United States: Sanctions Round Up: Third Quarter 2018

US sanctions against Russia remained front and center this quarter, with the Trump Administration imposing new measures in response to Russia's alleged involvement in biological attacks in the UK, issuing a new executive order aimed at preventing further election meddling, and even taking aim at Russia's weapons sales to China. Still, some US lawmakers are pushing for additional, "crushing" new sanctions against Russia as they argue that the Administration's approach to date is insufficient.

Ruble Hits Two-Year Low Following Threat of Toughest Sanctions Yet

President Trump's July meeting and joint press conference with Vladimir Putin sparked a negative political reaction in the US that could eventually culminate in stricter statutory sanctions against Russia. As the US midterm elections approach, American lawmakers are pondering curbs on Russian sovereign debt sales and tougher limits on some of the country's biggest banks as additional punishment for perceived election meddling and continued malign activities.

Most prominent among several proposed Senate bills, the bipartisan "Defending American Security from Kremlin Aggression Act of 2018" ("DASKAA") would impose the most comprehensive sanctions on Russia to date. In relevant part, the DASKAA would broaden and bolster last year's sanctions legislation (the Countering America's Adversaries Through Sanctions Act (CAATSA)) to include new primary and secondary sanctions targeted at Russia's sovereign debt, financial institutions, and energy sector. More specifically, the new provisions would include:

  • Prohibiting US persons from engaging in transactions related to new sovereign debt of the Russian Federation;
  • Sanctions against specified Russian sovereign and commercial financial institutions;
  • Additional sanctions (including against non-US persons) relating to the development of domestic Russian crude oil projects;
  • Additional sanctions (including against non-US persons) on investment in energy projects supported by Russia state-owned or parastatal entities; and
  • Required reports on political figures, oligarchs, and parastatal entities by the Trump Administration.

Although no measure is expected to pass before the November mid-terms, the specter of additional sanctions

has already taken a toll on Russian bond markets and prompted the most significant decline in the ruble in two years. In response, the Russian Central Bank has cancelled several recent bond auctions and significantly scaled back its announced borrowing plans for the upcoming quarter.

OFAC Continues to Forestall Sanctions Bite to Accommodate Deripaska Divestment

Since sanctioning a host of Russian oligarchs and their companies in April, OFAC has signaled that it would consider providing sanctions relief to the listed entities if their owners divest ownership and control. This quarter, the agency continued to forestall the full impact of sanctions in an apparent attempt to facilitate that process. For example, United Co. Rusal PLC has already instituted a series of management shakeups in its effort to come off of OFAC's sanctions list. In June, Rusal shareholders elected a new board of directors after the company's owner Oleg Deripaska and his top managers stepped down in May. Mr. Deripaska is reportedly intent on reducing his holdings to a sufficient extent to lift OFAC sanctions.

This quarter, OFAC twice extended the grace period during which time investors in Deripaska-linked companies (Rusal, GAZ Group, and EN+Group) may divest or transfer their equity or debt holdings without penalty. In July, the deadline was extended through October 23, 2018 (via the issuance of General License 13(C)). By September, OFAC again extended the deadline until November 12, 2018 (via General License 13(D)), explaining that the agency needed additional time to review "substantial corporate governance changes" by EN+ and Rusal "that could potentially result in significant changes in control."

In a further attempt to quell turmoil in the aluminum market, OFAC also issued guidance clarifying that customers are currently permitted to negotiate new annual supplies contracts with Rusal. While the current wind-down licenses permit the "maintenance" of business with Rusal for a limited period, industry participants were uncertain whether or not they were prohibited from entering new supplies contracts for the coming year, which are typically negotiated in September. In response to reports that Rusal was planning to cut production in anticipation of reduced orders, OFAC issued guidance making clear that entering new supplies contracts would be viewed as permissible "maintenance" activities during the wind-down period as long as they are generally consistent with the transaction history between the person and Rusal prior to April 6, 2018. (See FAQs 625-26). OFAC also extended the wind-down period for conducting business with Rusal, GAZ Group, and EN+Group from October 23, 2018, to November 12, 2018.

US Sanctions Russia for Nerve Gas Attack in UK

On August 8, 2018, the US State Department announced it would impose sanctions targeting Russia for its alleged role in the March 2018 nerve-agent attack on Sergei and Yulia Skripal in the United Kingdom. The sanctions will be imposed pursuant to the "Chemical and Biological Weapons Control and Warfare Elimination Act of 1991" —a rarely used US statute mandating sanctions against any foreign government determined to have used chemical or biological weapons (CBWs). The immediate effect of these measures is to restrict the export from the US of certain weapons and dual-use technologies to Russia and to restrict US foreign aid to the Russian Government until the country demonstrates a discontinuation of the alleged misconduct. Specifically, the initial tranche of sanctions include:

  • The termination of US foreign assistance, arms sales, and arms sales financing to Russia;
  • A denial of US Government credit and financial assistance, including from the Export-Import Bank of the United States; and
  • A prohibition on the export of national security-sensitive goods and technologies.

Under the statute, if Russia fails to provide adequate assurances as to its cessation of CBWs within 90 days, additional, more severe, sanctions could be imposed, such as preventing the Russian Government's access to financial assistance from US banks and multilateral development banks. Additional export and import prohibitions, a suspension of diplomatic relations, and the termination of air carrier landing rights could also follow. These additional measures would require additional, affirmative action by the President following the 90-day period.

President Trump Signs Two New Russia-Related Executive Orders of Limited Effect

On September 12, President Trump issued Executive Order 13848, titled "Imposing Certain Sanctions in the Event of Foreign Interference in a United States Election." Issued weeks ahead of the upcoming US mid-term elections, the new E.O. authorizes the President to take action against foreign governments, or associated individuals, after a finding that the foreign government has acted with the intent to interfere in any federal election or US election infrastructure. After a finding of foreign government interference, the US is authorized to target for sanctions both the individual actors who engage in interference, as well as the governments behind such efforts. The order was widely viewed as an attempt by President Trump to obviate the need for a more punishing sanctions bill currently being debated by Congress. Many US lawmakers criticized the order as redundant of existing authorities and insufficient to address the perceived threat posed by Russia.

Separately, on September 20, President Trump issued a new CAATSA-related Executive Order, titled "Authorizing  the  Implementation of Certain Sanctions Set Forth in the  Countering America's Adversaries Through Sanctions Act." The E.O. delegates the implementation of certain sanctions to the Department of Treasury and other US government agencies and departments. Importantly, the E.O. does not expand sanctions against Russia, but merely delegates implementation of CAATSA's provisions to various US government agencies.

Trump Administration Targets Entities and Individuals under CAATSA

On August 21, OFAC designated two Russian individuals and two Russian entities for their alleged role in helping a sanctioned Russian company circumvent US sanctions. According to OFAC, the individuals and entities allegedly assisted Divetechnoservices—itself a previously designated entity—in procuring a variety of underwater equipment and diving systems for Russian government agencies, including for Russia's Federal Security Services (FSB). The FSB was sanctioned in March 2018 for engaging in malicious cybersecurity attacks on behalf of the Russian government. Pursuant to E.O. 13694 and CAATSA Section 224, which targets those involved in malicious cyber-related activities, the following persons and entities were designated:

Marina Igorevna Tsareva

  • Anton Aleksandrovich Nagibin
  • Vela-Marine Ltd.
  • Lacno S.R.O. (Slovakia)

On September 20, the Administration took additional steps to bolster its implementation of CAATSA when the State Department added an additional thirty-three persons or entities to the CAATSA Section 231 List of Specified Persons (LSP) for being a part of, or operating on behalf of, the defense or intelligence sectors of the Government of the Russian Federation. CAATSA section 231 mandates the imposition of secondary sanctions against any person who knowingly engages in a "significant" transaction with persons or entities on the LSP. The following were added to the LSP, which now contains a total of 72 individuals and entities:

  • PMC Wagner
  • Oboronlogistika, OOO
  • Komsomolsk-na-Amur Aviation Production Organization (KNAAPO)
  • Internet Research Agency LLC
  • Concord Management and Consulting LLC
  • Concord Catering
  • Yevgeniy Viktorovich Prigozhin
  • Mikhail Ivanovich Bystrov
  • Mikhail Leonidovich Burchik
  • Aleksandra Yuryevna Krylova
  • Anna Vladislavovna Bogacheva
  • Sergey Pavlovich Polozov
  • Maria Anatolyevna Bovda
  • Robert Sergeyevich Bovda
  • Dzheykhun Nasimi Ogly Aslanov
  • Vadim Vladimirovich Podkopaev
  • Gleb Igorevich Vasilchenko
  • Irina Viktorovna Kaverzina
  • Vladimir Venkov
  • Viktor Borisovich Netyksho
  • Boris Alekseyevich Antonov
  • Dmitriy Sergeyevich Badin
  • Ivan Sergeyevich Yermakov
  • Aleksey Viktorovich Lukashev
  • Sergey Aleksandrovich Morgachev
  • Nikolay Yuryevich Kozachek
  • Pavel Vyacheslavovich Yershov
  • Artem Andreyevich Malyshev
  • Aleksandr Vladimirovich Osadchuk
  • Aleksey Aleksandrovich Potemkin
  • Anatoliy Sergeyevich Kovalev
  • Igor Valentinovich Korobov
  • Sergey Aleksandrovich Gizunov

Simultaneously with expanding the LSP, the State Department—in conjunction with OFAC—imposed secondary sanctions on a Chinese military entity and Chinese official for engaging in "significant transactions" with persons on this list in violation of CAATSA. Specifically, the Chinese Equity Development Department (EDD) and its director, Li Shangfu, were targeted for facilitating China's December 2017 purchase of Su-35 combat aircraft and S-400 surface-to-air missile systems from Russia. Both deals were negotiated with Rosoboronexport, Russia's main arms export entity, which was added to the LSP last year and separately designated as an SDN this April for its weapons sales to the Syrian Government.

The sanctions included the following restrictive measures:

  • 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;
  • Blocking of all property and interests in property within United States jurisdiction; and
  • The imposition of sanctions on an EDD principal executive officer and its 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, blocking of all property and interests in property within United States jurisdiction, and a visa ban.

The State Department emphasized that its actions were not intended to undermine the military capabilities or combat readiness of any country, but rather to impose costs on Russia in response to its interference in the US election process. Notably, Turkey and India are among other countries currently weighing the purchase of S- 400 missiles from Russia despite US opposition.

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