Russia Sanctions Update: 08-01-2017

CLIENT UPDATE:

The Future of U.S. Russia Sanctions

Passage by a vote of 98-2 in the Senate on July 27 of the Countering America’s Adversaries Through Sanctions Act (HR 3364), which had passed the House 419-3 on July 25, has made it likely that the current sanctions on Russia will be maintained and strengthened, and some new sanctions added. There were mixed signals from the White House regarding the President’s intent to sign the legislation last week, but the veto-proof majority in both houses makes it likely to become law in some form. Though the legislation also addresses sanctions on North Korea and Iran, its most far-reaching impacts for industry are likely to be from the Russia sanctions elements.

Summary of Significant Impacts

Among the most significant immediate impacts of its passage for industry would be:

A prohibition on participation by U.S. persons and persons in the United States in deepwater, Arctic or shale energy exploration and production projects worldwide, whenever an entity listed under Directive 4 as contributing to the situation in Ukraine has a one-third or greater interest in the project. This will dramatically expand the previous prohibition on participation in such projects only in Russia or Russian territorial waters.
Expansion of the prohibition on dealing in debt (to include debts of even shorter duration) and new equity investments in entities included on the list of Russian financial sector firms in Directive 1 and Energy sector firms in Directive 2.
A dramatic expansion of the defense sectoral sanctions to penalize any person who “engages in a significant transaction with a person that is part of, or operates for or on behalf of the defense or intelligence sectors” of Russia. The President would have discretion as to which entities to include in the list, to be published within 60 days of enactment. If robustly implemented, this provision will have the potential to impose secondary sanctions against any company around the world that buys arms from Russia (which in 2016 accounted for nearly 8 percent of global arms sales).

A more detailed description follows of the proposed new and expanded sanctions for activities concerning: (1) cyber security, (2) crude oil projects, (3) financial institutions, (4) corruption, (5) human rights abuses, (6) evasion of sanctions, (7) transactions with Russian defense or intelligence sectors, (8) export pipelines, (9) privatization of state-owned assets by government officials, and (10) arms transfers to Syria.

Codification of Existing Sanctions

Codifying the various Obama-era Executive Orders which imposed sanctions on Russia for its activities in eastern Ukraine and Crimea, as well as its malicious cyber activity, the new Act requires congressional notification and consent to terminate or waive those sanctions. Despite Congress’s intent to limit the President’s discretion to lift or modify sanctions, it does not expressly prohibit the issuance of general licenses, which can be used (as in the recent case of Sudan sanctions) to nearly the same effect as a general lifting.

Broadening of the Blocking Sanctions

Current blocking sanctions prohibit U.S. persons and persons within the United States from entering into any transaction which involves transferring, paying, exporting, withdrawing, or otherwise dealing in the property of interests in property of an entity or individual who has been listed as a Specially Designated National (SDN) because of that person’s involvement in Russian activities in the Ukraine, in Russian arms sales to Syria, or in certain malicious cyber activities.

This Act, if it becomes law, will expand the SDN listing authority to include:

any person who undermines cybersecurity against any person on behalf of the Russian government,
any person who provides material support to the Government of Syria in acquiring any defense articles, services or defense information,
any person responsible for or complicit in the commission of serious human rights abuses in any territory forcibly occupied or otherwise controlled by the Russian government, as well as any person who materially assists, sponsors, or provides financial, material or technical support, goods or services to such a person,
any foreign person who knowingly conspires to violate or causes a violation of the Russia Sanctions, and any foreign person who facilitates a transaction, including a deceptive or structured transaction, for or on behalf a person subject to the Russia Sanctions.

Broadening of Sectoral Sanctions

Current Sectoral Sanctions include persons in the Russian energy, financial and defense sectors not fully blocked as SDNs, but deemed to be contributing to the situation in Ukraine. Entities operating in these sectors are identified in a Sectoral Sanctions List (SSL). U.S. persons and persons in the United States are prohibited from undertaking specified financing or exporting activities with regard to those listed entities, as well as entities owned 50% or more in aggregate by such entities.

Sectoral sanctions do not block all transactions by U.S. persons or persons in the United States with listed entities, but the new Act broadens the scope of the prohibited transactions, as described below, and also authorizes the President to expand the sanctions to the Russian railway, metals, and mining sectors. (The House version removed the Senates inclusion of the shipping sector). There is a specific NASA exception written into the act to ensure that it does limit or restrict “the supply by any entity of the Russian Federation of any product or service, or the procurement of such product or service by any contractor or subcontractor of the United States” in connection with any space launch conducted for the NASA or another non-Department of Defense customer.

In the Financial Sector,

Financing -- U.S. persons and persons within the United States have been prohibited from providing financing to entities listed under Directive 1 with a maturity longer than 30 days, which would now be reduced to 14 days,
Privatization -- New secondary sanctions would be imposed against any persons investing $10 million or more to facilitate privatization of Russian state assets in such a way as to benefit Russian official s or their families.

In the Energy Sector,

Financing – U.S. persons and persons within the United States have been prohibited from providing financing to energy sector entities listed under Directive 2 with a maturity longer than 90 days, which would now be reduced to 30 days,
Providing goods services or technology to support Exploration and Production – U.S. persons and persons within the United States have been prohibited from providing, exporting, re-exporting, directly or indirectly, goods, services or technology in support of exploration or production of deep-water (>500 ft.), Arctic offshore, or shale projects in Russian territory or waters. This restriction would be extended to new projects anywhere in the world whenever an entity listed under Directive 4 has a one-third or greater interest in the project.
Energy Pipelines – This act would authorize (but not require) the imposition of new secondary sanctions on any person (including non-U.S. persons) making investments in or provision of goods, services, technology or support for the construction, modernization or repair of Russian energy export pipelines. Any investment over $1 million, or multiple investments totaling $5 million a year would subject the investor to sanctions, which many European companies involved in the Nord Stream 2 pipeline project fear would subject them to U.S. sanctions.
Crude Oil – This act would make mandatory the imposition of secondary sanctions on any person (including non-U.S. persons) making significant investments in Russian crude deepwater, Arctic offshore or shale oil projects, as described in the Ukraine Freedom Support Act of 2014.

In the Defense & Intelligence Sector,

Financing – U.S. persons and persons within the United States have been prohibited from providing financing to defense sector entities listed under Directive 3 with a maturity longer than 30 days, which is unchanged, but potentially eclipsed by the sanctions on defense transactions.
Defense and Intelligence Transactions – One of the most far-reaching expansions of secondary sanctions is the imposition of sanctions on any party which “engages in a significant transaction with a person that is part of, or operates for or on behalf of the defense or intelligence sectors” of Russia. The law would require the USG to issue guidance within 60 days of enactment to specify the persons subject to these new sectoral sanctions. If fully implemented, this provision will amount to a threat of secondary sanctions against any company around the world that buys arms from Russia.

The breadth of new sanctions, especially if robustly applied to secondary sanctions targets, has the potential to dramatically increase pressure on the Russian government, but also to negatively impact European and other foreign consensus on maintaining multilateral controls. We will provide further analysis of potential impacts if and as these sanctions are enacted into law and embodied in implementing regulations.