HIGHLIGHTS:

  • The U.S. Department of State issued public guidance on sanctions with respect to 39 named entities related to Russia's defense and intelligence sectors. This guidance is issued under Section 231 of the Countering America's Adversaries Through Sanctions Act of 2017 (CAATSA).
  • Under Section 231, the U.S. Secretary of State, in consultation with the U.S. Secretary of the Treasury, is required to impose sanctions on persons determined to have knowingly engaged in a significant transaction, with a person that is part of or operating on behalf of the defense or intelligence sectors of the Government of the Russian Federation.

On Oct. 27, 2017, the U.S. Department of State issued public guidance (Guidance) on sanctions with respect to 39 named entities related to Russia's defense and intelligence sectors.This guidance is issued under Section 231 of the Countering America's Adversaries Through Sanctions Act of 2017 (CAATSA), which was signed by President Trump on Aug. 2, 2017. Another list was supposed to be announced by Oct. 1, 2017. The law codifies prior executive orders concerning Russia and Ukraine (e.g., Executive Orders 13660, 13661, 13662, 13685, 13694, and 13757), and therefore requires congressional action before these sanctions can be reversed by the President.

Four days later, the Office of Foreign Assets Control (OFAC), pursuant to the mandate in CAATSA, amended Directive 4 under Executive Order 13662 to prohibit the provision, exportation, or reexportation, directly or indirectly, of goods, services (except for financial services), or technology in support of exploration or production for all deepwater, Arctic offshore, or shale projects in which a designated entity is involved — not just projects in Russian waters — including those projects where the designated entity has a 33 percent or larger interest.

A. Section 231

Under Section 231, the U.S. Secretary of State, in consultation with the U.S. Secretary of the Treasury, is required to impose sanctions on persons determined to have knowingly engaged in a significant transaction, with a person that is part of or operating on behalf of the defense or intelligence sectors of the Government of the Russian Federation. The menu of sanctions options, which are described in Section 235, includes, among others, prohibitions concerning property transactions, export license restrictions, Export-Import Bank assistance restrictions, debt and equity restrictions, visa ramifications for corporate officers, and United States government procurement prohibitions. These are "secondary" sanctions in that they could apply to any person (not just U.S. entities). It is not clear, however, what the real-world effect will be on these 39 entities. Most of the entities named are already subject to U.S. sanctions.

The Guidance is clear that "[n]o asset freezes are being imposed on these named persons . . . and inclusion in this Guidance does not, of itself, mean such persons are added to the Department of the Treasury's List of Specially Designated Nationals [] and Blocked Persons or Sectoral Sanctions Identification List." CAATSA does require, at some point, the imposition of five or more sanctions — as described above — beginning on or after January 29, 2018, against these 39 entities. However, those specific sanctions determinations will be made at a later date. Thus, it appears that President Trump is following in the footsteps of President Obama by refusing to implement secondary sanctions, despite their existence. Regardless of whether the U.S. government actively enforces these sanctions, the secondary sanctions do create some legal and practical concern.

B. Significance

According to the Guidance, in determining whether a transaction is "significant" for purposes of Section 231, the Department of State will consider the totality of the facts and circumstances surrounding the transaction and weigh various factors on a case-by-case basis. The relevant factors may include, but are not limited to, "the significance of the transaction to U.S. national security and foreign policy interests, in particular whether it has a significant adverse impact on such interests; the nature and magnitude of the transaction; and the relation and significance of the transaction to the defense or intelligence sector of the Russian government." Moreover, the initial focus by the State Department will be on "significant transactions of a defense or intelligence nature with persons named in the Guidance" and that transactions involving goods or services involving purely civilian end-uses and/or civilian end-users (with no involvement by entities in the intelligence sector) will generally weigh heavily against a finding that a transaction is "significant."

In sum, the Guidance indicates that "[w]here possible the United States intends to work with persons considering transactions with persons named in this Guidance to help them identify and avoid engaging in potentially sanctionable activity." We fully expect that the State Department will be flooded with requests for clarification in the coming weeks.

C. Directive 4

Directive 4, as amended, imposes two prohibitions on the provision, exportation, or reexportation of goods, services (except for financial services), or technology for certain activities involving persons subject to Directive 4 (SSI List entities (Directive 4)), their property, or their interests in property, operating in the energy sector of the Russian Federation. Examples of prohibited services include "drilling services, geophysical services, geological services, logistical services, management services, modeling capabilities, and mapping technologies." In addition, Directive 4 prohibitions do not apply to projects that have the potential to produce only gas.

First, Directive 4 prohibits the direct or indirect provision, exportation, or reexportation of goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore1, or shale projects2 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, and that involve SSI List entities (Directive 4).

Second, for projects initiated on or after January 29, 2018, Directive 4 prohibits the direct or indirect provision, exportation, or reexportation of goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that meet the following criteria: 1) the project has the potential to produce oil in any location, and 2) the SSI List entity (Directive 4) has a 33 percent or greater ownership interest — calculated in the aggregate for multiple SSI List entities (Directive 4) — in the project or owns a majority of the voting interests in the project.3 The key difference is that this section applies to all deepwater, Arctic offshore, and shale projects in which an SSI List entity (Directive 4) is involved or has a 33 percent ownership interest — not just projects in Russian waters. This, for example, could affect Rosneft's operations in the Amazon.