Article Law360

Cos. Must Prepare for Toughening Russia Sanctions

29 August 2018

On Aug. 27, 2018, the U.S. Department of State enacted the first round of sanctions against Russia pursuant to its Aug. 6, 2018, determination under the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991, or the CBW Act.[1][2] These sanctions trigger a three-month period after which additional sanctions are likely to be imposed.

Several weeks earlier, on Aug. 1, 2018, U.S. senators led by Lindsay Graham, R-S.C., and Robert Menendez, D-N.J., introduced the Defending American Security from Kremlin Aggression Act of 2018, or DASKAA, a comprehensive piece of Russia sanctions legislation.[3]

For now, the Trump administration’s exercise of its waiver authority leaves significant exceptions under the CBW Act sanctions for exports to the Russian private sector. It further suggests that the administration could also take a similar, tempered approach to imposing sanctions in the next round. Nonetheless, Congress’ continued focus on enhanced U.S. sanctions on Russia, and the availability of additional, severe financing and trade restrictions through both existing and proposed legislation, would appear to indicate that companies with direct or indirect Russia-facing business and investments should pay close attention to sanctions changes in the coming months.

The View From Washington

The CBW Act sanctions reflect a finding that the Russian government was responsible for the March 2018 poisoning of the Skripal family with nerve agents in the United Kingdom. In announcing the sanctions, the State Department indicated that the action was taken “to punish egregious acts.”[4]

These sanctions would also appear to be a response to continued criticism that the Trump administration has not done enough to hold Russia accountable for election interference, including not following through on imposing all of the sanctions mandated by Congress under the Countering America’s Adversaries Through Sanctions Act, or CAATSA.[5]

With those concerns in mind, and with midterm elections approaching in November, the bipartisan introduction of DASKAA represents what Sen. Graham termed “crushing sanctions.”[6] Whether that proposed legislation will actually become law remains to be seen.

Nonetheless, the intensifying pressure on Russia has triggered a pile-up of potential sanctions that may be forthcoming, reflecting Congress’ push to move even beyond the measures implemented and set in motion by the separate authority of the executive branch. For the foreseeable future, these developments would seem to project a largely negative outlook for U.S.-Russia relations.

The View from Brussels

The U.K. government has hailed the CBW Act sanctions as a “strong international response” to the Skripal poisoning, and has called on the EU to take a similarly “comprehensive” approach towards Russia.[7][8] However, the EU, for its part, seems reluctant to do so — perhaps in part because of an interest in trying to influence Russian policy through dialogue, and because of its dependence on Russian gas. It has not imposed significant new sanctions on Russia since 2014, and with Brexit on the horizon, the U.K.’s ability to drive policy within the 28-nation bloc — which requires unanimous approval of all member states in order to enact new sanctions — is waning.

While the first wave of CBW Act sanctions may have only limited impact on EU trade with Russia, further U.S. sanctions on the horizon could make significant waves in Europe. For example, the next round could impose sweeping restrictions on U.S. export-controlled items that would even apply to EU persons who deal in such items, while DASKAA could usher in new “secondary sanctions” targeting non-U.S. companies that support the Russian energy sector or deal with certain oligarchs.

The prospect of such measures, along with repeated U.S. threats to impose sanctions targeting the Nord Stream 2 gas pipeline, seems likely to drive concerns in Brussels that, as with Iran, the United States is getting ready to impose “extraterritorial” sanctions, which could hit EU companies and financial institutions.[9]

Sanctions Now in Effect

The first tranche of CBW Act sanctions now in effect focuses on export restrictions, as well as some prohibitions on financial assistance.

Export Restrictions

There are new restrictions on exporting to Russia goods, software, technology and services subject to U.S. export controls. For example:

Defense articles: For defense articles on the United States Munitions List, whose export is regulated by the State Department, the sanctions prohibit such exports to Russia outright. These sanctions are effective immediately, regardless of whether parties are acting under pre-existing contracts, and licenses authorizing the exports will be terminated.
“Dual-use” items: For “dual-use” items on the Commerce Control List, whose export is regulated by the U.S. Department of Commerce, the sanctions impose certain export controls on what the department terms “national security-sensitive” items. These may be, but are not necessarily, those items on the Commerce Control List that are identified as being controlled for export on the basis of national security. In this case, the underlying statute authorizes pre-existing contracts to continue, and there is no indication in the notice implementing the CBW Act sanctions that licenses will be terminated.
Exceptions: The export restrictions also contain important exceptions. For example, license applications for exports (i) to wholly owned U.S. subsidiaries in Russia or (ii) for commercial end uses in Russia and civil end-users in Russia, may still be permitted. Also, applications for government space cooperation and space launches similarly may be permitted. In addition, exports pursuant to the terms of nine license exceptions — including for encryption items, for temporary exports and for servicing and replacing parts and equipment — remain permitted. These exceptions will enable many U.S. companies — even those in the technology sector — to continue commerce for now.

Financial Assistance

The CBW Act sanctions deny Russia arms sales financing and credit, credit guarantees and other financial assistance by any U.S. government department, agency or instrumentality, including the Export-Import Bank. The State Department was also authorized to terminate assistance to Russia under the Foreign Assistance Act of 1961 (concerning economic and social development), but exercised its authority to waive application of this restriction on the basis that doing so was “essential to the national security interests of the United States.”

Sanctions Taking Effect in Three Months

In addition to triggering the sanctions described above, the State Department’s Aug. 6 determination under the CBW Act kicked off a three-month review period regarding Russia’s chemical and biological weapons programs, after which the Trump administration can impose further sweeping sanctions against Russia.

Specifically, the statute calls on the president to certify to Congress that (1) Russia is no longer using chemical or biological weapons in contravention of the CBW Act; (2) the Russian government has provided “reliable assurances” that it will not do so again; and (3) the Russian government is willing to permit inspections by U.N. observers or other internationally recognized observers.

If the president cannot make this certification within the required time frame, then he is required to impose at least three of the following six types of sanctions:

U.S. government opposition to multilateral development bank assistance to Russia;
A prohibition on U.S. financial institutions extending credit to the Russian government;
A total prohibition on all exports to Russia of dual-use items (except for food and agricultural commodities);
A ban on the import of Russian-origin items;
Downgrading or suspension of diplomatic relations with Russia; and
Suspension of the authority of state-owned Russian air carriers (such as Aeroflot) to engage in transportation to or from the United States.

As the State Department made its determination under the CBW Act on Aug. 6, the president will be required to impose the above sanctions on or around Nov. 6, unless Russia provides adequate assurances regarding its weapons programs (which seems unlikely). Notably, the above sanctions provide for potentially sweeping trade and financial restrictions targeting Russia, which could significantly impact any company doing business with Russia.

It should be noted, however, that given the Trump administration’s use of its waiver authority under the CBW Act in issuing the first round of sanctions on Aug. 27, it would be reasonable to expect that the administration will take a similarly measured approach in the second round. Of course, with U.S. elections coming up, and given the fractious state of U.S.-Russia relations, circumstances can change.

Pending Legislation With Further Potential Impact

DASKAA is the latest congressional proposal to respond to Russian interference in the United States' democratic processes and national security, and is currently viewed as the Russia sanctions legislation most likely to gain passage.

DASKAA contains a number of sanctions provisions of particular import to finance, energy and technology companies with Russian business or clients. DASKAA would require the president to impose a broad set of sanctions focused on Russian sovereign debt, foreign energy projects, crude oil development and production and malicious cyber activities. It also contains a requirement that the State Department assess whether Russia should be designated as a state sponsor of terrorism, which would lay the foundation for a full trade embargo.

More specifically, DASKAA would amend CAATSA to include new sanctions on:

U.S. persons’ transactions involving, financing of or dealings in Russian sovereign debt, as well as U.S. persons’ dealings with key Russian financial institutions including VTB Bank, Sberbank, Gazprombank and the Bank of Moscow;
Political figures, oligarchs and other persons who facilitate illicit and corrupt activities, directly or indirectly, on behalf of Russian president Vladimir Putin, as well as persons and financial institutions that engage in “significant transactions” with such persons;
Persons who knowingly invest in energy projects outside of Russia that have a total value of greater than $250 million (or are “reasonably expected” to have such a value) and are supported by a Russian parastatal entity or any entity owned or controlled by the Russian government;
Persons who knowingly sell, lease or provide Russia with certain high-value goods, services, technology, financing or support (defined as those with a $1 million fair market value or $5 million aggregate fair market value over a 12-month period) which could “directly and significantly contribute” to new Russian projects to develop or produce crude oil resources; and
Persons who engage in “significant transactions” with any person in Russia who has the ability to support or facilitate malicious cyber activities, or who is owned or controlled by, or acting on behalf of, a person who engages in such “significant transactions.” Note that authorities have significant discretion in interpreting these terms.

The DASKAA sanctions would be subject to a presidential waiver for national security interests, and also contain provisions for cooperation and alignment with European allies, which may provide further grounds for the administration to decline to impose otherwise mandatory provisions. Accordingly, it is possible that some or all the DASKAA sanctions may ultimately fail to take effect, even if they pass into law.

If implemented, however, these sanctions would pose new compliance challenges for financial institutions and other parties that deal with the Russian finance, energy and technology sectors, in particular.

Key Takeaways

The impact of the first round of sanctions under the CBW Act is somewhat limited, as the sanctions target what little remains of U.S-Russia defense trade, as well as exports of “national security-sensitive” dual-use items to Russian government entities and state-owned enterprises.

The next round of sanctions, however, which are expected in early November, could usher in sweeping trade and financial restrictions, although the Trump administration could continue to take a measured approach.

Notably, any export restrictions imposed under the CBW Act apply not only to U.S. persons, but also to all persons worldwide who export or re-export U.S. export-controlled defense articles and dual-use items (such as U.S.-origin items, and non-U.S.-origin items that incorporate certain levels of U.S. content).

It will be important to examine the terms of license exceptions, to check whether dual-use items subject to export controls are still eligible to be exported without a license after imposition of the sanctions.

It will be necessary to perform proper due diligence on counterparties (including for indirect sales through parties such as distributors), as whether ultimate end-users actually are commercial or instead are connected with the Russian government may be important in determining whether exports remain permissible or are now prohibited.

Despite some uncertainty as to DASKAA’s prospects for passage in the near or medium term, if enacted, this legislation’s new restrictions targeting the Russian financial and energy sectors could have a significant impact on the Russia sanctions landscape.

Mario Mancuso, Sanjay José Mullick and Anthony Rapa are partners and Abigail E. Cotterill is of counsel at Golden Flag & Ellis LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Chemical and Biological Weapons Control and Warfare Elimination Act of 1991, 22 U.S.C. § 5605 (1991).

[2] Determinations Regarding Use of Chemical Weapons by Russia Under the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991, 83 Fed. Reg. 43,723–43,724 (2018).

[3] Defending American Security From Kremlin Aggression Act of 2018, S. 3336, 115th Cong. (2018).

[4] Press release, U.S. Department of State, Previewing the Imposition of Chemical and Biological Weapons Control and Warfare Elimination Sanctions on Russia (Aug. 8, 2018).

[5] Countering America’s Adversaries Through Sanctions Act, 22 U.S.C. § 9401 (2017).

[6] Press release, Office of Sen. Lindsey Graham, Graham, Menendez, Gardner, Cardin, McCain, Shaheen Introduce Hard-Hitting Russia Sanctions Package (Aug. 2, 2018).

[7] Britain welcomes U.S. sanctions for Russia over Skripal poisoning, Reuters (Aug. 8, 2018), https://www.reuters.com/article/us-britain-poison-skripal-usa-may/britain-welcomes-u-s-sanctions-for-russia-over-skripal-poisoning-idUSKBN1KT2LX?il=0.

[8] Jeremy Hunt wants ‘malign’ Russia to face tougher sanctions, BBC News (Aug. 21, 2018), https://www.bbc.com/news/uk-politics-45250069.

[9] Bojan Pancevski and Emre Peker, U.S. Opposition to Pipeline Hangs Over Meeting Between Putin and Merkel, Wall Street Journal (Aug. 18, 2018), https://www.wsj.com/articles/u-s-opposition-to-pipeline-hangs-over-meeting-between-putin-and-merkel-1534582801?ns=prod/accounts-wsj.

Mario Mancuso, P.C.

Practices