Introduction

On 2 August 2019 the US State Department announced the issuance of another round of sanctions on the Russian government in relation to the Chemical and Biological Weapons Control and Warfare (CBW) Elimination Act 1991, which will come into effect on 19 August 2019.

The sanctions follow President Trump's Executive Order (EO) 13883, issued on 1 August 2019, which delegated implementation of the CBW act's sanctions to the secretary of the Treasury.

While this second round of sanctions is unlikely to affect most US companies, it may affect US banks, but only with respect to transactions involving non-ruble bonds and funds from the Russian sovereign issued after 26 August 2019.

The sanctions also make it next to impossible to obtain a licence to export items controlled for chemical and biological weapons reasons on the Commerce Control List to the Russian government and state-owned companies. However, because companies exporting chemical and biological controlled items to Russia already required a licence (and might have had trouble in the past for exports to the Russian government and state-owned companies), it is hard to assess the impact.

As such, it is paramount that banks and companies exporting items controlled for chemical and biological reasons review this article.

First round of sanctions

The Trump administration previously announced the imposition of sanctions against the Russian government under the CBW act, including five initial sanctions. On 27 August 2018 the State Department issued the first round of these sanctions, while waiving several others (for further details see "New Russia sanctions: all bark and no bite?").

Under the CBW act, unless the executive branch was able to certify within three months of the intial round of sanctions that the Russian government had made certain reassurances, additional sanctions would be imposed. These reassurances included:

  • not using chemical and biological weapons against its own nationals or in violation of international law;
  • not engaging in such activities in future; and
  • allowing onsite inspections by UN observers or other internationally recognised impartial observers.

The administration made no such certification in November 2018, thus ensuring a second round of sanctions.

Second round of sanctions – licensing policy for affected CBW items

The Trump administration waited until the last days of summer to issue its second round of sanctions on the Russian government. After one year, the sanctions can be lifted if the executive branch can certify to Congress that Russia has met the conditions described above.

The three new sanctions are as follows:

  • The United States will oppose the extension of any loan or financial or technical assistance to Russia by international financial institutions (eg, the World Bank or the International Monetary Fund).
  • US banks will be prohibited from participating in the primary market for non-ruble denominated bonds issued by the Russian sovereign and lending non-ruble denominated funds to the Russian sovereign.
  • Licences for exports to state-owned or state-funded entities of dual-use chemical and biological items controlled by the Export Administration Regulations will be subject to a 'presumption of denial' policy.

The CBW act provides that "[t]he authorities of section 4605 of title 50 shall be used to prohibit exports to that country of all other goods and technology (excluding food and other agricultural commodities and products)". To reduce the export sanctions from the broad-based export restrictions set out in the CBW act, the Trump administration has "determined that it is essential to U.S. national security interests to partially waive the restrictions on bank loans and exports".

In addition to limiting export restrictions to chemical and biological controlled items, the State Department has also noted that some export licence applications will continue to be considered on a case-by-case basis – specifically:

  • exports for space flight activities, including those involving government space cooperation and commercial space launch;
  • exports needed to ensure the safe operation of commercial passenger aviation;
  • exports to commercial end users in Russia for civil end uses;
  • exports to wholly owned subsidiaries of US and other foreign companies in Russia; and
  • deemed export licences for Russian nationals working in the United States.

The US government noted the same categories as for case-by-case review for the restrictions imposed in the first round of sanctions relating to items controlled for national security on the Commerce Control List. The first two waivers make more sense for national security-controlled items than chemical and biological items, which are less likely to be used in space or aviation.

The State Department also noted that export licences issued by the Commerce Department, Bureau of Industry and Security (BIS) would continue to be available to US companies fulfilling existing contracts with Russian customers. This likely confirms that licences already issued will not be revoked, and it may even include a case-by-case review policy for new applications relating to an existing contractual obligation. The BIS has yet to issue separate guidance on a licensing policy.

Companies exporting items to Russia subject to chemical and biological controls on the Commerce Control List should assess their current customer base to determine whether the change in licensing policy will affect their ability to obtain an export licence.

US banks prohibited from engaging in sovereign non-ruble denominated bond market

The Office of Foreign Assets Control (OFAC) issued the Russia-Related Directive under EO 13883, which implements the CBW act sanction relating to US banks. The directive clarifies the scope of the sanctions, as do the newly published FAQs. Pursuant to the directive, US banks are prohibited from:

  • participating in the primary market for non-ruble denominated bonds issued by the Russian sovereign after 26 August 2019; and
  • lending non-ruble denominated funds to the Russian sovereign after 26 August 2019.

As in the export context, the Trump administration decided it was essential to US national security interests to water down the bank loan sanction to these non-ruble denominated bond and fund transactions. The CBW act states that:

[t]he United States Government shall prohibit any United States bank from making any loan or providing any credit to the government of that country, except for loans or credits for the purpose of purchasing food or other agricultural commodities or products.

The directive limits this to new non-ruble denominated bonds issued by Russia and new non-ruble denominated funds loans to the Russian government after 26 August 2019. This leaves untouched transactions in pre 26 August 2019, non-ruble currency bonds and transactions in all ruble-denominated bonds and loans of the Russian government.

The OFAC's definition of 'US banks' also departs from previous precedent to exclude foreign branches. The definition includes:

  • depository institutions;
  • banks;
  • savings banks;
  • trust companies;
  • securities brokers and dealers;
  • commodity futures and options brokers and dealers;
  • forward contract and foreign exchange merchants;
  • securities and commodities exchanges;
  • clearing corporations;
  • investment companies;
  • employee benefit plans; and
  • US holding companies, US affiliates or US subsidiaries of any of the foregoing.

The definition of 'US banks' also includes branches, offices and agencies of non-US financial institutions that are located in the United States. However, according to the directive, the definition of 'US bank' does not extend to non-US financial institutions' branches, offices or agencies located outside the United States. According to the OFAC's FAQs, the directive does not prohibit US banks from participating in the secondary market for Russian sovereign debt.

Finally, the OFAC has defined 'Russian sovereign' narrowly to mean any ministry, agency or sovereign fund of the Russian federation, including the Central Bank of Russia, the National Wealth Fund and the Ministry of Finance of the Russian Federation. Critically, the definition does not include state-owned enterprises of the Russian Federation, unlike the BIS export licence restrictions discussed above. In other words, US banks can still loan money to Russian state-owned enterprises.

For further information on this topic please contact Kay C Georgi, John Gurley or Regan K Alberda at Arent Fox LLP's Washington DC office by telephone (+1 202 857 6000) or email (kay.georgi@arentfox.com, john.gurley@arentfox.com or regan.alberda@arentfox.com). Alternatively, contact Marwa M Hassoun at Arent Fox LLP's Los Angeles office by telephone (+1 213 629 7400) or email (marwa.hassoun@arentfox.com). The Arent Fox LLP website can be accessed at www.arentfox.com.

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