U.S. Moves Cautiously to Impose Mandated Sanctions Against Russia, While Congress Mulls Further Measures

by Dechert LLP
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On August 24, 2018, the U.S. Department of State announced a new but limited export licensing policy for defense and national security-sensitive goods and technology to Russia, effective August 27, 2018. The export licensing policy, as well as other restrictions related to arms sales and foreign assistance, were required by law following the Trump Administration’s finding of Russian culpability for the March 2018 chemical poisonings in the United Kingdom. However, the State Department did not go as far as the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (the CBW Act) would have allowed; the State Department invoked its waiver authority to limit the scope of several provisions and focus the restrictions on Russian government entities, as well as state-owned and state-funded enterprises.

The licensing policy essentially formalizes current export control policies already in effect toward Russia. Although the CBW Act requires the imposition of additional sanctions in 90 days unless certain conditions are met, the limited nature of this action suggests the Administration will seek to limit the scope of further measures. Not to be deterred, however, Congress is weighing two bills that could significantly escalate financial and trade sanctions against Russia, signaling bipartisan frustration with the Administration’s use of existing authorities to counter Russia’s alleged interference in U.S. elections.

CBW Act Sanctions

On March 4, 2018, former Russian military officer and U.K. intelligence agent Sergei Skripal and his daughter fell victim to an apparent poisoning in Salisbury, England. A U.K. investigation revealed the use of a Novichok nerve agent and attributed the attack to Russia, and U.S. government officials announced their support of the U.K. government’s position. Congress then submitted a request to the President under the CBW Act seeking a determination as to whether Russia had used chemical or biological weapons in violation of international law. Under the CBW Act, the President had 60 days to respond, and if he so determined or did not respond within 60 days, sanctions automatically would be triggered.

On August 6, 2018, the State Department made its formal finding, triggering a 15-day congressional notification period that ended on August 22, 2018.

On August 24, 2018, the Department of State published guidance on its imposition of sanctions under the CBW Act, which will remain in effect for at least one year. The initial sanctions include:

  • The termination of foreign assistance except for urgent humanitarian assistance and food or other agricultural commodities or products – the Administration has entirely waived this provision, thus that sanction is not being implemented;
  • The termination of foreign military sales and an export licensing ban on defense articles;
  • The termination of foreign military financing;
  • The denial of U.S. government financial assistance, including through the Export-Import Bank of the United States; and
  • A licensing policy of denial for exports of national security-sensitive goods and technology (meaning, dual-use items that would require a license or exception for Russia) to the Russian government and state-owned or funded enterprises.

The last of these measures was expected to be the most impactful. However, the Department of State invoked a national security waiver under the CBW Act to substantially narrow the scope of that provision, essentially continuing a pre-existing export licensing policy depending on the end-use and end-user. Moreover, the licensing policy does not add new licensing requirements or impact items that would not require a license for export to Russia (e.g., EAR99 items). For transactions requiring a license, exceptions are still valid for the following types of exports: U.S. government and international organization end users, certain encryption item transactions, repairs and replacements of previously authorized products, personal baggage, temporary exports (e.g., tools of trade), limited-use software and technology, certain previously authorized re-exports, civilian end users, and aviation/vessel related end uses.1

For the following types of transactions, currently licensed exports of dual-use items are unaffected, and new license requests will be subject to the case-by-case licensing policy in place before August 27, 2018:

  • Exports and reexports to wholly-owned U.S. subsidiaries in Russia;
  • Exports and reexports for civil fixed-wing passenger aviation safety;
  • Deemed exports and reexports of technology to Russian nationals;
  • Exports and reexports in support of government space cooperation and commercial space launches;
  • Exports and reexports for commercial end users and civil end uses in Russia.

Exports of all defense articles and services are subject to a formal licensing policy of denial, with a narrow carve-out for case-by-case license approval for space cooperation activities. Dual-use products and technology requiring a license for Russia are subject to a formal licensing policy of denial for the Russian government and state-owned or state-funded enterprises. This essentially is a continuation of the existing licensing policy already implemented informally by the U.S. government for sensitive exports to Russia.

Russia will face additional sanctions under the CBW Act unless President Trump certifies to Congress within three months of August 22 that Russia is no longer using chemical or biological weapons in violation of international law, has committed to ceasing such practices in the future, and is willing to allow inspections by the United Nations or other observers. If Russia does not meet these requirements, then the CBW Act requires the U.S. government to impose three or more of the following sanctions (which may similarly be subject to waivers):

  • A prohibition on all exports other than food and agricultural commodities;
  • Restrictions on the import of Russian goods;
  • A ban on Russian government-owned air carriers traveling to or from the United States;
  • Halting the provision of loans or credit by U.S. banks to the Russian government (except for the purchase of food or agricultural commodities);
  • Opposition by the U.S. government to any provision by international financial institutions of financial or technical assistance to Russia; or
  • A downgrading of diplomatic relations between the United States and Russia.

Some of these measures could result in a significant escalation of U.S. sanctions against Russia—most prominently, by authorizing a near-comprehensive trade embargo against Russia. However, the Administration could also meet the requirements of the CBW Act by choosing three less impactful measures—such as a downgrading of diplomatic relations, opposition to international financial institution assistance, and the prohibition on loans or credit issued to the Russian government, measures that are largely in place already. The Administration could further soften the blow by issuing additional waivers under the CBW Act, or by invoking contract sanctity provisions that would limit the impact of sanctions on existing business. Based upon the initial application of measures under the CBW Act, it does not appear the Administration is keen to significantly and indiscriminately escalate sanctions against Russia. However, it may feel compelled to take some action in the coming months in order to alleviate pressure it is facing from Congress.

Pending Sanctions Legislation

The U.S. Congress is weighing two bills that could expand further sanctions against Russia for its alleged role in U.S. election hacking and other acts of cybercrime. During hearings on August 21, 2018, members of the Senate Foreign Relations and Banking Committees emphasized the need to strengthen existing sanctions against Russia.

Defending American Security from Kremlin Aggression Act of 2018

A bipartisan coalition of Senators submitted legislation in August that would establish sanctions against a wide range of Russian individuals and entities. Under the Defending American Security from Kremlin Aggression Act of 2018 (DASKAA), the President would be required to expand existing sanctions to target a wide range of Russian entities and individuals.

Specifically, the legislation would mandate sanctions against political figures, oligarchs, parastatal entities, and affiliates who facilitate illicit or corrupt activities on behalf of President Vladimir Putin. It would also require the President to impose new sanctions targeting investments in Russian energy and oil projects and Russian sovereign debt issuances, and it would block the assets of one or more key Russian financial institutions. In implementing the latter provisions, the President would be required to prescribe regulations prohibiting U.S. persons from dealing in any way with a variety of financial instruments—including bond issuances, foreign exchange swap agreements, or any other financial instruments determined to be Russian sovereign debt—with a maturity of more than 14 days.

Defending Elections from Threats by Establishing Redlines Act of 2018

The U.S. Senate is also considering the Defending Elections from Threats by Establishing Redlines Act of 2018 (the DETER Act), which would require the Office of the Director of National Intelligence (DNI) to assess, within 30 days after any U.S. election, whether a foreign government interfered with the election in any manner and to report its findings to Congress. The bill would establish specific penalties only if the DNI finds that the Russian government interfered in an election. In such cases, the U.S. government would block the assets of a variety of Russian entities and individuals, including financial institutions, energy companies, defense and intelligence firms, state-owned entities, and political figures and oligarchs. The severity of the measures that would be automatically triggered in such an event appears to make the DETER Act less likely to gain adequate support in Congress.

In addition to establishing potential penalties against Russia, the bill would also require certain reporting by the President, who would be tasked with (1) briefing appropriate congressional committees on any governments likely to engage in election interference every 90 days and (2) submitting a report on appropriate deterrence strategies against the governments of China, Iran, North Korea, and other countries determined by the President to be likely to engage in election interference.

Conclusion

Although the Administration has taken a relatively cautious approach to the administration of sanctions under the CBW Act, it will face political pressure to move more aggressively against Russia in the coming months, especially if it seeks to head-off new legislation from Congress that would bind its hands even further. Under the circumstances, companies should expect an additional tightening of sanctions on Russia in the coming months, whether it is imposed under executive authorities or through new legislation.

Footnote

1) The waiver permits continued use of License Exceptions GOV, ENC, RPL, BAG, TMP, TSU, APR, CIV, and AVS. See 15 C.F.R. Part 740.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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