether the item will be used in such projects in Russia."

The controlled items include, but are not limited to, drilling rigs, parts for horizontal drilling, drilling and completion equipment, subsea processing equipment, Arctic-capable marine equipment, wireline and down hole motors and equipment, drill pipe and casing, software for hydraulic fracturing, high pressure pumps, seismic acquisition equipment, remotely operated vehicles, compressors, expanders, valves and risers.

The new BIS rule also imposes the license requirement of § 746.5, as well as other restrictions, on certain other US-origin commodities. The list below contains the Export Control Classification Numbers (ECCN) that are now subject to § 746.5’s license requirement:

  • 0A998: Specific oil and gas exploration items, software, and data
  • IC992: Commercial charges and devices containing energetic materials, n.e.s., and nitrogen trifluoride in a gaseous state (see List of Items Controlled
  • 3A229: Firing sets and equivalent high-current pulse generators (for detonators controlled by 3A232), as follows (see List of Items Controlled)
  • 3A231: Neutron generator systems, including tubes, having both of the following characteristics (see List of Items Controlled)
  • 3A232: Detonators and multipoint initiation systems, as follows (see List of Items Controlled)
  • 6A991: Marine or terrestrial acoustic equipment, n.e.s., capable of detecting or locating underwater objects or features or positioning surface vessels or underwater vehicles; and "specially designed" "parts" and "components," n.e.s.
  • 8A992: Vessels, marine systems or equipment, not controlled by 8A001 or 8A002, and "specially designed" "parts" and "components" therefor, and marine boilers and "parts," components," "accessories," and "attachments" therefor (see List of Items Controlled)
  • 8D999: "Software" "specially designed: for the operation of unmanned submersible vehicles used in the oil and gas industry

These items are subject to a "presumption of denial" by BIS. Moreover, no EAR License Exceptions are available to overcome the prohibitions of 764.5, except for License Exception GOV.1

The Entity List

BIS added United Shipbuilding Corporation to its "Entity List." United Shipbuilding Corporation is a Russian state-owned company that manufactures ordnance and related items and also engages in shipbuilding, repair, and maintenance.

Companies on the Entity List are subject to stringent US export controls. Among other things, exports of items subject to the EAR to any company on the Entity List require a license from BIS—but must overcome a license review policy of "presumption of denial." These license requirements apply to any transaction where items are to be exported, re-exported, or transferred (in-country) to United Shipbuilding, or a transaction in which United Shipbuilding acts as a purchaser, intermediate consignee, ultimate consignee, or end-user.

As a result, United Shipbuilding is now subject to a total cutoff from the US market. OFAC had previously included this company on the List of Specifically Designated Nationals and Blocked Persons, making it unlawful for any US Person to do business (without an OFAC license) with United Shipbuilding. With BIS' Entity List announcement, now United Shipbuilding effectively cannot import US-origin items subject to export controls, even via a re-export of such items from non-US sources.

Revocation of Russia's Favorable Status

The BIS Final Rule also amends the EAR to remove Russia’s favorable license review status for items subject to the EAR’s national security controls. Thus, BIS will now only approve license applications to export or reexport items subject to national security controls to Russia upon a case-by-case determination that the items are for civilian use or would not make a significant contribution to the military potential of Russia that would prove detrimental to U.S. national security.

Conclusion

The new sanctions impact both US and non-US companies engaged in trade in Russia's oil and gas industry. They do not include restrictions on the sale of oil or gas, however, and their scope is limited to certain facets of oil and gas exploration and production. Nonetheless, the new measures represent a shift in the US sanctions against Russia, as these are the first sanctions that directly target a specific sector of the Russian economy.

Another important aspects of the new regulations is the lack of the so-called "saving clause"—a mechanism which "grandfathers" in goods in transit when new sanctions are implemented. Because there is no saving clause in the BIS sanctions, goods in transit as of August 6, 2014, cannot be delivered without a license. If this is an indication that future sanctions in additional sectors of the Russian economy also will not include a savings clause, it makes the prospect of trade with Russia at the very least un-predictable because the trading public will not know when additional sanctions will be imposed with immediate effect. Therefore, each shipment to Russia will carry with it a certain risk that was not there prior to the issuance of these regulations.

This modification to the regulations — and the continually changing situation overseas — requires heightened diligence by US non-US persons alike, and active monitoring of the policy landscape, to ensure ongoing compliance.