Russian Energy Denied Detonators as U.S. Exports Halted

Russia’s energy industry will be denied detonators from the U.S. used for oil and gas drilling as the Obama administration expands its response to the annexation of Crimea by suspending sales of goods with military uses.

The State Department said yesterday it halted licensing for exports of defense items and services on March 24. The Commerce Department posted a notice on its website saying it had also suspending export licensing, effective March 1.

Goods licensed by Commerce alone represented $1.5 billion, or 14 percent of all U.S. exports to Russia last year.

“This is a lot more significant than blocking some oligarchs,” said Michael Burton, a Washington lawyer who works on export controls. “In light of the allegations that have been made, how could we continue to license, say, rifle scopes to Russia?”

The U.S. has previously imposed sanctions on business leaders and government officials with ties to Russian President Vladimir Putin, as well as on a bank. President Barack Obama this month targeted seven Russian officials and four people from Ukraine. Last week he blocked travel and froze assets of 20 more Russians and Bank Rossiya. The U.S. House and Senate yesterday passed separate bills to impose additional sanctions.

“Obviously we’ve been taking steps as part of our ongoing response” to Russia’s actions, Marie Harf, a State Department spokeswoman, told reporters yesterday. The hold on export licenses is “just the latest,” she said.

$11 Billion

The U.S. exported about $11 billion worth of goods to Russia in 2013, primarily for the transportation, machinery and chemical industries, according to Commerce Department data.

The new limits came just 15 months after the U.S. repealed Cold War-era trade restrictions with Russia.

“Just as companies are really starting to export, now we’ve got this problem,” Marianne Rowden, president of the Washington-based American Association of Exporters and Importers, said by phone. “It is unfortunate.”

Of the $1.5 billion worth of exports to Russia licensed by the Commerce Department last year, $798 million were for detonators. Those are used in oil and gas drilling, mining and construction, Burton said. Russia is the world’s third-largest producer of oil after Saudi Arabia and the U.S., according to the Energy Information Administration.

The Commerce Department also granted licenses for $367 million in software products, according to the Bureau of Industry and Security’s annual report. Other goods licensed last year include encrypted software, ammunition for firearms, spacecraft, chemicals, optical sensors and cameras.

The Commerce Department action was previously reported by Foreignpolicy.com.

Military, Terrorists

Comparable figures for licenses issued by the State Department weren’t available.

Officials from the Russian Embassy in Washington didn’t respond to a request for comment.

U.S. companies need government approval to export commercial goods that also may be used by the military or terrorists. The State Department oversees licenses for defense products, while the Commerce Department controls permits for commercial items that also have a military application, known as dual-use products.

“A lot of what is going to be caught are dual-use items used in” industries, especially energy, Burton, a partner at Jacobson Burton PLLC, said in an interview. The firm reported the filings March 25 on its blog.

Neither Commerce nor State have said they will retract licenses that have already been granted or reject applications that have been filed, Burton said.

Hold, Deny

“The question will be whether it goes from hold to denial,” Burton said.

The step is “a sign that the administration is actively looking at things they can do to interdict the flow of goods,” said William Reinsch, the former head of the Commerce office responsible for export controls and the head of the National Foreign Trade Council in Washington. The Washington-based group represents exporters such as Boeing Co. (BA) of Chicago and Exxon Mobil Corp. (XOM) of Irving, Texas.

Reinsch said technology companies are most concerned by the change.

“It’s very calibrated,” he said in an interview. “This is a little step, but it’s a sign that more steps could be coming.”

WTO Joined

Russia in 2012 joined the Geneva-based World Trade Organization, and the U.S. that year lifted trade restrictions put in place in the 1970s. The move was supported by companies including Boeing, General Electric Co. of Fairfield, Connecticut and Caterpillar Inc. (CAT) of Peoria, Illinois.

“We are closely monitoring the situation,” Seth Martin, a GE spokesman, said by e-mail of the U.S. action on export licenses. He declined to comment further.

Spokesmen from Boeing, Caterpillar and BSA/The Software Alliance also declined to comment. The Washington-based software group represents companies including Apple Inc. (AAPL), Microsoft Corp. (MSFT) and Oracle Corp. (ORCL) in dealing with international governments.

“Potentially, it could have a much larger commercial impact on U.S. companies than the sanctions Congress approved today,” Caitlin Webber, a Washington analyst for Bloomberg Industries, said in a phone interview of the U.S. action. “U.S. exporters could be collateral damage from this.”

To contact the reporters on this story: Brian Wingfield in Washington at bwingfield3@bloomberg.net; Mark Drajem in Washington at mdrajem@bloomberg.net

To contact the editors responsible for this story: Jon Morgan at jmorgan97@bloomberg.net Steve Geimann

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