United States: Russian Companies Penalized Under Iran Nonproliferation Act

On Aug. 4, 2006, the State Department issued sanctions against seven companies under the Iran Nonproliferation Act of 2000 (the "Act"). Two prominent Russian companies—Rosoboronexport, the Russian state arms export company, and Sukhoi, a leading Russian aerospace and defense contractor—were named on this list which also included companies from North Korea, Cuba, and India. The United States cited Rosoboronexport and Sukhoi for aiding Iran in its development of weapons of mass destruction ("WMD"), a charge that both companies sharply denied. While unconfirmed reports have circulated that Sukhoi soon will be removed from this list, the imposition of U.S. sanctions against these prominent Russian companies nevertheless highlight the tensions between the two countries both over trade and how best to deal with Iran.

The Act seeks to punish any entity that transfers to Iran equipment or technology that makes a material contribution to the development of WMD. While the Act primarily restricts the U.S. government from interacting with the named entities, it also imposes restrictions on U.S. persons as well. According to the Federal Register notice implementing the sanctions against the seven companies [71 Fed. Reg. 44345 (Aug. 4, 2006)] (the "Notice"):

• No department or agency of the United States Government may procure, or enter into any contract for the procurement of, any goods, technology, or services from these foreign persons;

• No department or agency of the United States Government may provide any assistance to the foreign persons, and these persons shall not be eligible to participate in any assistance program of the United States Government; and

• No United States Government sales to the foreign persons of any item on the United States Munitions List (as in effect on August 8, 1995) ("USML") are permitted.

In addition to these restrictions on the U.S. government, the Notice imposed the following restrictions on all U.S. exports intended to the named entities under the Act, including Rosoboronexport and Sukhoi.

• No new individual licenses shall be granted for the transfer to these foreign persons of items the export of which is controlled under the Export Administration Act of 1979 or the Export Administration Regulations ("EAR"), and any existing licenses are suspended; and

• All sales to these persons of any defense articles, defense services, or design and construction services under the Arms Export Control Act are terminated.

According to the Commerce Department, the provision dealing with the EAR does not create a new license requirement. Instead, any new license application involving Rosoboronexport and Sukhoi will be subject to a general policy of denial. In practical terms, this generally means that if an item is subject to the Commerce Control List ("CCL"), requires a license for the export to Russia, and either Rosoboronexport or Sukhoi are the intended end-user, then the application will be subject to the Commerce Department’s general policy of denial. However, if an item on the CCL does

not require a license for the export to Russia, then no additional license is required under the Act for the export of such items to Rosoboronexport or Sukhoi. Similar restrictions exist under the USML, i.e., authorization currently is not forthcoming for any item on the USML where the intended end-user is either Rosoboronexport or Sukhoi.

Citation under the Act is not as restrictive as being placed on the Treasury Department’s Specially Designated Nationals and Blocked Persons ("SDN") list. In the latter case, the SDN prohibits all trade with a named person, while the Act only imposes the above-described license requirement for two years. Nevertheless, as discussed below, the sanctions have practical consequences for the named companies and the overall U.S.-Russian trade relationship.

Both Rosoboronexport and Sukhoi categorically denied that they had supplied WMD technology to Iran, although the Russian Foreign Ministry admitted to supplying defensive weapons to Iran. Sukhoi itself claimed that it had not shipped any products to Iran in the past eight to 10 years. In light of these public denials, Russian officials speculated that the sanctions were in response to Russia’s recent $3 billion arms agreement with Venezuela, and not because of any direct involvement in Iran’s WMD program.

The sanctions already appear to have affected both Rosoboronexport and Sukhoi. According to the Russian press, Rosoboronexport was involved in negotiations to sell arms to Iraq and Afghanistan through various intermediaries. Shortly after the publication of the Notice, however, a Rosoboronexport spokesman indicated that the deal was in danger of falling apart because of the sanctions. Sukhoi is working with several prominent U.S. companies (Boeing, Honeywell) to produce a new medium-range passenger aircraft. The Russian press has reported that the State Department recently rejected two license applications related to the project, although Sukhoi insisted that these denials would not delay the development of the aircraft.

Ironically, the sanctions may have their greatest impact on U.S. companies. Boeing, in addition to contacts with Sukhoi, maintains extensive business relations in Russia that may suffer as a result of the sanctions. For example, Aeroflot is currently considering purchasing up to $3 billion worth of new planes, and speculation already exists that alternative sources (i.e., Airbus) may be pursued in light of the sanctions. Rosoboronexport also recently purchased Russia’s main titanium producer that has extensive dealings with Boeing, as well as controls AvtoVAZ, the country’s biggest automobile manufacturer and a joint venture partner with General Motors. How the sanctions affect these relationships remain unclear, although at the very least, U.S. companies will have to exercise an increased level of caution when dealing with Rosoboronexport and Sukhoi.

The Act provides for yet another prohibited parties list that U.S. companies must consult before conducting business overseas. In light of the recent signing of the WTO bilateral agreement between Russia and the United States, unconfirmed reports indicate that the United States already has decided to lift the sanctions against Sukhoi. No decision, however, has been made in regards to the sanctions against Rosoboronexport, and Reed Smith will continue to monitor developments concerning both companies.

This article is presented for informational purposes only and is not intended to constitute legal advice.