Former Officials Say Complexity of New Sanctions, Export Control Regimes on Russia Have Chilling Effect

Even before new sanctions and export controls targeting Russia take full effect, many companies are deciding that compliance and due diligence costs are not worth the potential profits of continued business dealings in Russia and Belarus, former U.S. export control and sanctions officials said, speaking at a Washington International Trade Association panel on March 10.

Because the Russia sanctions regime was "essentially put in place over a weekend" (see 2203020072), it created overcompliance and precompliance as companies tried to quickly navigate it, said Clay Lowery, former Treasury Department assistant secretary-international affairs. Likewise, Kevin Wolf, former Bureau of Industry and Security assistant secretary-export administration, said that BIS is "certainly aware" that companies are often scared of doing business with prohibited entities due to the cost of navigating new and complex rules and that the cooling effect is a component of the design of the new export control regime.

Wolf added that, in the case of export controls on Russia, BIS “bent over backwards not to impose controls on products used by ordinary Russian consumers," which added complexity to the new rules. This effort is contrary to previous sanctions regimes like those on Iran or North Korea, which were subjected to country-wide export controls that were simple to navigate for companies. Companies are practicing a form of voluntary compliance but stopping or slowing business dealings with Russia, he said.

BIS's "novel" approach in applying the foreign direct product rule has had a particularly chilling effect, Wolf said. "Nothing like it has ever been done, because most companies don't have a clue whether their products are controlled." Even under normal circumstances, compliance practice is "until you know the impact of the rules, you shut off all of your exports," he said.

The foreign direct product rule has only been used once before. on Huwaei in 2020, so many export lawyers and professionals are still unfamiliar with its nuances, Wolf said. Its application to Russia, which begins March 26, "effectively subjected the entire planet to U.S. export controls, using not the leverage of dollars ... but the leverage of U.S. equipment and software," Wolf said. The FDPR covers "wholly foreign-made items -- no U.S. dollars, no U.S. persons ... no U.S. intersection of any sort except the use of a piece of production equipment," he said.

Although enforcement is not perfect, foreign companies can often be coerced by threatening use of the entity list for non-compliance, Wolf said. He cited a comment by Secretary of Commerce Gina Raimondo, who said earlier this week that Commerce can "essentially shut" down any Chinese company that defies the sanctions, including Semiconductor Manufacturing International Corporation (see 2203080053).