A bipartisan US Senate coalition has approved a wide-ranging package of new Russia-related sanctions as an amendment to the Countering Iran's Destabilizing Activities Act of 2017 ("S.722" or "Iran Sanctions Bill") currently pending before Congress. The changes contemplated by these provisions-dubbed-Countering Russian Influence in Europe and Eurasia Act of 2017 ("CRIEEA" or the "Amendment") would codify existing Russia-related sanctions and mandate congressional review of any attempts by the President to modify or terminate them.
If enacted, CRIEEA would impose significant new restrictions on carrying out Russia-related business in targeted sectors, including many applicable to non-US companies. However, it is less sweeping than prior proposals, such as Sen. Ben Cardin's (D-MD) Counteracting Russian Hostilities Act of 2017 ("S.94" or "Cardin Bill"). CRIEEA would constrain, but not eliminate, the President's traditional discretion in this area.
The Senate approved the CRIEEA amendment to the Iran Sanctions Bill by a wide 97-2-margin. However, the shape of any legislative changes to Russia sanctions may continue to evolve as the United States House of Representatives considers similar legislation and as the White House provides further input regarding these issues. Although House Speaker Paul Ryan (R-Wis.) expressed support for codifying existing Russia-related sanctions in February, he sounded a more cautious note as recently as last week. Moreover, the Trump Administration has reportedly not taken an active part in the negotiation of CRIEEA, and Secretary of State Rex Tillerson was equivocal in his comments on the measure during his testimony before the Senate Foreign Relations Committee on June 13, noting that the Administration wished to maintain "flexibility" in its posture towards Russia and keep channels of communication open. The provisions of CRIEEA demonstrate, however, that there is significant potential for changes to the US-Russia sanctions environment in the near and medium term.
New Mechanism for Congressional Review of Presidential Action
Section 216 of CRIEEA imposes a congressional review regime with respect to any Presidential "action" that would modify or terminate the existing sanctions regime against Russia. CRIEEA defines "action" broadly to include efforts (i) to terminate sanctions regulations, (ii) waive the application of sanctions to specific persons (such as Specially Designated Nationals ("SDNs") designated under the Russia sanctions programs), or (iii) to take any "licensing action that significantly alters United States foreign policy with regard to the Russian Federation." This mechanism would enable Congress to block changes to the existing sanctions regime through legislation, but it does not require Congressional approval before the imposition of new sanctions.
The scope of the sanctions that would trigger review extends to all designations made under the authority of the four Executive Orders ("EOs") related to the events in Ukraine (EOs 13660, 13661, 13662, 13685), as well as the two EOs related to the cybersecurity of the United States (EOs 13694, 13757). Section 216 would not appear to apply to Russian persons or entities sanctioned under the Magnitsky Act or under non-Russia-related sanctions programs.
If the President sought to engage in any of the three categories of action listed above, he would be obligated to submit a report to Congress, and a mandatory period of congressional review would be triggered. In the event that both houses of Congress passed a Joint Resolution of Disapproval of the President's proposed action, and such legislation became law, the President would be barred from taking the proposed action.
Codification of Existing Executive Orders and Sanctions Regime
The Amendment also codifies six existing, Russia-related EOs, which would have the effect of barring the President from altering them without affirmative Congressional action.
The President would have no authority to terminate the sanctions imposed under the listed EOs or otherwise repeal the sanctions created under the EOs. Moreover, the new sanctions regime imposed by CRIEEA is, in many cases, mandatory, subject only to the President's discretion with regard to whether an individual or entity warrants inclusion on an applicable sanctions list. While the President would retain authority to waive the application of the EOs and the numerous "mandatory" provisions of the new sanctions regime with respect to specific individuals and entities, the Amendment imposes a cumbersome, three-stage process of certification and Congressional review before Presidential waivers would be given effect. With respect to the Ukraine-related and cybersecurity-related sanctions, any waiver would require a certification by the President that the Russian Federation is, respectively, "taking significant steps to implement the Minsk Agreement"; or "has made significant efforts to reduce the number and intensity of cyber intrusions" conducted by the Russian Government.
Imposition of a New, Wide-Ranging Sanctions Regime
The balance of the Amendment imposes a broad range of sanctions spanning a number of sectors of the Russian economy, or tightens specific components of the existing sanctions regime (§§ 224-234). Significant changes include the following:
- New sanctions authority under EO 13662 to reach SOEs in the "shipping, metals, railway, or mining sector": Section 223 expands the scope of persons who may be designated under section 1(a) of EO 13662 to any state-owned entities ("SOE") "operating in the railway, shipping, or metals or mining sector[s]." These terms are all undefined, and a potentially broad range of SOEs may therefore be affected.
- Shortening of SSI debt maturity periods: Section 223 also directs the Director of the Office of Foreign Assets Control ("OFAC") to modify the SSI regulations to tighten restrictions on the financing of or transactions in debt issued by any person named on a related sanctions list. Directive 1 (September 12, 2014) will be modified to impose a 14-day maturity limit (from 30 days); while Directive 2 (March 20, 2014) will be modified to impose a 30-day maturity limit (from 90 days).
- Mandatory report on expanding SSI under Directive 1 to include sovereign debt and derivatives: Section 242 mandates the Secretary of the Treasury to submit a report to Congress within 180 days of its enactment into law that details the "potential effects" of expanding the scope of application of Directive 1 under EO 13662 to include "sovereign debt and the full range of derivative products."
- Modification of Directive 4 to expand scope of application: Section 223 would modify the scope of Directive 4, applying its restrictions to the provision of any goods, services, or technology supporting the "exploration or production for deepwater, Arctic offshore, or shale projects" in which "a Russian energy firm [is] involved," even if the project is outside of Russia.
- Making UFSA crude oil and financial institution sanctions mandatory: The Ukraine Freedom Support Act of 2014 ("UFSA") created two tiers of Ukraine-related sanctions against Russia: (i) sanctions relating to the Russian defence sector that the President was required to impose (subject to waiver authority); and (ii) sanctions relating to other economic sectors, such as the energy sector and the financial sector, which the Act merely authorized the President to impose. Section 225 of the proposed Amendment would have the effect of making the latter category of sanctions mandatory (subject to waiver authority). With regard to Russia's energy sector, UFSA authorized the imposition of three of nine categories of sanctions against any person determined by the President to have made a "significant investment" in projects related to the extraction of crude oil from Russian territory. The UFSA further authorized the President to impose sanctions on OAO Gazprom, if Gazprom were determined by the President to have withheld "significant" natural gas supplies from a number of countries, including members of NATO, Ukraine, Georgia, or Moldova. Additionally, UFSA authorized sanctions on foreign financial institutions, where the President determines that they "knowingly" engaged in "significant" transactions related to targeted entities or individuals within the defence or energy sectors; or where the foreign financial institution, on behalf of a Russian SDN, facilitated a "significant" financial transaction.
- Making corruption sanctions mandatory: Section 9 of the Sovereign, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014 ("SUA") "authorized and encouraged" the President to impose sanctions provided for in the Act on "persons in the Russian Federation" that the President has determined are "complicit in or responsible for significant corruption." Section 227 of the proposed Amendment would render this provision of SUA mandatory, and eliminate the Russian territorial nexus required under SUA.
- New mandatory secondary sanctions on "facilitat[ors]" of proscribed transactions: Section 228 significantly expands the scope of sanctions under SUA by introducing mandatory secondary sanctions against persons that the President has determined have knowingly "facilitate" significant deceptive or structured transactions," and do so "on behalf of" any person currently included on Russia-related sanctions lists or any child, spouse, parent, or sibling of such persons.
- New mandatory human rights sanctions: Section 229 further expands the scope of SUA to include mandatory sanctions against persons that the President has determined are responsible for or materially assisted in the commission of "serious human rights abuses."
- New mandatory sanctions on those "engaging in transactions" with Russian intelligence or defence personnel: Section 231 requires the President to impose five or more items from the menu of sanctions provided under Section 235 to any person determined by the President to have "knowingly" engaged in a "significant transaction" with members or persons acting on behalf of members of the Russian defence or intelligence sectors.
- New authorization for elective sanctions related to development of pipelines: Section 232 authorizes the President to impose secondary sanctions on any person determined by the President to have "knowingly" made an investment exceeding $1,000,000 in fair market value, or exceeding $5,000,000 in aggregate fair market value over a 12-month period, in the export-pipeline infrastructure of Russia. The investment must either "directly and significantly contribute to the enhancement" of Russia's ability to construct such pipelines, or must consist in "goods, services, technology, information, or support" that could "directly and significantly facilitate the maintenance or expansion of the construction, modernization, or repair of energy pipelines" by Russia. The President is authorized to impose, at his discretion, a selection of five out of the menu of sanctions provided for under Section 235.
- New mandatory sanctions related to privatization of state-owned assets: Section 233 requires the President to impose secondary sanctions on any person determined by the President to have, with "actual knowledge," (i) made an investment exceeding $10,000,000 (or a combination of investments, each greater than $1,000,000, where the aggregate exceeds $10,000,000 in a 12-month period) or (ii) "facilitate[d]” such an investment. To fall within the scope of the sanctions, the investment must “directly and significantly contribute” to Russia’s ability to privatize state assets and must “unjustly benefit" either government "officials" or their "close associates or family members." The potential scope of the application of this provision is uncertain, as the phrase "unjustly benefits" is nowhere defined by the proposed Amendment.
- New mandatory sanctions on the transfer of arms and materiel to Syria: Section 234 requires the President to impose sanctions on any person determined by the President to have "knowingly exported, transferred, or otherwise provided . . . significant financial, material, or technological support" to the Government of Syria. The sanctions apply only to support that promotes the Syrian Government's ability to acquire certain classes of weapons and munitions, including chemical, biological, and nuclear weapons and related technologies, but also extending to articles, services and information defined under the Arms Export Control Act.
While the provisions of CRIEEA are not law at present, and may be modified or abandoned during further stages of the legislative process, the Amendment demonstrates that there is significant support in the US Congress for a tightening of Russia-related sanctions, and suggests that large-scale relaxation of the current Russia-related sanctions is unlikely in the near term. Herbert Smith Freehills continues to monitor legislative developments related to US sanctions policy and will provide further updates as the Iran and Russia-related sanctions proposals move forward in Congress.