United States government agencies escalated sanctions and tightened rules on exports this month in connection with Russia’s enduring attacks on Ukraine – and at least one of these actions is expected to impact fashion and footwear brands. Implemented on September 15, the Department of Commerce’s Bureau of Industry and Security (“BIS”) issued a Final Rule applying further export-focused restrictions that not only expand the scope of Russian industry sector sanctions to include items that could potentially be useful for “chemical and biological weapons production capabilities” but that refine existing controls on “luxury goods” (namely, apparel and footwear products) to put the U.S. in line with requirements implemented by its allies.
In addition to including “lower-level items potentially useful for Russia’s chemical and biological weapons production capabilities and items needed for advanced production and development capabilities to enable advanced manufacturing across a number of industries,” the new BIS rule revises previously-enacted controls by lowering the dollar value thresholds that trigger legally-mandated license requirements in order for certain “luxury goods” to be exported to Russia and/or Belarus.
(There are two license requirements for “luxury goods” as defined by the BIS-administered Export Administration Regulations (“EAR”) and identified in Supplement No. 5 to Part 746: One for “luxury goods” that are being exported, reexported or transferred to or within Russia or Belarus; and another for “luxury goods” that are being exported, reexported or transferred to “certain Russian or Belarusian oligarchs and malign actors, regardless of their location.”)
While the list of 400 or so “luxury goods” identified in Supplement No. 5 includes everything from nuclear reactors and vehicles to wine and spirits, leather goods, furs, carpets, and artworks, clothing and footwear are primarily affected by BIS’s new threshold revisions. “Tennis, basketball, gym, [and] training shoes” that are “valued at greater than or equal to $1000 per unit wholesale price in the U.S.,” for example, are among the various types of garments and/or footwear that are subject to decreased price thresholds, as are things like “women’s or girls’ swimwear, not knitted or crochet, and valued at greater than or equal to $1000 per unit wholesale price in the U.S.”
“In reviewing our allies’ value threshold exclusions,” BIS said in a statement on September 15 that it “determined that the $1,000 Per Unit Wholesale Price in the U.S. dollar value exclusion for clothing and shoes was more permissive than those adopted by our allies.” As such, the new rule reduces the dollar value threshold for clothing and shoes from $1,000 to $300 Per Unit Wholesale Price. BIS estimates that these changes will result in a reduction of 10 license applications submitted per year.
While the reduction in dollar thresholds brought about by the new BIS rule – which went into effect on September 15 – serves to extend the licensing requirement for exports to a wider pool of less expensive “luxury goods,” Thompson Hine LLP’s Scott Diamond, Samir Varma, and Francesca Guerrero state that “even with these revisions certain luxury goods entries continue to not warrant a dollar value exclusion and those entries remain unchanged by this rule.” (These include other “luxury goods” like jewelry, leather goods, etc.)
The new BIS rule comes on the heels of earlier rulemaking from the U.S., which first saw BIS impose restrictions on certain “luxury goods” destined for Russia and Belarus and certain “Russian and Belarusian oligarchs and malign actors” in the wake of Executive Orders from President Biden on March 11, including EO 14068, which restricts exports of luxury goods to Russia and Belarus. In accordance with the luxury goods-centric rule that BIS enacted in March, direct – or indirect – exports, reexports, or transfers of such goods from the U.S. or by a “U.S. person” to Russia or Belarus require a BIS export license.
Because requests for licenses are reviewed with a “presumption of denial,” the rule “effectively restricts U.S. retailers and businesses from suppling any luxury items” to Russia and/or Belarus, Morgan Lewis’s Ezra Church, Gregory Parks, Rachelle Dubow, and Emily Kimmelman stated at the time. In other words, the BIS rule established “a high bar to obtaining an authorization, thereby, acting effectively as a ban on licenses.”
Still yet, it is “important to note,” according to K&L Gates attorneys Jeffrey Orenstein, Steven Hill, Stacy Ettinger, Jerome Zaucha, and Donald Smith, that the BIS export restrictions apply to more than just U.S.-origin luxury goods. “First, the restrictions apply to all goods listed under the final rule that are subject to the EAR,” which includes products that are: (1) U.S.-origin (wherever they are located); (2) Located in the U.S. (whatever their origin); (3) Produced outside the U.S. with more than 25 percent (by value) U.S.-controlled content; and (4) Produced outside the U.S. and covered by the special “foreign direct product rules” for Russia, which was discussed in a prior alert.
Beyond that, they contend that “even with regard to products that are not subject to the EAR, the text of [Biden’s] executive order indicates that U.S. persons, wherever they are located, are barred from the exportation, re-exportation, sale, or supply of covered luxury goods to Russia, Belarus, and designated parties,” which makes for an even broader scope.
“Combined with the broad range of U.S. and multilateral sanctions already issued,” the Morgan Lewis attorneys asserted that such “luxury goods” export bans “further tighten restrictions on commercial activities with Russia and are designed to impact Russia’s wealthiest citizens most directly by ensuring that these luxury products are no longer available to them.”
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