U.S.-Russia Business Climate Likely to Change Under Trump Presidency

by Dechert LLP
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Donald Trump’s election has the potential to significantly reshape U.S.-Russia relations, but whether any change occurs will depend largely on his willingness to offer Russia a clean slate and whether the U.S. Congress imposes legislative constraints on President-elect Trump’s ability to unilaterally lift sanctions. As discussed below:

  • President-elect Trump has made various statements over the last few months which could indicate a major shift in relations between Russia and the United States.

  • President Putin has expressed the hope that he and President-elect Trump will work together to “end the crisis” in Russian-American relations.

  • The Russian stock market gained as much as 7% in the immediate aftermath of the election.

  • Since 2014, the United States and the European Union have applied a range of sanctions on Russian individuals and companies, particularly in the financial services, energy and defense sectors, arising out of the situation in Ukraine, while Russia has imposed counter-sanctions on U.S. and EU produce. These measures have not only affected trade with respect to the sanctioned entities, but they have had a chilling effect on investment and trade generally.  

  • Under U.S. law, the President has the ability to terminate current sanctions against Russian and Ukrainian companies and individuals by executive order. However, this could be complicated by opposition from the U.S. Congress and/or the European Union. The Russian President also has the ability to immediately and unilaterally terminate sanctions. 

  • In the wake of sanctions, the Russian Government has focused its efforts on ways to increase local production, particularly in the food and pharmaceutical sectors and has encouraged business to increase ties with Asia (the so-called Asia pivot) with mixed success.  

  • A rapprochement with the West could have a very positive impact on investment in Russia, which may be further boosted by Russia’s plan to carry out major privatizations of state-owned companies in 2017 and other recent changes to Russian law and business regulations which have helped Russia to move up on the World Bank's "Ease of Doing Business" list. 

Potential Warming in U.S.-Russia Relations

U.S.-Russia relations have suffered in recent years due to, among other things, the situation in Ukraine and accusations that Russia coordinated cyberattacks on U.S. government servers and attempted to influence the outcome of the recent U.S. presidential election. Pentagon officials, members of Congress and European leaders have cautioned that Russia’s power should not go unchecked and that the United States must continue to pressure President Putin through political and military means. Since the U.S. election, European leaders have expressed concern that President-elect Trump may reduce or eliminate sanctions affecting Russia. Notwithstanding these concerns, President-elect Trump may choose to offer Russia the chance for a fresh start in relations with the United States, as he suggested during his presidential campaign. The recent nomination of Lt. General Michael Flynn as National Security Advisor further supports a possible shift in U.S.-Russia relations given Flynn’s various statements to the effect that the U.S. and Russia should be working closely together.

President-elect Trump and President Vladimir Putin exchanged various compliments over the last few months suggesting a potential thaw in U.S.-Russia relations in a Trump administration. President Putin reportedly was one of the first world leaders to congratulate President-elect Trump on his victory, expressing hope that they can work together toward the “end of the crisis in Russian-American relations, as well as address the pressing issues of the international agenda.” President-elect Trump has said that he would prefer to “have Russia friendly, as opposed to the way they are right now, so that we can go and knock out ISIS with other people.”  

Other statements by President-elect Trump indicate a willingness to consider a reset in U.S.-Russia relations. He has expressed his belief that the people of Crimea preferred to be a part of Russia rather than remain with Ukraine, and that he would consider recognizing Crimea as official territory of Russia and lifting sanctions against Russian and Ukrainian persons (as discussed in more detail below). President-elect Trump also called for a potential reduction of U.S. support of the North Atlantic Treaty Organization (“NATO”) and expressed the view that the United States may revisit NATO’s policy of automatically defending allies against aggression from Russia and other countries. In addition, President-elect Trump has suggested that he would reverse the U.S. role in undermining President Assad’s regime in Syria, which has been another key point of contention between the U.S. and Russia. Trump has stated that he would rather emphasize strategic cooperation with Russia and President Assad against ISIS, instead of supporting the Syrian rebels against President Assad.

President-Elect Trump’s Ability to Modify/Terminate Sanctions

The United States currently maintains a variety of sanctions against Russian and Ukrainian individuals and entities, ranging from restricting transactions in certain equity or debt instruments of designated Russian companies identified on the Sectoral Sanctions Identification List (“SSI List”) to placing certain Russian and Ukrainian persons on the List of Specially Designated Nationals (“SDN List”)1. These sanctions have been implemented under the authority of Executive Orders issued by President Obama under the International Emergency Economic Powers Act, which provides him (and the Executive branch) with broad discretion to impose and remove restrictions as he determines appropriate without approval from the U.S. Congress. 

President-elect Trump will also have broad authority to shape sanctions against Russia and Ukraine. For example, he could choose to remove all prohibitions imposed through the SSI List, and U.S. persons would thereafter immediately be permitted to transact in equity and debt instruments of the designated Russian financial, energy and defense companies. And Mr. Trump need not take any action in order to bring about a change in the Russia sanctions regime; he might choose simply to allow the current Executive Order authorizing the sanctions to expire this spring.

However, the U.S. Congress could try to limit President-elect Trump’s authority in this area. Prominent Republican senators, including Sens. Lindsey Graham and John McCain, have stated strongly that Russia should be held accountable for its activities in Syria and Ukraine. In September 2016, the U.S. House of Representatives passed a bill that would codify existing sanctions against Russia and Ukraine and would require that, prior to any sanctions being removed, the President must certify to Congress either that Ukraine’s sovereignty over Crimea has been restored or Ukraine is otherwise satisfied with the status of Crimea. On 15 November 2016, the U.S. House of Representatives passed a bill that would impose mandatory sanctions on anyone that provides financial, economic or technological support to the Syrian government in the ongoing civil war – clearly targeting the Russian government. Both bills have been referred to the U.S. Senate Committee on Foreign Relations and are unlikely to be considered in the near future. Presumably, the Administration of President-elect Trump will not favor such legislation, but it is not yet clear whether the Senate will proceed in the face of such objections.

While, as described above, President-elect Trump has repeatedly expressed the desire to bring about a rapprochement with Russia, and while he has the authority to dismantle the sanctions imposed by President Obama, other issues may, of course, complicate U.S.-Russia relations during a Trump Administration. Actions on the ground in Syria remain a source of uncertainty. Moreover, Mr. Trump expressed views during the campaign regarding European missile defense, international oil and gas exploration, and other issues that may create concern in the Kremlin. 

Response in the Russian Federation

The Kremlin meanwhile has welcomed President-elect Trump’s proposed “realist” approach to foreign relations, which it considers a departure from the Obama administration, which it viewed as more interventionist.  

In 2014, in response to the imposition of Ukraine-related sanctions, Russia launched a retaliatory embargo of certain food products and raw materials from the U.S., EU, Canada, Australia, UK, Norway, Ukraine, Albania, Montenegro, Iceland and Liechtenstein. First enacted by Presidential decree No. 560 on August 6, 2014, the embargo has remained for two years and was recently extended to the end of 2017 by 2016 Presidential Decree No. 305. The embargo bans imports originating from these countries, including meat, sausage, fish, seafood, vegetables, fruit and dairy products. Salt was also recently added to the embargo list in 2016 in order to support domestic production, which aims to attain an 85% market share. Russia has also considered adding other products such as confectionery, canned fish, and flowers, although thus far it has chosen not to do so.

The Russian government has also implied that it may implement additional counter measures if new sanctions are imposed on Russia relating to the crisis in Syria, such as the current proposed sanctions sitting in the U.S. Senate, or for purported cybersecurity violations. 

If, on the other hand, the U.S eliminates certain sanctions or allows sanctions to lapse, Russia will most certainly respond by lifting its sanctions. Just as a President Trump can repeal the U.S. sanctions by an administrative order or allow them to lapse, President Putin can remove or relax the Russian embargo by a presidential decree, or he can simply wait for the embargo to lapse after December 31, 2017.  

If the sanctions are relaxed between Russia and the U.S., this could lead to increased investment opportunities for U.S. companies. Russian companies are heavily undervalued due to both the economic and political crises that have affected Russia over the past several years. Indeed, the market has never fully recovered from the 2008 global economic collapse and the low oil prices have further fueled the economic downturn. These multiple economic downward pressures on Russia have resulted in lower costs for investors given the devaluation of the ruble, which has declined by nearly twofold since 2014. Previously, the cost of doing business was relatively high for an emerging market discouraging investment due to the combination of high cost and high risk, but developments over the last few years have significantly changed market conditions. In addition to the lower cost of doing business, Russia has also sought to attract business by making certain legislative and regulatory changes that have improved the business climate overall. This has led to Russia climbing higher on the World Bank’s “Ease of Doing Business” rankings where it recently rose to number 40 overall, up from 92 in 2014. Russia is also steadily improving in the World Bank’s “frontier” benchmark of all economic indicators worldwide, up nearly 20 points since 2010. 

The possible shift in relations also comes at a time when Russia is set to launch the next stage of its privatization program. The Russian government recently approved a federal budget for 2017-2019 that includes significant revenue from the partial privatization of certain state-owned enterprises, including a sale of 19.5% in Rosneft, Russia’s largest oil company, and possible sales of shares in the Novorossiysk Commercial Sea Port, the shipping firm Sovcomflot, and VTB Bank, Russia’s second largest state bank. Other companies to be partially privatized include Russian Railways (or RZD), Russia’s largest aircraft lessor State Transport Leasing Company (or GTLK),  Rostelecom, Transneft, and Zarubezhneft.   

In summary, Russia has a great deal to gain if U.S.-Russia relations improve. Investors and companies operating in Russia, as well as Russian banks and energy companies, in particular, would stand to reap the greatest benefits from improved relations. However, all of this rides on how Mr. Trump decides to proceed with Russia and how motivated President Putin is to make certain concessions in order to improve relations. 

Footnotes

1) See prior Dechert OnPoints dated March 2014, April 2014, July 2014, September 2014, June 2015 and August 2015.

 

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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