Nick Turner and Steptoe partners summarize noteworthy US proposals for imposing Russia-related sanctions over the situation in Ukraine.
Economic sanctions and export controls will form a core part of any multilateral response to an escalation of Russia’s military actions targeting Ukraine. While it is not possible to predict with certainty whether an escalation will occur or what form the responsive measures would take, this blog post outlines some of the current US sanctions proposals and authorizations to assist companies in taking preliminary steps to assess their potential exposure.
As of January 2022, none of the United States, the EU, or the UK have implemented any new, significant Russia-related sanctions or export control measures concerning Russia’s recent military buildup near the Russia-Ukraine border. Based on events in 2014 and the sanctions that ensued, companies could face rapid and potentially disruptive regulatory restrictions with wide-ranging impacts on a variety of industries. Some measures could be imposed within hours of a triggering event, or even prior to a specific triggering event. The US, EU, and UK are likely to coordinate a sanctions response to some extent, but some variations across different jurisdictions’ sanctions measures are also to be expected. According to reports, policymakers have yet to agree on the triggers for new sanctions, and diplomatic efforts are ongoing.
Defending Ukraine Sovereignty Act of 2022
On January 12, 2022, Democratic Senator Robert Menendez introduced S.3488, the Defending Ukraine Sovereignty Act of 2022 (DUSA). If adopted into law, Title III of DUSA would mandate sanctions against Russian Federation officials, Russian financial institutions, Russian sovereign debt, companies in the Russian extractive sector, and the Nord Stream 2 pipeline in response to a Russian military escalation targeting Ukraine. The bill also targets “specialized financial messaging services” (e.g., SWIFT) provided to sanctioned Russian financial institutions.
While the draft bill could be changed during the legislative process, key provisions of Title III, as introduced, include:
- Section 302 requires the President to make a determination concerning whether “the Government of the Russian Federation, including through any of its proxies, is engaged in or knowingly supporting a significant escalation in hostilities or hostile action in or against Ukraine, compared to the level of hostilities or hostile action in or against Ukraine prior to December 1, 2021” and, if so, “whether such escalation has the aim or effect of undermining, overthrowing, or dismantling the Government of Ukraine, occupying the territory of Ukraine, or interfering with the sovereignty or territorial integrity of Ukraine.”
- Section 303 mandates sanctions against certain officials of the Russian Federation, including, among others, the President, Prime Minister, and Foreign Minister, and numerous military officials, within sixty days of an affirmative determination under Section 302, and requires the President to report periodically on other Russian officials warranting sanctions.
- Section 304 mandates sanctions against a minimum of three of Russia’s 12 largest financial institutions (which are named in the bill) within 30 days of an affirmative determination under Section 302. Section 304 also authorizes sanctions on the financial institutions’ subsidiaries and successor entities, and requires the President to report periodically on other significant Russian financial institutions warranting sanctions.
- Section 305 instructs the President to report to Congress on any “provider of specialized financial messaging services that continues to provide messaging services to, or enables or facilitates access to such services” for the 12 financial institutions named in Section 304, including intermediaries enabling such access, and “efforts to ensure the termination” of such services to any institution sanctioned under Section 304. Section 305 also authorizes the President to impose sanctions on any provider of financial specialized financial messaging services that continues to service a sanctioned financial institution after 90 days following the imposition of sanctions under Section 304.
- Section 306(a) instructs the President to prohibit US persons from all transactions involving Russian sovereign debt (beyond those previously imposed, as described below) within 30 days of an affirmative determination under Section 302. Section 306(b) requires the President to impose sanctions on non-US persons who are found to have engaged in transactions involving the debt of at least 10 Russian state-owned or -controlled entities that are not already sanctioned. Section 306(c) requires the President to report to Congress on non-US persons dealing in Russian sovereign debt and to impose sanctions on them, without regard to whether their dealings in Russian sovereign debt are significant.
- Section 307 requires the US State Department to review a May 19, 2021 waiver of secondary sanctions with respect to Nord Stream 2 AG and the chief executive officer of Nord Stream 2 AG. (For more information on the Nord Stream 2 sanctions, see this Steptoe blog post.)
- Section 308 requires the President to impose sanctions on “any entity established for or responsible for the planning, construction, or operation of the Nord Stream 2 pipeline or a successor entity” and their corporate officers, within 30 days of an affirmative determination under Section 302.
- Section 309 requires the President to identify within 60 days and sanction within 90 days of an affirmative determination under Section 302 foreign persons in Russia’s oil and gas, coal, and minerals extraction, mining, and processing industries and “any other sector or industry with respect to which the President determines the imposition of sanctions is in the United States national security interest.”
- Section 310 outlines the sanctions applicable to parties identified in Sections 303, 304, 306(b), 306(c), 308, and 309. The sanctions include blocking sanctions (asset freezes) on property and interests in property of designated persons and visa bans.
DUSA (and an earlier Menendez-sponsored amendment proposed for the National Defense Authorization Act for Fiscal Year 2022) has received significant attention, and currently it seems that some version of this bill is the most likely to be adopted following a triggering event. However, it is not the only pending piece of Russia sanctions legislation in the US Congress. We anticipate that more bills will likely be introduced if tensions escalate. In the House, for example, Republican Congressman Jim Banks introduced H.R. 6422, titled the Putin Accountability Act, on January 19, 2022 in response to rising tensions. With almost 40 Republican co-sponsors, that bill would impose sanctions on Putin and his allies, Russian debt, the Russian financial sector, and Nord Stream 2; would remove Russia from the SWIFT system; and would designate Russia as a state sponsor of terrorism.
Existing Sanctions Authorities
Notwithstanding DUSA, the President does not require any congressional action to implement sanctions under the International Emergency Economic Powers Act (IEEPA) or other statutes such as the Countering America’s Adversaries Through Sanctions Act (CAATSA). Even if Title III of DUSA is not enacted, the Biden administration has no shortage of sanctions options at its disposal and could impose all of the same sanctions described in Title III.
Pursuant to the authority given under IEEPA, President Biden issued Executive Order (EO) 14024 (“Blocking Property With Respect To Specified Harmful Foreign Activities Of The Government Of The Russian Federation”), on April 15, 2021, which provides a broad framework for Russia-related sanctions. Under OFAC Directive 1 issued pursuant to EO 14024, US financial institutions are prohibited from participating in the primary market for ruble or non-ruble Russia sovereign debt issued after June 14, 2021 or lending ruble or non-ruble funds to certain Russian government entities. This Executive Order could form the basis for a broader set of sanctions targeting sectors or entities of concern.
For more information on EO 14024 and Directive 1, see this Steptoe blog post.
EOs 13660, 13661, 13662, and 13685, adopted in 2014, enable OFAC to identify Specially Designated Nationals (SDNs) in connection with the situation in Ukraine and to list Russian companies in the financial, energy, and defense sectors on the List of Sectoral Sanctions Identifications (SSIs). US persons are prohibited from dealing in specified debt and equity of companies on the SSI List and from supporting certain energy projects in the Russian Federation. Under EO 13685, OFAC administers a comprehensive embargo that prohibits the involvement of the United States and US persons globally from most activities involving the disputed Crimea region.
Under CAATSA, OFAC, in consultation with the US State Department, may impose potentially significant secondary sanctions targeting non-US persons engaged in certain Russia-related activities, including pipeline projects and transactions with persons sanctioned under any US Russia-related sanctions program.
For a detailed look at CAATSA, see this Steptoe blog post.
In short, the Biden administration could use existing Russia-related authorities to add new individuals and entities to the SDN List or the SSI List, impose new restrictions on transacting in Russian sovereign debt, or even target non-Russian persons with secondary sanctions for supporting activities that are contrary to US policy on Ukraine, among other actions. The administration could also establish new Russia-related sanctions authorities by Executive Order, whether or not DUSA or other sanctions legislation is enacted.
Foreign-Produced Direct Product Rule
As reported in the media, the Biden administration may consider restricting Russia’s access to semiconductors and other critical inputs through an expansion of the “foreign-produced direct product rule” (FPDP Rule) under “General Prohibition 3” (GP-3) of the Export Administration Regulations (EAR), 15 CFR §736.2(b)(3).
The FPDP Rule, which has been in existence for many years, prohibits the export from outside the United States of certain foreign-produced items subject to the EAR to specified countries or end users without a license from the Commerce Department’s Bureau of Industry and Security (BIS). Russia is one such country. The current FPDP Rule applies to the export of certain foreign-made items that are the “direct product” of US-origin software or technology or of a plant or a major component of a plant controlled for “national security” reasons, as reflected in specific Export Control Classification Numbers (ECCNs).
Examples of items controlled under the FPDP Rule include semiconductor products manufactured outside the United States using highly controlled US-origin equipment, software, or technology.
On May 19, 2020, BIS expanded the scope of the FPDP Rule to restrict a much broader scope of foreign-made items to designated companies that are also identified on the so-called Entity List. BIS did so by adding a “Footnote 1” to the Entity List, and then applied the enhanced restrictions to Huawei Technologies Co., Ltd. and its affiliates on the Entity List, with license applications subject to a presumption of denial.
Russia, which is included in Country Group D in Supplement No. 1 to Part 740 of the EAR, is already subject to some aspects of GP-3. However, no Russian companies are currently subject to the expanded controls of Footnote 1 to the Entity List. The designation of strategic Russian manufacturers under Footnote 1—or a similar restriction—would impose an immediate licensing requirement not only on US suppliers, but also those in Europe, Asia and elsewhere that rely on certain US-origin software, technology, or equipment in their production. The export licensing requirement would likely impact the supply of most semiconductors, as well as other electronic equipment, and could be tailored to particular technologies. These restrictions, if imposed, potentially could be accompanied by a “savings clause” or wind-down provision allowing reexports of covered products for a limited period of time.
For more information on the FPDP Rule in the context of China, see this Steptoe client alert.
Assessing Risks and Other Considerations
Much of our current understanding of the Biden administration’s and US allies’ preparations for new Russia-related sanctions and export controls is based on media reports, many citing unnamed government officials. While informative, such reports should be taken with a grain of salt, as actual measures could vary significantly. Some proposals, such as terminating Russia’s access to the SWIFT network, may be unlikely to occur despite recent speculation.
There are some immediate and practical steps companies can take to mitigate their sanctions and export controls exposure in the meantime. These include mapping important transactions, customer relationships, and suppliers against policy proposals such as DUSA and existing sanctions and export control authorities, like those summarized above. Having an understanding of a company’s exposure will enable one to identify commercial risks and disruptions, develop a rapid response to new restrictions, and identify potential lawful alternative courses of action. For many companies, a playbook for compliance responses—including operational steps and internal communications strategies—can be put in place even when the contours of new sanctions and export control prohibitions are not yet known.
Additionally, companies may consider appointing staff or working groups to monitor and provide updates on developments. Employees with experience dealing with US and EU sanctions after Russia’s purported annexation of Crimea in 2014, as well as recent China-related sanctions, will be of particular help in this regard.
Companies that enter into contracts with counterparties who could be exposed to new Russia-related sanctions or export controls may consider including exit provisions allowing for the termination or winding-down of newly sanctioned business. Such terms may not hold up in Russian courts; however, they may be upheld in disputes outside of Russia and provide a basis for commercial negotiations.
This article was first published by Nicholas Turner, Ed Krauland, Alexandra Baj, Wendy Wysong, Dave Stetson & Meredith Rathbone on Steptoe’s International Compliance Blog.