Coalition Countries Should Expand Russia Export Controls, Penalties, Researchers Say

The U.S., the EU and other countries imposing export controls against Russia need to better harmonize their restrictions, including by developing a “centralized” list of controlled dual-use goods, treating license applications the same way across all jurisdictions and creating coalition-wide foreign direct product rule restrictions, researchers said this month. They also said enforcement authorities need to impose harsher fines against corporations involved in illegally sending goods to Russia to incentivize them to invest more heavily in compliance.

Researchers with the ​​Kyiv School of Economics and Yermak-McFaul Expert Group on Russian Sanctions, an international group studying how to better implement restrictions on Russia, said there are still “significant inconsistencies” between various countries’ export control regimes nearly two years after Moscow’s invasion of Ukraine. They said in a January report that export controls, including license procedures and penalties for violators, “need to be harmonized across coalition jurisdictions.”

They specifically said non-U.S. countries should impose similar restrictions to the U.S. foreign direct product rules, which place license requirements on foreign goods made with certain U.S. technology or software. The EU could especially benefit from export controls that “apply extraterritorially the way U.S. ones do,” the report said, which can help “address the large share of goods that never physically enter the jurisdiction of countries that have imposed restrictions.”

While the EU’s 11th sanctions package in June (see 2306230013) may have introduced controls similar to the FDPR, “these EU measures certainly do not ensure the same extraterritorial application of export controls that the FDPR triggers,” the report said. “We believe that all export controls coalition countries need to establish regulations that ensure the application of restrictions to goods containing certain inputs, independent of where the actual manufacturing and/or sales take place.”

They also called for stronger U.S. enforcement of the FDPR, saying a “notable portion of goods” produced by U.S.-based companies in other countries “find their way to Russia via intermediaries.” U.S. authorities “appear to be lacking data for cross-checking voluntary corporate reporting to monitor FDPR compliance or conduct effective on-site checks.”

The researchers also urged the U.S. and its allies to simplify and expand their controls, including by capturing “important inputs” the Russian military uses that “are not yet export controlled.” Countries can do this by adopting a “centralized approach for developing dual-use goods lists.”

While the U.S. and its partners have made progress on a central export control list through a set of 45 Harmonized System codes that the U.S., the EU, Japan and others designated as high-priority, the report said that list should capture a wider range of items. “The current focus on specific products leaves similar goods unregulated, allowing considerable room for circumvention schemes,” it said. Enforcement for those items is challenging because it’s impossible to physically inspect each piece of cargo being shipped to see if it contains products that meet specific HS codes.

“Using broader categories, at least on the six-digit HS code level -- on which trade codes are standardized -- would close loopholes and simplify implementation,” the report said.

Licensing procedures for export-controlled goods destined to Russia should also be “rules-based, transparent, and harmonized across jurisdictions,” the report said. The researchers pointed out that EU exporters can choose to obtain a license from the member state authority that applies “the least-strict standards,” and called on the bloc to scale back its license exemptions, which “represent important loopholes through which Russia continues to be able to import controlled goods.”

Countries also can take steps to boost compliance by their private companies, the report said, including by imposing “significant monetary penalties” for export violations. They said companies trading high-priority goods “lack sufficient motivation for undertaking compliance efforts that effectively address” Russian attempts at sanctions evasion.

The researchers suggested making export penalties “proportional to the profits generated by the underlying illicit transactions,” and said any corporate settlement agreements “should include significantly higher” fines. They also said all countries imposing export controls against Russia should criminalize export and sanctions violations.

“Only sufficiently-severe consequences -- monetary or otherwise -- together with a bigger risk of their materializing, will change businesses’ risk calculations when it comes to compliance,” the report said.