Russian Sanctions Redux: What the New Sanctions Bill (Soon to Be Law) Means For Trade with Russia

Russia today announced that it would seize two US properties and order the reduction in staff in the US Embassy in Moscow in retaliation for Congress’s passage of the bill.
 
In this first of three alerts, we examine the key provisions of the Russian sanctions portion of the Bill, called the Russia Sanctions Review Act of 2017 and examine what it means for companies that do business with Russia. There are numerous provisions so we first summarize the key takeaways, then provide short summaries of each of the major sanctions programs.

Key Takeaways

• The Obama Executive Orders sanctioning Russia are codified into law, meaning the President cannot terminate them without Congressional approval enacting the termination; [Section 222]
• There is a 30-day Congressional review of any presidential decision to terminate or waive sanctions on a sanctioned person or take any licensing action that significantly alters US foreign policy towards Russia, creating unprecedented Congressional oversight of Executive Branch sanctions determinations and OFAC licensing; [Section 216]
• ­OFAC Directive 1 (financial sector sanctions) will be amended to prohibit debt transactions with designated entities with a maturity of greater than 14 (instead of 30) days; [Section 223]
• OFAC Directive 2 (sanctions on the Russian energy sector) will be amended to prohibit debt transactions with designated entities with a maturity of greater than 60 (instead of 90) days; [Section 223]
• OFAC Directive 4 (additional sanctions on the Russian energy sector) will be amended to target new deepwater, Arctic offshore, or shale projects, of designated persons outside the boundaries of Russia and that are less than 50% owned (now just 33%) by designated persons; [Section 223]
• The President is required to impose sanctions on persons who knowingly engage in significant activities undermining cybersecurity, as well as any person who knowingly materially assists, sponsors, or provides financial, material, or technological support for, or goods or services to, those persons; [Section 224]
• The President is required to impose sanctions on foreign persons who knowingly make a significant investment in a special Russian crude oil project, as well as anyone knowingly engaged in significant transactions with those persons, and anyone who knowingly facilitated a significant financial transaction on behalf of any Russian SDN or blocked person; [Section 225 & 226]
• The Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014 is amended to require the President to impose sanctions in cases of significant corruption, foreign sanctions evaders, and serious human rights abusers in Russia; [Section 227]
• The President is required to impose sanctions on an entity that is knowingly engaging in “significant” transactions with “a person that is part of, or operates for or on behalf of, the defense or intelligence sectors of the Government of the Russian Federation, including the Main Intelligence Agency of the General Staff of the Armed Forces of the Russian Federation or the Federal Security Service of the Russian Federation.” The key terms are not defined; [Section 231]
• The President is allowed, in coordination with allies of the United States, to impose sanctions on any person determined to make an investment that directly and significantly contributes to Russia’s ability to construct energy export pipelines or sell, lease, or provide to Russia related goods, services, technology, information, or support of $1 million or more (or $5 million in one 12 month period); [Section 232]
• The President is required to impose sanctions on persons making an investment of $10 million or more that contributes to Russia’s ability to privatize state-owned assets in a manner that unjustly benefits Russian government officials, or their close associates or family members; and [Section 233]
• The President is required to impose sanctions on foreign person determined to have knowingly exported, transferred, or otherwise provided to Syria significant financial, material, or technological support that materially contributes to the Syrian government’s ability to acquire or develop WMD, their means of delivery, or conventional weapons. [Section 234]

Section 216 – Congressional Review of President’s Determination to Terminate Sanctions

In the provision perhaps most hotly disputed by the Administration, Congress imposes a 30-day Congressional review period on any action by the Administration, either to terminate or waive the application of Russian sanctions with respect to a person, or take any licensing action that “significantly alters United States’ foreign policy with regard to the Russian Federation.” The sanctions affected include those in:

• The Bill;
• The Executive Orders codified by Section 222 (see below); 
• The Support for the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014 (22 U.S.C. 8901 et seq.);
• The Ukraine Freedom Support Act of 2014 (22 U.S.C. 8921 et seq.); and
• The prohibition on access to the Russian Government properties located in Maryland and New York that the President ordered vacated on December 29, 2016.

The provision requires the President to transmit to Congress a report that describes the proposed action and the reasons for that action. Where the action is intended to significantly alter United States foreign policy with regard to the Russian Federation, the President’s report also must include a description of: (i) the significant alteration to United States foreign policy with regard to the Russian Federation; (ii) the anticipated effect of the action on the national security interests of the United States; and (iii) the policy objectives for which the sanctions affected by the action were initially imposed.  

During the 30-day review period, the President cannot take the proposed action unless Congress passes  a joint resolution of approval allowing him to do so. If instead Congress passes a joint resolution of disapproval relating to a report, the President may not take that action for a period of 12 calendar days after the date of passage of the joint resolution of disapproval, 10 days from the date of his veto, if he vetoes it, or not at all if the joint resolution of disapproval is enacted into law.
 
The level of Congressional review over individual sanctions termination and licensing decisions is in fact unprecedented, essentially placing Congress into the role of an OFAC oversight review committee. It remains to be seen whether this causes the Administration and OFAC either:

• To leave the Russian sanctions untouched rather than sending reports and having potentially painful reviews; or
• To send many reports to Congress in the hopes that over time Congress (and the public) become inured to them, and Congress fails to pass the necessary joint resolution of disapproval on the reports, allowing the actions to go through.

Section 222 – Codification of Sanctions Relating to the Russian Federation

In addition to expanding the Russian sanctions currently in place, the bill codifies the following EOs related to Russia:

1. 13660 (targeting certain persons contributing to the situation in Ukraine);
2. 13661 (targeting additional persons contributing to the situation in Ukraine);
3. 13662 (targeting additional persons contributing to the situation in Ukraine);
4. 13685 (targeting certain persons and prohibiting certain transaction involving Crimea);
5. 13694 (targeting certain persons engaging in significant malicious cyber-enabled activities); and
6. 13757 (taking additional steps to address significant malicious cyber-enabled activities).

Section 223 – Modification of Directives Under EO 13662

The bill expands and modifies the application of EO 13662, which applies to entities involved in the situation in Crimea, to state-owned entities operating in the railway or metals and mining sectors of the Russian economy. 

• Directive 1, which imposes certain sanctions on the Russian financial sector, will be modified so that all transactions in, provision of financing for, and other dealings in new debt or new equity may not exceed a 14-day maturity;
• Directive 2, which imposes certain sanctions on the Russian energy sector, will be modified so that all transactions in, provision of financing for, and other dealings in new debt may not exceed a 60-day maturity; and
• Directive 4, which also pertains to the Russian energy sector, will be modified so that sanctions are no longer limited to certain energy projects that have the potential to produce oil in Russia or in maritime areas extending beyond its territory, but now also target new deepwater, Arctic offshore, or shale projects in which that involve any person determined to be subject to the directive or the property or interests in property of such a person who has a controlling interest or a substantial non-controlling ownership interest in such a project defined as not less than a 33 percent interest. This expands Directive 4 sanctions outside the boundaries of Russia and from companies that are less than 50% owned (now just 33%) by persons designated under Directive 4. 

Section 224 – Sanctions on Activities of the Russian Government Undermining Cybersecurity

The bill instructs the President to, on and after 60 days enactment, impose sanctions on any person determined to knowingly engage in significant activities undermining the cybersecurity of any person. Any person that is owned, controlled, or acts on behalf of such person shall be similarly sanctioned. The sanctions include asset blocking and exclusion from the United States and revocation of visa or other documentation. The bill also instructs the President to impose:

• 5 or more of the sanctions described in section 235 (see below) with respect to any person that the President determine knowingly materially assists, sponsors, or provides financial, material, or technological support for, or goods or services (except financial services) in support of, the cybersecurity activities; and
• 3 or more of the sanctions described in section 4(c) of the of the Ukraine Freedom Support Act of 2014 (22 U.S.C. 8923(c)) with respect to any person that the President determines knowingly provides financial services in support of the cybersecurity activities.^[1]

Sections 225 & 226 – Sanctions on Special Russian Crude Oil Projects and Other Foreign Financial Institutions

The bill modifies the sanctions imposed under the Ukraine Freedom Support Act of 2014, by limiting the discretion of the President in determining whether certain sanctions under the act will be imposed. First, under section 224, on and after 30 days after enactment of the bill, unless the President determines that it is not in the national interest of the United States to do so, the President shall, rather than may, impose three or more sanctions with respect to a foreign person if the President determines that the foreign person knowingly makes a significant investment in a special Russian crude oil project.
 
Second, on and after 30 days enactment of the bill, unless the President determines that it is not in the national interest of the United States to do so, the President shall, rather than may, impose certain sanctions relating to Russian and other foreign financial institutions that the President determines:

1. Knowingly engaged in significant transactions involving activities by designated persons in the following areas:
   • Russian producers, transferors, or brokers of defense articles that sell defense articles to Syria;
   • Foreign persons who knowingly make a significant investment in a special Russian crude oil project; or
   • Gazprom, if the President determines it is withholding natural gas supplies from NATO and other countries.
2. Knowingly facilitated a significant financial transaction on behalf of any Russian person included on the list of specially designated nationals and blocked persons maintained pursuant to the Ukraine Freedom Support Act of 2014, Executive Orders 13660, 13661, or 13663, or any other Executive order addressing the crisis in Ukraine. 

Section 227 – Sanctions and Significant Corruption in Russia

The bill modifies sanctions imposed under the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014. Again, the bill seeks to limit the discretion of the President in determining whether to impose certain sanctions under the act by stating that the President shall impose sanctions, rather than merely authorizing and encouraging the President to do so.

Section 228 – Sanctions on Certain Transactions with Foreign Sanctions Evaders and Serious Human Rights Abusers in Russia

The bill also amends the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014 by requiring the imposition of sanctions on foreign persons determined to materially violate, attempt to violate, conspire to violate any prohibition contained in any covered EO (namely EO 13660, EO 13661, EO 13662, EO 13685, EO 13694, and EO 13757), this Act, or the Ukraine Freedom Support Act of 2014 (22 U.S.C. 8921 et seq.) or facilitates a significant transaction or transactions for, or on behalf of, any person subject to Russia-related sanctions, or on behalf of their children, spouse, parent, or siblings. The Act is further amended to require the President to impose asset blocking and exclusionary sanctions on any foreign person responsible for, or generally involved in, the commission of serious human rights abuses in any Russia-occupied or controlled territory, as well as persons that materially assist, sponsor, or provide financial, material, or technological support for, or goods or services to, such foreign persons, or as well as on persons who are owned or controlled by, or act or purport to act for or on behalf of, directly or indirectly, a foreign person.

Section 231 – Sanctions Transactions with the Intelligence and Defense Sectors of the Russian Government

The President is required to impose sanctions on entities, on and after 180 days after enactment, if the President determines that an entity is knowingly engaging in “significant” transactions with “a person that is part of, or operates for or on behalf of, the defense or intelligence sectors of the Government of the Russian Federation, including the Main Intelligence Agency of the General Staff of the Armed Forces of the Russian Federation or the Federal Security Service of the Russian Federation.”
 
Once the determination has been made, the bill requires the President to apply a minimum of five sanctions from a list of twelve sanctions found in Section 235 (see description below). The bill does not define what constitutes “a significant transaction” or what meets the “operates for or on behalf of, the defense or intelligence sectors of the Government of the Russian Federation” requirement, which will be left to the President’s discretion. However the bill does require the President, not later than 60 days after the date of enactment, to issue regulations or other guidance to specify the persons that are part of, or operate for or on behalf of, the defense and intelligence sectors of the Government of the Russian Federation. The President may delay the imposition of sanctions under subsection (a) with respect to a person if the President certifies to Congress every 180 days that the person is substantially reducing the number of significant transactions in which that person engages.
 
Persons who violate a regulation, license, or order issued under this provision can be subjected to penalties under section 206 of the International Emergency Economic Powers Act (50
U.S.C. 1705).

Section 232 – Sanctions on the Development of Pipelines in Russia

Unlike many of the other modifications to Russia-related sanctions introduced in the bill, the sanctions imposed under this section preserve the President’s discretion in determining whether to impose sanctions. The President may, in coordination with allies of the United States, impose 5 or more the sanctions described in section 235 (see description below) on any person determined to make an investment that directly and significantly contributes to Russia’s ability to construct energy export pipelines or sell, lease, or provide to Russia related goods, services, technology, information, or support, which:

1. Has a fair market value of $1,000,000 or more; or
2. That, during a 12-month period, has an aggregate fair market value of $5,000,000 or more.

Goods, services, technology, information, or support are defined as “goods, services, technology, information, or support that could directly and significantly facilitate the maintenance or expansion of the construction, modernization, or repair of energy export pipelines by the Russian Federation.”

Section 233 – Sanctions on Investment in or Facilitation of Privatization of State-Owned Assets by Russia

The President shall impose five or more of the sanctions described in section 235 (and described below) on any person determined to make an investment of $10,000,000 or more (or any combination of investments not less than $1,000,000 each, which in the aggregate is at least $10,000,000 in any 12-month period), or facilitates an investment that directly and significantly contributes to Russia’s ability to privatize state-owned assets in a manner that unjustly benefits Russian government officials, or their close associates or family members.

Section 234 – Sanctions on the Transfer of Arms and Related Materiel to Syria

The President shall impose asset blocking and exclusionary sanctions on a foreign person determined to have knowingly exported, transferred, or otherwise provided to Syria significant financial, material, or technological support that materially contributes to the Syrian government’s ability to:

1. Acquire or develop chemical, biological or nuclear weapons, or related technologies;
2. Acquire or develop ballistic or cruise missile capabilities;
3. Acquire or develop destabilizing numbers and types of advanced conventional weapons;
4. Acquire significant defense articles, defense services, or defense information (as defined under the Arms Export Control Act); or
5. Acquire items designated by the President for purposes of the US Munitions List.

Section 235 – Sanctions Described

 The sanctions to be imposed throughout the bill vary, but a number of the key sections, sections 224(a)(2), 231(b), 232(a), or 233(a) required that the President shall impose 5 or more of the following sanctions, which have varying degrees of severity:

1. Restricting export-import bank assistance for exports to sanctioned persons;
2. Not granting specific license, permission, or other authority to export any goods or technology to sanctioned persons;
3. Prohibiting any US financial institution from making loans or providing credits to the sanctioned persons totaling more than $10,000,000 in any 12 month period;
4. Opposing any loan from international financial institution that would benefit sanctioned person;
5. If the person is a financial institution:
   • Neither the Board of Governors of the Federal Reserve Bank of New York nor the Federal Reserve Bank of New York may designate the financial institution as a primary dealer in US Government debt instruments; and
   • The financial institution may not serve as agent of the US Government or serve as repository for US Government funds;
6. Prohibiting the US Government from procuring or entering into any contract for procurement with sanctioned person;
7. Prohibiting any transactions in foreign exchange that are subject to the jurisdiction of the United States and in which sanctioned person has any interest;
8. Prohibiting any transfers of credit or payments between financial institutions or by, through, or to any financial institution, to the extent they are subject to the jurisdiction of the United States and involve any interest of the sanctioned person;
9. Prohibiting a sanctioned person:
   • From acquiring, holding, withholding, using, transferring, withdrawing, transporting, importing, or exporting any property that is subject to the jurisdiction of the United States and with respect to which the sanctioned person has any interest;
   • Dealing in or exercising any right, power, or privilege with respect to such property; or
   • Conducting any transaction involving such property;
10. Prohibiting any United States person from investing in or purchasing significant amounts of equity or debt instruments of the sanctioned person;
11. Directing the Secretary of State to deny a visa to, and the Secretary of Homeland Security to exclude from the United States, any alien that the President determines is a corporate officer or principal of, or a shareholder with a controlling interest in, the sanctioned person; and 
12. Impose on the principal executive officer or officers of the sanctioned person, or on persons performing similar functions and with similar authorities as such officer or officers, any of the sanctions under subsection 235. 

Of these, number 9, which effectively freezes the property of the sanctioned person, essentially placing the person in SDN status, is the most severe. However, even the lighter sanctions would have some economic bite, as many parties might not choose to invest the time and effort to get legal counsel as to which transactions  are prohibited.
  ^[1]These sanctions relate to: (1) Export-Import Bank assistance; (2) Procurement sanction; (3) Arms export prohibition; (4) Dual-use export prohibition; (5) Property transactions; (6) Banking transactions; (7) Prohibition on investment in equity or debt of sanctioned person; (8) Exclusion from the United States and revocation of visa or other documentation; and (9) Sanctions on principal executive officers. See 22 U.S.C. 8923(c) for more details.