Dentons US LLP : US arms embargo on Russia presents new commercial compliance issues

March 10, 2021

On March 2, 2021, the Department of State announced that it would add Russia to the list of countries subject to a policy of denial for exports of defense articles and defense services under Section 126.1 of the International Traffic in Arms Regulations ('ITAR'),¹ effectively imposing an arms embargo on Russia, with certain exceptions for space-related activities. This move was part of a multi‑agency undertaking to respond to the alleged poisoning and Russia's subsequent incarceration of Russian opposition leader, Alexey Navalny. As part of the coordinated effort, the Department of the Treasury's Office of Foreign Assets Control ('OFAC') also imposed targeted sanctions against seven Russian government officials,² the Department of State sanctioned three Russian entities,³ and the Department of Commerce's Bureau of Industry and Security ('BIS') added fourteen new Russia-related entities to the Entity List.⁴

Reports have surfaced that the Russian government dismissed the move, noting that no military equipment has been delivered to Russia from the United States since 1945. And Russia has been subject to certain restrictions applicable to Section 126.1 countries - for instance, unclassified software or data sent, stored, or taken outside of the United States using appropriate encryption is not considered an export under either the ITAR or the Export Administration Regulations ('EAR'), provided that the data is not intentionally stored in a Section 126.1 country or Russia.⁵ So, if arms sales have not occurred to Russia since World War II, and given existing restrictions, including those following from previous chemical-weapons based sanctions on Russia, what practical significance might this latest action have?

First, inclusion of a country in Section 126.1 triggers certain requirements and restrictions that do not apply in the case of other countries. Certain licensing exemptions under the ITAR are not applicable to countries listed in Section 126.1 or foreign nationals of those countries, or are subject to additional restrictions or requirements. Notably, authorized foreign consignees or end users of defense articles or defense services that intend to use the exemption in Section 126.18 of the ITAR⁶ as to dual and third-country national employees will now be required to screen such employees for substantive contacts with Russia. Depending on the subsection of Section 126.1 to which DDTC adds Russia, employees with such contacts may be subject to a presumptive risk of diversion unless DDTC determines otherwise. Additionally, inclusion of Russia in Section 126.1 may present obstacles in the event a United States company requires access authorizations under a DSP-5 or other vehicle for foreign person employees who are nationals of Russia, as such applications would become subject to a policy of denial. Finally, the exemption authorizing foreign persons who are 'bona fide and full-time regular employees of US institutions of higher learning' to access unclassified technical data in the US will no longer be available as to foreign nationals of Russia.⁷ As a result, the addition of Russia to Section 126.1 will, at a minimum, create potential compliance challenges with respect to dual and third-country national employees.

The action will also impose a mandatory disclosure requirement as to certain activities involving Russia. Specifically, parties are required to notify DDTC if they know or have reason to know of any proposed, final, or actual sale, export, transfer, re-export, or retransfer of articles, services, or data to a country listed in Section 126.1.⁸

The action will also, presumably, result in restrictions on the use of certain exceptions under the EAR. Countries added to Section 126.1 are also added to Country Group D:5 under the EAR.⁹ Certain licensing exceptions under the EAR are not available or are subject to limitations as to Group D:5 countries.¹⁰

DDTC has, however, indicated that it will allow some limited relief from the broad restrictions otherwise applicable to countries listed in Section 126.1. Specifically, it will allow, for a six-month period, case-by-case review of license applications in support of commercial space launches, as well as allowing continued use of certain ITAR exemptions for exports to Russia in furtherance of government space cooperation.

Taken as a whole, these actions serve as an early signal from the Biden Administration that it intends to hold Russia, as well as other state actors, accountable for what it deems to be failures to adhere to the norms of international behavior. Notably, the US government's actions were announced in coordination with actions against Russia by the European Union. From a broader policy perspective, this demonstrates the Biden Administration's prioritization of, where feasible, working with traditional allies to advance US foreign policy objectives, including in the deployment of sanctions and other restrictive measures to punish and deter malign activities. Dentons Regulatory and Compliance team will continue to monitor changes to US export controls and sanctions regulations as they relate to Russia.

1. 22 C.F.R. § 126.1. ↩
2. Press Release, U.S. Dep't of Treas., Treasury Sanctions Russian Officials in Response to the Novichok Poisoning of Aleksey Navalny (Mar. 2, 2021), available at https://home.treasury.gov/news/press-releases/jy0045. ↩
3. Press Statement, U.S. Dep't of State, Imposing Sanctions on Russia for the Poisoning and Imprisonment of Aleksey Navalny (Mar. 2, 2021), available at https://www.state.gov/imposing-sanctions-on-russia-for-the-poisoning-and-imprisonment-of-aleksey-navalny/. ↩
4. Press Release, U.S. Dep't of Commerce, U.S. Department of Commerce Adds 14 Parties to the Entity List for Support of Russian Weapons of Mass Destruction Programs and Chemical Weapons Activities (Mar. 2, 2021), available at https://www.commerce.gov/news/press-releases/2021/03/us-department-commerce-adds-14-parties-entity-list-support-russian.↩
5. 22 C.F.R. § 120.54(a)(5); 15 C.F.R. § 734.18(a)(5). ↩
6. 22 C.F.R. § 126.18 permits companies, governmental entities and international organizations to transfer unclassified defense articles, including technical data, to their dual and third-country full-time employees as long as they maintain 'effective procedures' to prevent diversion to prohibited destinations, entities, or for prohibited purposes.↩
7. 22 C.F.R. § 125.4(b)(10). ↩
8. 22 C.F.R. § 126.1(e)(2). ↩
9. 15 C.F.R. part 740, Supp. 1, Country Group D, note 1.↩
10. These largely relate to 600-series items and firearms, see, e.g., 15 C.F.R. §§ 740.9 (TMP), 740.10 (RPL), 740.14(h) (certain personal protective equipment under BAG, other than certain US government uses), but also to release of technology and source code to university employees under 15 C.F.R. § 740.13(f) (TSU). While the EAR restricts use of a number of exceptions in connection with spacecraft (9x515) items, BIS's implementation may track DDTC's with respect to certain space launches and cooperation. ↩