Further to our previous post (which can be accessed here), in which we reported on the passing of a bill by the US Senate to amend US sanctions against Russia and Iran, the subsequent House of Representatives bill, which was passed by a 419-3 majority in the House and 98-2 in the Senate, titled “Countering America’s Adversaries Through Sanctions Act” or “CAATSA”, was signed into law by President Trump on the morning of 2 August 2017.
By way of broad overview, in relation to Russian sanctions, CAATSA (i) introduces sanctions “on persons who undermine cybersecurity, evade sanctions imposed on Russia and those responsible for human rights abuses”; (ii) imposes blocking measures and travel bans “on persons supplying weapons to Syria’s government”; (iii) imposes a wide range of new sanctions “on persons assisting those who undermine cybersecurity on behalf of the Russian government, engaging in significant transactions with the Russian defence and intelligence sectors, and on those persons who make significant investments in or provide goods or services in respect of pipelines or who make significant investments in or facilitate privatisation of state-owned assets”; (iv) consolidates and codifies sanctions on Russia’s energy and financial sectors currently imposed by executive order; and (v) imposes new sanctions on certain areas of Russia’s commodities and transport sectors.
With respect to item (iii), the President may impose five or more of the following sanctions on such a sanctioned person: (1) denial of Export-Import bank assistance; (2) limitation of exports for the sanctioned person; (3) prohibition of loans in excess of $10,000,000; (4) opposition from the US to loans by international financial institutions; (5) a range of specific prohibitions where the sanctioned person is a financial institution; (6) prohibitions on procurement by the US; (7) prohibition on foreign exchange transactions; (8) prohibitions on banking transactions; (9) prohibitions on property transactions; (10) ban on investment in equity or debt of the sanctioned person; (11) exclusion of corporate offices; and (12) direct sanctions on principal offices of the sanctioned person.
CAATSA also imposes an obligation on the Secretary of the Treasury, in consultation with the Director of National Intelligence and the Secretary of State, to submit a report on senior foreign political figures and oligarchs in the Russian Federation. In addition, it imposes further sanctions against Iran and North Korea and makes it more difficult for sanctions to be eased once they have been put in place. Please refer to our general briefing on CAATSA for more information.
Of specific interest to the energy sector is that CAATSA establishes a secondary sanctions regime, which authorises the President to impose, at his discretion, penalties on Russian and overseas entities supporting or investing in Russian “energy export pipelines”, which would include the Nord Stream 2 (“NS2”) pipeline to Europe. The investment must either “directly and significantly contribute” to the enhancement of Russia’s ability to construct such pipelines, or must consist in “goods, services, technology, information, or support” that could “directly and significantly facilitate the maintenance or expansion of the construction, modernization, or repair of energy export pipelines” by Russia. The President may impose five or more penalties. Certain European energy companies and lenders involved in financing NS2, and other unconventional oil projects, are likely to be affected by the new restrictions. Unsurprisingly, this amendment was not well received within Europe when the Senate passed its version of the bill in mid-June 2017. Most notably, Germany and Austria, whose governments and companies are heavily involved in NS2, issued a joint statement in which they described the bill passed by the Senate as a “new and very negative quality in European-American relations […] Europe’s energy supply is a matter for Europe, not the United States of America”. These concerns appear to have effected change in the version of the bill passed by the House, as the President is now only authorised to impose sanctions in relation to export pipelines “in coordination with allies of the United States”. In addition, the House also revised an earlier portion of the bill to read: “It is the sense of Congress that the President should continue to uphold and seek unity with European and other key partners on sanctions implemented against the Russian Federation”.
Another important amendment effected by CAATSA is to Directive 4 of Executive Order 13662. Before CAATSA, Directive 4 prohibited the provision, exportation or re-exportation, directly or indirectly, by US persons or persons within the US, of goods, services (except financial services) or technology in support of unconventional oil projects within Russia (or in a maritime area claimed by Russia) and in which a targeted Russian energy company was involved. The new amendments to Directive 4 now also target these unconventional oil projects anywhere, including outsideof Russia, that involve targeted Russian companies, or the property or interests in property of such a person, who has a “controlling interest, or a substantial non-controlling ownership interest in such a project defined as not less than 33 percent interest”. There has been some debate as to what is meant by a “controlling interest”. Seeking to provide some clarity on this point, Representatives Pete Sessions and Ed Royce engaged in a discussion on the floor of the House, specifying their understanding that “controlling” would mean “the power to direct, determine, or resolve fundamental, operational, and financial decisions of an oil project through ownership of a majority of the voting interests of the oil project”. We expect the US Office of Foreign Assets Control (“OFAC”) will issue guidance on this point.
A second notable amendment to Directive 4 is that it has only been expanded to apply to “new” unconventional oil projects. What is meant by “new” is not defined in the legislation, and as far as we can tell the introduction of the word “new” was not discussed during the legislative process. We expect OFAC will issue guidance on this point, as it may be difficult to determine the exact point in time when a particular project comes into existence (and therefore the date in relation to which it is determined whether the project is “new” for the purposes of the amended Directive 4).
The oil sector is targeted further by the proposed amendments to The Ukraine Freedom Support Act of 2014 (“UFSA”). The UFSA currently specifies that the President “may impose” certain sanctions on a non-US person who knowingly makes a significant investment in certain Russian crude oil projects. CAATSA amends this provision so that the President “shall impose” such sanctions, “unless the President determines that it is not in the national interest of the United States to do so”. Similarly, CAATSA proposes that the President “shall impose” certain sanctions on foreign financial institutions who knowingly engage in transactions involving defense and energy sectors. We note, however, that there is still room for manoeuvrability and discretion by the President.
CAATSA also provides for the tightening of restrictions on the financing of, or transactions in, debt issued by any person named on a related sanctions list. Such persons currently include designated persons in the Russian financial services sector and designated persons in the Russian energy sector. Directive 1 of EO 13662 (which targets financial institutions) will be modified to impose a 14-day maturity limit (previously at 30 days). With respect to Directive 2 of EO 13662 (which targets energy companies), and contrary to the version of the bill passed by the Senate (which amended the maturity period to 30 days), Directive 2 will be modified to impose a 60-day maturity limit (previously at 90 days). We expect that these amendments will not apply retrospectively, such that the new thresholds for debt under Directive 1 and Directive 2 will apply only to debt that comes into existence after the date on which the changes become effective. The list of persons determined to be subject to one or more of the directives under EO 13662 can be found here.
Our previous post reported that the shipping industry would also be targeted by the amendments if the version of the bill originally passed by the Senate was enacted as law. However, the amendments concerning the shipping sector have been omitted by the House of Representatives in CAATSA. By way of explanation, the version of the bill passed by the Senate proposed amendments to section 1(a) of EO 13662, which provides for the blocking of property and interests in property of certain persons contributing to the situation in Ukraine (as determined by the Secretary of the Treasury, in consultation with the Secretary of State), to include, amongst others, the “shipping” sector. However, CAATSA broadens the first category of persons subject to section 1(a) to include only state-owned entities (“SOEs”) “operating in the railway or metals and mining sector of the economy of the Russian Federation”, and not SOEs in the shipping sector. Before CAATSA, the first category of persons subject to section 1(a) included persons operating in certain sectors of the Russian Federation economy, such as “financial services, energy, metals and mining, engineering, and defense and related material”. The provisions affecting the financial sector, described in the previous section above, are generally applicable and will affect the shipping sector.
The main provisions of the Act should come into effect in October. OFAC will issue implementation guidance in the interim period. If you have any queries about how CAATSA may affect your business, transaction or project, please do not hesitate to contact us