The U.S. Congress currently is considering various pieces of legislation imposing new, broad sanctions on Russia in connection with events surrounding Ukraine. If passed, these new sanctions would significantly impact companies doing business in Russia as well as non-U.S. financial institutions conducting transactions with the sanctioned Russian individuals or companies.
One piece of legislation imposes sweeping sanctions if Russia takes heightened action against Ukraine or if it does not withdraw its forces from the eastern border of Ukraine. Such sanctions would target (1) specific major Russian companies (including Gazprom and Rosneft) and banks and (2) all government-owned entities and any companies that operate in certain sectors in Russia. The scope of sanctions depends on whether the sanctions are imposed for failure to withdraw forces or heightened action against Ukraine.
Another piece of legislation could limit the scope of activities undertaken by the National Nuclear Security Administration (NNSA) with regard to Russia and could impact private contractors that support the Department of Energy's (DOE) nuclear cooperation program with Russia. The provisions might also be interpreted to restrict the NNSA’s ability to process or issue pending and new Part 810 specific authorizations for Russia.
CORKER LEGISLATION (S. 2277)
A group of Republican senators led by Bob Corker (R-Tenn.), the highest-ranking Republican on the Senate Foreign Relations Committee, has introduced a bill (S. 2277) that would impose broad sanctions on a variety of Russian entities in critical sectors, as well as against all government-owned entities, depending on specific circumstances triggering new sanctions. Essentially, the bill imposes escalating sanctions, depending on Russia’s actions toward Ukraine. The sanctions have significant implications for U.S. companies/U.S. persons who would be restricted from dealing with designated persons/entities in Russia as well as for non-U.S. financial firms due to the extra-territorial nature of certain measures in this bill. Sections 201 to 203 relate to the situation in Ukraine.
The legislation establishes three classes of sanctions, depending on the nature of Russia’s actions vis-à-vis Ukraine. All three classes are of interest to U.S. companies/U.S. persons, while the third class also has extraterritorial reach and could impact non-U.S. financial institutions that transact with persons/entities targeted by those sanctions.
Class 1: Russian forces do not withdraw from Crimea
If Russian forces do not withdraw from Crimea within seven days of the bill’s enactment, the bill requires the president to impose sanctions on any official or agent of the Russian government and any “close associate or family member of an official” of the Russian government who is responsible for or participates in violations of Ukraine’s territorial integrity and sovereignty beginning in February 2014, or for significant corruption. The bill also requires the president to impose sanctions on individuals or entities that provide financial, material, or technical support for these actions. The president is also granted further authority to sanction senior executives and entities already subject to sanctions as well as related individuals and entities.
Class 2: Russian forces do not withdraw from Eastern border of Ukraine/destabilizing measures
If Russian forces do not withdraw from the eastern border of Ukraine or otherwise cease destabilizing measures within seven days of the bill’s enactment, the bill requires the president to impose sanctions on enumerated Russian entities, as well as entities they own or control and their Russian citizen senior executives. The companies targeted include major Russian banks as well as Russia’s key oil and natural gas producers. This list is as follows:
- VTB Bank
The measures to be imposed are asset blocking and a visa ban. Essentially, these entities would be designated as Specially Designated Nationals (SDNs), resulting in the blocking of all transactions relating to property and interests in property of a sanctioned person or entity, if that property has a nexus with the U.S. or if a U.S. person is involved. The bill does provide an exception for the importation of goods, meaning that transactions relating to imports would not fall under the scope of the otherwise prohibited transactions relating to property and interests in property. The visa ban would bar sanctioned persons from entering the U.S., though the bill provides an exception for travel relating to U.N. obligations.
The president may waive the application of sanctions on national security grounds upon justification to certain Senate and House committees.
Class 3: Further Russian expansion Into Ukraine or other countries
The bill also addresses the potential for future aggressive action by Russian armed forces. Should Russia further expand into Ukraine or any other country in Europe or Eurasia, the bill requires the president to impose sanctions not only on those listed in the above section, but also on senior Russian officials and entities they own or control, as well as “close associates” of senior Russian officials that provide them with support and/or resources. (The bill defines senior Russian officials in its “Definitions” section, and includes immediate advisors to the president). Moreover, the sanctions would extend to all state-owned entities in Russia and all entities (including private companies) that operate in the arms, defense, energy, financial services, metals, or mining sectors of Russia. As such, this third class of sanctions would have the most sweeping reach.
These sanctions dovetail with a further provision that could have significant implications for many non-U.S. financial institutions. Although the sanctions specified in this section are the same as those in the previous section — asset blocking and a visa ban, with the same exceptions for the importation of goods and compliance with U.N. obligations — an additional provision extends the reach of these sanctions to non-U.S. financial institutions that transact with the persons described above. A non-U.S. financial institution that knowingly conducts transactions with persons/entities targeted by this class of sanctions (including all state-owned entities in Russia) could itself be cut-off from the U.S. financial system.
Specifically, the provision prohibits the opening and most maintenance of correspondent accounts or payable-through accounts in the U.S. of such foreign financial institutions that are determined by the president to have engaged in transactions with sanctioned persons/entities. The bill uses 31 U.S.C. 5312(a)(2)’s broad definition of “financial institution,” which includes not only commercial banks and securities brokers, but also insurance companies and precious metals dealers. For those financial institutions making use of correspondent accounts or payable-through accounts in the U.S., these sanctions could significantly affect the business operations of those institutions in the United States, even if that activity did not relate at all to Russia.
The president may waive the application of sanctions on national security grounds upon justification to certain Senate and House committees, though, of course, it is not certain whether he would exercise that waiver in any given situation.
This fate of this legislation is not yet clear. It was introduced with only Republican co-sponsors, making bipartisan passage of the bill in its current form less likely. However, it is supported by a notable group of Republican senators respected on foreign-policy matters. It is our experience that geopolitical events (e.g., Russian incursions into eastern Ukraine) can give legislation of this type momentum and suddenly become a far greater likelihood. Therefore, this legislation merits monitoring.
NATIONAL DEFENSE AUTHORIZATION ACT
The DOE related provision is contained in the U.S. House of Representatives version of the National Defense Authorization Act (NDAA), H.R. 4435, the bill by which Congress authorizes funding for the U.S. Department of Defense. Section 3120 of that bill contains provisions that could limit the scope of activities undertaken by the NNSA with regard to Russia. Specifically, it provides that no funds appropriated for the NNSA may be used for “any contact, cooperation, or transfer of technology between the United States and the Russian Federation,” unless the secretaries of Energy, State, and Defense make certain certifications to Congress. Those certifications have to do with Russia’s withdrawal from Ukraine, Russia’s respect for the territorial integrity of Ukraine, and Russia’s compliance with certain non-proliferation treaties.
On 19 May 2014, the White House Office of Management and Budget issued a statement objecting to Section 3120 of the draft NDAA on the grounds that U.S.-Russian cooperation on nuclear security and nonproliferation are in the national interest of the U.S. and that the proposed limitations unconstitutionally interfere with the president’s ability to execute foreign policy.
The language of Section 3120 is quite broad, and it is as yet unclear how the NNSA would interpret it if it were enacted. The language appears to be intended to suspend government-to-government nuclear cooperation programs, including joint nuclear non-proliferation efforts, until Russia has withdrawn from Ukraine and taken other steps. This could include cooperative programs undertaken by the DOE labs. As such, this restriction could affect private contractors that support DOE nuclear cooperation programs with Russia. In addition, it is unclear how DOE would interpret the restriction on technology transfers between the United States and Russia and whether it would view this language as restricting NNSA’s ability to process or issue pending and new Part 810 specific authorizations for Russia.
The fate of these provisions is still uncertain, but they have some possibility of being enacted. The bill was passed by the full U.S. House of Representatives on 22 May 2014. The Senate has begun work on its version of the bill, but it is still unclear whether the Senate version will contain a comparable provision. The full Senate has not yet voted on the bill. Any differences between the House and Senate versions would need to be reconciled between the two bodies. The underlying bill does have a reasonable chance of enactment this year, since it authorizes the activities of the U.S. Defense Department and therefore is a popular bill with members of Congress. Therefore, these provisions bear monitoring as the legislation moves through the Congressional process.