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Sanctions Against Russia Put Squeeze on U.S. Exporters

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By Mike Frail, Senior Advisor

As if export control reforms weren’t enough of a burden, U.S. exporters now have their plates pretty full with various sanctions imposed against Russia. U.S.-Russia relations have been strained since the annexation (or occupation) of Crimea, rebel fighting in eastern Ukraine, and the tragic downing of Malaysian Flight MH17. These circumstances have led the U.S. to ratchet up sanctions against Russia.

The first wave of sanctions came in March with the annexation of Crimea. In response, President Obama issued the first of three Executive Orders, blocking property interests and authorizing economic sanctions against any persons undermining the democratic processes in the Ukraine. That was quickly followed by a second executive order, which was aimed at Russian government officials and people providing them material support. It also began addressing the amount of ownership in companies that certain individuals and entities had (7 total). The Office of Foreign Assets Control (OFAC) then followed suit by sanctioning additional entities.

With all these sanctions coming out the woodwork, U.S. exporters were no doubt becoming all the more wary of business partners in Russia. Of course, since every U.S. exporter dutifully complies with denied party screening requirements, I would contend that there was no need to worry, right? To which my exporting readers would respond, “Yes, Mike!” (Good answer).

It didn’t take long for the situation to escalate with Russia. In late April, the Bureau of Industry & Security (BIS) imposed limits on exports and re-exports of high technology that had the potential to enhance Russia’s military capabilities. Any licenses to export or re-export said items were denied and already issued licenses meeting those criteria were revoked. 13 companies were also added to the Entity List. Can you see the pattern developing here?

As the crisis in eastern Ukraine continued to worsen, the Treasury Department in mid-July instituted additional sanctions, which were imposed on Russia’s financial and arms-related sectors. Then, on July 17, Flight MH17 was tragically shot down by what is believed to have been a Russian-made surface-to-air missile launched from rebel territory in eastern Ukraine. There were no survivors and it’s been argued that Russia continues to arm the rebels and may have stationed soldiers in the field with them. The shooting down of Flight MH17 led to additional Treasury Department actions against three of Russia’s largest banks, and the blocking of assets owned by United Shipbuilding Corporation, which is involved in both military and civilian ship construction.

The latest round of export restrictions by the BIS limits energy sector exports to Russia, specifically those related to exploration, production from deep-water (greater than 500 feet), arctic offshore, and shale projects that have the potential to produce oil. There also was one addition to the Entity List, United Shipbuilding.

With the tightening of these sanctions, exporters must now be concerned with specific commodities and ECCNs. Click here to read the ruling. Companies who have subsidiaries overseas, specifically in the EU, should bear in mind the EU has Russia sanctions as well, which address many of the same export concerns as the U.S. government. i.e. OFAC, BIS, etc.

In all, the latest sanctions affect several sections of the Export Administration Regulations (15 CFR Parts 732, 738, 740, 742, 744, 746 and 774). That’s a lot of material! Now some cargo carriers are asking for exporters to confirm that they are abiding by European Union sanctions on Russia.

So, what does all this mean? Simply put, it’s going to get progressively more difficult to export to Russia. Exporters need to be aware of the sanctions against Russia and understand how they apply to American business operations. Sanctions aren’t to be taken lightly, as one could easily find an export violation hidden in the weeds. Recent action taken by U.S. Customs & Border Protection finds the agency carefully scrutinizing cargo bound for Russia, including increased container examinations.

Exporters should continue their due diligence:

  • know the client
  • screen all parties to the transaction
  • review product classifications
  • maintain export records as required

U.S.-Russia relations certainly don’t appear to be moving in the most positive direction. Unless Crimea is returned to the Ukraine or the pro-Russian rebels in eastern Ukraine are defeated, it’s possible this frigid spell between the U.S. and Russia could turn into a second cold war.

Ukraine & Russia Sanctions (U.S. Department of State)

Mike Frail is Senior Advisor for Mohawk Global Trade Advisors. Click here to read more about Mike Frail.

 

 

 

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