In the past week, the US Government took several significant steps related to the US sanctions against Russia sanctions. This included imposing sanctions pursuant to Section 231 of the Countering America’s Adversaries Act (“CAATSA”) for the first time and expandeing the list of persons and entities identified as being part of the Russian defense or intelligence sectors under CAATSA Section 231. The US Government also clarified the scope of a sanctions waiver impacting foreign subsidiaries in Russia under the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (the “CBW Act”). Finally, the US Government extended the expiration dates for several general licenses related to United Company RUSAL PLC (“RUSAL”) and EN+ Group PLC (“EN+ Group”).
Imposition of Sanctions Pursuant to CAATSA Section 231
On September 20, 2018, the Secretary of State imposed sanctions on the Chinese entity Equipment Development Department (“EDD”) and its director, Li Shangfu, for engaging in “significant transactions” with Rosoboronexport, an entity listed on the CAATSA Section 231(d) Defense and Intelligence Sectors of the Government of the Russian Federation (“Section 231 Lists”). As described in our prior blog posts here and here, CAATSA Section 231 requires the imposition of sanctions against persons or entities (including US and non-US persons) who engage in “significant transactions” with parties who are part of, or operate for or on behalf of, the defense or intelligence sectors of Russia and are identified on the Section 231 Lists.
The transactions between Rosoboronexport and EDD involved the transfer of ten Su-35 combat aircraft and S-400 surface-to-air missile system-related equipment from Russia to China. The sanctions, which were selected from a menu of 12 possible sanctions in CAATSA Section 235, consisted of the following measures to be imposed on EDD:
- a denial of export licenses;
- a prohibition on foreign exchange transactions under United States jurisdiction;
- a prohibition on transactions with the United States financial system;
- designation on the List of Specially Designated Nationals and Blocked Persons (“SDN List”); and
- the imposition of sanctions on an EDD’s director Li Shangfu, which include a prohibition on foreign exchange transactions under United States jurisdiction, a prohibition on transactions with the United States financial system, designation on the SDN List, and a visa ban.
This effectively cuts off EDD and Mr. Shangfu from doing business in the United States. In addition, non-US persons who deal with EDD or Mr. Shangfu may themselves risk being added to the SDN List. After the sanctions were announced, China’s Ministry of Foreign Affairs reportedly summoned the US Ambassador to China to protest their imposition.
The action taken against EDD and Li Shangfu followed the issuance of a new executive order delegating the implementation of the menu of sanctions set forth in CAATSA and the Ukraine Freedom Support Act of 2014, as amended, to the Secretary of the Treasury, the Secretary of State, and the heads of relevant departments and agencies. The sanctions imposed against EDD and Li Shangfu represent the first time the US Government has imposed sanctions under CAATSA Section 231 and reflects an evolution in the US Government’s implementation of that provision. In January 2018, the State Department announced that the imposition of sanctions under Section 231 was not necessary because of the provision’s deterrent effect. More recently, the State Department indicated that, although CAATSA Section 231 continued to have a real deterrent effect behind-the-scenes, the time would likely come when the US Government would have “no choice” but to impose sanctions under CAATSA Section 231. Statements made concurrently with the imposition of sanctions against EDD and Li Shangfu indicate that the State Department felt it “necessary” to impose sanctions against these parties.
In addition to imposing sanctions against EDD and Li Shangfu, the Secretary of State also added 33 additional persons and entities to the Section 231 Lists for being a part of, or operating for or on behalf of, the defense or intelligence sectors of Russia, which increases the number of persons identified on the Section 231 Lists to 72. The additions to the Section 231 Lists can be reviewed here. US and non-US persons who engage in “significant transactions” with parties on the Section 231 Lists are at risk of themselves being sanctioned.
Clarification of a CBW Act Waiver Impacting Foreign Subsidiaries in Russia
On September 19, 2018, the State Department made a correction that clarified the scope of a waiver previously issued in connection with the sanctions imposed on Russia under CBW Act on August 27, 2018. We have described those sanctions in a prior blog post.
One of the five sanctions imposed was a prohibition on all exports to Russia of national security-sensitive goods and technology, subject to certain waivers. One of those waivers was for “Exports and reexports of goods or technology pursuant to new licenses for exports and reexports to wholly-owned U.S. subsidiaries in Russia, provided that such licenses shall be issued on a case-by-case basis, consistent with export licensing policy for Russia prior to enactment of these sanctions.” The correction broadens the scope of the waiver to encompass “wholly-owned U.S. and other foreign subsidiaries in Russia” (emphasis added).
Extension of the Expiration Date for General Licenses Related to RUSAL and the EN+ Group
On September 21, 2018, the Office of Foreign Assets Control reissued several general licenses related to RUSAL and the EN+ Group with extended expiration dates. The extensions are as follows:
- General License 13C, authorizing certain transactions necessary to divest or transfer debt, equity, or other holdings in EN+ Group PLC, GAZ Group, and RUSAL, was reissued as General License 13D and now expires on November 12, 2018 rather than on October 23, 2018 for transactions involving RUSAL and the EN+ Group (the expiration date with respect to the GAZ Group, October 23, 2016, remains unchanged).
- General License 14, authorizing certain activities necessary to maintenance or wind down of operations or existing contracts with RUSAL, was reissued as General License 14A and now expires on November 12, 2018 rather than rather than on October 23, 2018.
- General License 16, authorizing certain activities necessary to maintenance or wind down of operations or existing contracts with EN+ Group or JSC EuroSibEnergo, was reissued as General License 16A and now expires on November 12, 2018 rather than rather than on October 23, 2018.