The invasion of Ukraine resulted almost immediately in a range of new license requirements for exports to Russia. (See Feb. 28 blog post, The Russia-Ukraine War: EAR Updates You Need to Know.)
The new export controls, detailed in the Federal Register, cover Categories 3-9 of the Commerce Control List (CCL) and include a variety of product categories related to the aerospace industry: electronics; sensors and lasers; navigation and avionics; and aerospace and propulsion. The rule includes the Donetsk, Luhansk and Crimea regions of Ukraine. The Bureau of Industry and Security (BIS), which oversees Export Administration Regulations (EAR), is drawing a firm line by setting “… a license review policy of denial applicable to all of the license requirements being added to this rule, with certain limited exceptions.” Importantly, license applications to exports items for safety of flight will be evaluated on a case-by-case basis.
For businesses that export such goods and services, the new controls should mean a serious review of export licenses, and they could result in a loss in business. As an example, British news outlet The Guardian reported on March 2 that The Boeing Co. had halted shipments of aircraft parts and service to Russia. Those items are needed to maintain the U.S.-made aircraft that comprise a third of Russia’s civilian fleet. And on March 18 BIS effectively banned the service and support of dozens of specific civil aircraft by anyone, anywhere after those commercial and private jets were exported and reexported to Russia in contravention of the new EAR restrictions.
But for most companies in the aerospace industry, sanctions against Russia are likely to be the source of less disruption than fast-rising demand as global markets recover from two years of pandemic.
Here’s why:
The United States is the world’s largest exporter of arms and munitions, accounting for 37 percent of all arms sold, according to SIPRI (the Stockholm International Peace Research Institute). But 80 percent of exports from the U.S. aerospace industry are classified as civilian use, according to the Aerospace Industries Association (AIA), which tracks U.S. exports in three distinct but overlapping categories: civilian aerospace, defense aerospace and defense/non-aerospace. Nearly half of those exports went to just five destinations—all of which continue to maintain close ties with the U.S. economy: Germany, France, Canada, United Kingdom and Japan.
(Interestingly, China was the top destination for U.S. aerospace exports as recently as 2017, but with relations deteriorating, it had fallen to No. 7 in 2020—the most recent year for which figures are available.) The upshot is that controlled products already represent the smallest slice of aerospace exports—and the volume of those products that go to Russia or its closest allies is only a fraction of that.
While the export of defense-related products dropped 17 percent in 2020 as a result of the pandemic, civilian aerospace exports were down a record-setting 39 percent, according to AIA. Global demand for civilian aircraft, components and services is expected to rebound during 2022 to something close to pre-pandemic levels. And with Russia’s direct challenge to NATO, defense exports are likely to see a surge as well. Germany – the top importer of U.S. aerospace goods – announced three days after the invasion of Ukraine that it would finally increase defense spending to more than 2 percent of its GDP 100 billion Euros—up from 47 billion in 2021.
The operational challenges to meeting such sudden increases in demand are likely to have far more impact on the industry than the new export controls that are part of the sanctions against Russia. Meanwhile, since 2013, the ongoing Export Control Reform Initiative has reclassified thousands of military parts and components, moving them from ITAR to the new 600 series of EAR classifications. The purpose was to reduce confusion over classification and jurisdiction for products and services that don’t provide a critical military or intelligence capability.
For exporters that are experiencing new and increasing orders, that means it’s important to check the licensing status of products that may have come under this initiative.
As a refresher in the aftermath of the pandemic, here are the basic resources:
- ITAR: (International Traffic in Arms Regulations)
- Enforced by the U.S. State Department’s Directorate of the Defense Trade Controls (DDTC)
- Regulates the manufacture, sale, and distribution of defense and space-related products and services as defined in the United States Munitions List (USML).
- ITAR is relatively uncomplicated; if an item is on the USML, a license is required to export it.
- If an item is on the USML, the software used to run that device is also on the list – as are any drawing, manuals, algorithms and other technical data related to the device. The State Department takes a broad view of what it means to export data; even a conversation with foreign nationals on U.S. soil might qualify.
- Consideration of license applications for items covered under ITAR can be open-ended and difficult to resolve.
- EAR: (Export Administration Regulations)
- Enforced by the U. S. Commerce Department’s Bureau of Industry and Security (BIS)
- Regulates dual-use items – including products, related technology, data and services – that are designed for commercial use but which can have military applications.
- Items controlled under EAR are identified by their Export Control Classification Number (ECCN), and are collected on the Commerce Control List (CCL).
- Things get more complicated with EAR, where some items are unregulated and others may require a license to export. The status of an item will depend on a number of variables, such as its ECCN classification, the country it’s going to, and other parties that might be involved in the transaction – for example as a subcontractor who is using the product to build a larger system that will then be sold to another user.
- License applications for items covered under EAR are generally handled in a timely and repeatable process.
- Sanctions Programs and Country Information
- Enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC)
- This is the third and least orderly branch of federal export control. It operates outside the scope of EAR and ITAR to enforce sanctions against countries, entities and individuals.
- Due to the fluid nature of global sanctions, OFAC maintains several sanctions lists and recommends checking its website regularly for changes and updates.
- Federal Register
- Managed by the National Archives
- Serves as the daily journal of the U.S. government, and is the central location where updates to ITAR and EAR are accessible through a searchable database.
Do you have questions about export compliance challenges for your aerospace company? Visit www.davidatkinsontv.com to learn about our company, our faculty, our staff and our esteemed Export Compliance Professional (ECoP®) certification program. To find upcoming e-seminars, live seminars and live webinars, and to browse our catalog of 80-plus on-demand webinars, visit our ECTI Academy. You also can call the Export Compliance Training Institute at +1 (540)-433-3977 for more information.
Scott Gearity is President of ECTI, Inc.