Senate Moving Forward with Strong Russia Sanctions Bill Targeting Energy and Financial Services

Last night, a key group of bipartisan senators reached agreement on, and introduced, a Russia sanctions amendment to a broader sanctions bill focused on Iran, which could be voted on as early as this week.  It is called the Countering Russian Influence in Europe and Eurasia Act of 2017 (CRIEEA).  The CRIEEA does not adopt the most hawkish provisions of the Countering Russian Hostilities Act, on which we previously advised.  If enacted into law, the CIREEA would significantly expand the current scope of US sanctions against Russia, including targeting non-US persons.  The CRIEEA also incorporates, with some changes, the previously-introduced Russia Sanctions Review Act, on which we have already commented, limiting the President’s ability to lift the sanctions that the Obama Administration imposed on Russia. Below are some of the most noteworthy provisions of the CRIEEA, mandating that the President expand US sanctions on Russia in the following areas:

• Impose measures from a menu of sanctions on foreign persons that the President determines “knowingly” make a “significant investment” in a “special Russian crude oil project,” which means deepwater (more than 500 feet deep), Arctic offshore or shale.  This would send a strong message to non-US oil companies about their ability to make additional investments in Russia, and could also impact the viability of existing projects.
• Expand existing prohibitions (“Directive 4”) on US persons providing goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale oil projects.  Whereas currently these prohibitions only apply to projects “that have the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation and extending from its territory,” the CRIEEA would expand them to cover projects “(1) that have the potential to produce oil; (2) in which a Russian energy firm is involved; and (3) that involve any person determined to be subject to the directive or the property or interests in property of such a person.”  In other words, the CRIEEA would expand the scope of Directive 4 to apply globally instead of applying only to projects located in Russia.  The idea behind this presumably is to cut off Russian oil companies from these emerging technologies on a worldwide basis in order to prevent them from applying the same technologies at home. This would complicate the viability of any deepwater, Arctic offshore, or shale oil projects involving sanctioned Russian oil companies (which include the largest Russian oil companies) anywhere in the world, by cutting them off from most of the industry’s major suppliers and technologies.
• Expand existing prohibitions (“Directive 2”) on US persons transacting in new debt of sanctioned Russian energy companies.  Rather than allowing dealings in these companies’ new debt of 90 days maturity or less, as is currently the case, the CRIEEA would allow only dealings in their new debt of 30 days maturity or less.  This would severely limit Russian energy companies’ ability to obtain short-term financing in international markets, and would also impact the allowable sales terms that US companies can offer these Russian customers.
• Similarly, expand existing prohibitions (“Directive 1”) on US persons transacting in new debt of sanctioned Russian financial institutions.  The CRIEEA would only allow dealings in their new debt of 14 days maturity or less, versus 30 days currently (while maintaining the current restriction on dealings in their new equity).  This could have a real impact on the liquidity and health of the Russian financial sector.
• Impose restrictions on US correspondent and payable-through accounts for foreign financial institutions that “knowingly” engage in “significant” transactions: 1) on behalf of Russian persons designated on OFAC’s Specially Designated Nationals (SDN) list under the Ukraine-related authorities, 2) in connection with significant investments in a Russian deepwater, Arctic offshore or shale oil project, or 3) involving certain other sanctioned persons (e.g. those sanctioned for manufacturing or transferring defense articles to Syria or other countries without the consent of the “internationally recognized government of that country”).  Foreign banks and other financial institutions will need to watch this provision closely, as there are important Russian companies and individuals on the SDN list, and this would also impose risk for any significant financial activity in the Russian energy sector.
• Block the property of “foreign sanctions evaders” in the Russia context, as has already been done in the contexts of Iran and Syria, including any foreign person that the President determines knowingly “(1) materially violates, attempts to violate, conspires to violate, or causes a violation” of any Russia sanctions; or “(2) facilitates significant deceptive or structured transactions for or on behalf of—(A) any person subject to sanctions imposed by the United States with respect to the Russian Federation; or (B) any child, spouse, parent, or sibling of an individual described in subparagraph (A).”  This could present broad risks for Russia-related dealings, particularly offshore transactions or those with opaque structures.
• Impose measures from a menu of sanctions on any person who “with actual knowledge . . . makes an investment of $10,000,000 or more (or any combination of investments of not less than $1,000,000 each, which in the aggregate equals or exceeds $10,000,000 in any 12-month period), or facilitates such an investment, if the investment directly and significantly contributes to the ability of the Russian Federation to privatize state-owned assets in a manner that unjustly benefits— (1) officials of the Government of the Russian Federation; or (2) close associates or family members of those officials.”   It is unclear whether this provision would have much of an impact, in light of the strict “actual knowledge” requirement and the subjective “unjustly benefits” clause.  Still, this could create additional risk in any involvement in Russian privatization deals.

This list is only an illustrative view of some of the most significant potential impacts that this bill could have.  The CRIEEA contains numerous additional sanctions provisions, and also calls for a variety of studies and reports into the exposure of the US economy to certain Russia-related risk areas, presumably with an eye towards assessing the feasibility of yet another major expansion of Russia sanctions down the road.  Notably, the CRIEEA authorizes the President to waive many of the sanctions described above where he determines that it is “in the vital national security interest” of the United States to do so. It remains to be seen if such a bold Russia sanctions bill will survive in the House, where some in the Republican leadership have appeared to take a more cautious stance about imposing additional costs on Russia.  Moreover, Secretary of State Tillerson has expressed some opposition to the idea of additional statutory sanctions at a time when he claims that “we’re starting to talk” with the Russians about counterterrorism cooperation and resolving the conflict in Syria.  Depending on how these events unfold in the coming days, this could potentially set the stage for a rare Presidential veto of a bill supported by the President’s own party, although all sides will likely seek to avoid that scenario if at all possible.  In any case, the fact that Senate leadership is now on board with materially expanding the scope of Russia sanctions calls for great caution and diligence in any Russia-related dealings until the policy and legal picture becomes more clear.