Client Alert

Not So Fast…Aiming to Prevent Their Completion, the Trump Administration Paves Way for Expanded Sanctions on Russian Pipeline Projects

17 Jul 2020

Earlier this week, on July 15, 2020, U.S. Secretary of State Mike Pompeo paved the way for enhanced sanctions on the Russian Nord Stream 2 and TurkStream projects by announcing that the Trump Administration is removing an existing sanctions exemption that spared the pipelines from sanctions authorized by the Countering America’s Adversaries Through Sanctions Act of 2017 (“CAATSA”). Specifically, he announced that the Department of State deleted the portions of its public guidance in effect prior to July 15, 2020, that limited the focus of implementation of Section 232 of CAATSA to Russian energy export pipeline projects for which a contract was signed on or after August 2, 2017 (the date CAATSA took effect). In this week’s announcement, the Department of State clarified that the focus of implementation of Section 232 will include Russian energy export pipelines such as Nord Stream 2 and the second line of the TurkStream project. The controversial Nord Stream 2 pipeline, which would deliver Russian natural gas to Germany, is nearing completion despite an escalating series of threats from the United States. Meanwhile, the TurkStream project, connecting Russia with Turkey via the Black Sea, was partially completed in January 2020. New sanctions may affect the second line of the TurkStream pipeline, which, like the Nord Stream 2 pipeline, is still under construction. As we discussed in a previous alert, the U.S. Congress is likely to pass a measure later this year enhancing the existing sanctions on the projects, but Wednesday’s announcement makes clear that the Trump Administration has lost its patience – and perhaps fears continued election year criticism – as construction of the two pipelines marches along.

Key Takeaways

  • As the Nord Stream 2 and TurkStream projects inch closer toward completion, despite existing U.S. sanctions, concern within the U.S. government continues to grow – concern that the pipelines will be completed, the sanctions will have been too little, too late, and the projects will cause lasting geopolitical damage.
  • Secretary Pompeo’s announcement removes a grandfather clause that had exempted the Nord Stream 2 and TurkStream projects from broad sanctions under CAATSA.
  • Together with proposed legislation in Congress, Secretary Pompeo’s announcement illustrates a renewed whole-of-government approach against the Nord Stream 2 and TurkStream projects.

Nord Stream 2 Project

One of the most contentious current issues between Germany and the United States has been the Nord Stream 2 pipeline, an underwater natural gas pipeline that will connect Russia and Germany via the Baltic Sea, skirting a current pipeline through Ukraine. Germany views the project as consistent with its long-term interests, specifically its energy security. The German economy, which is substantially more industry-heavy than economies in other European countries or the United States, increasingly relies on natural gas as part of its energy supply. The United States, however, strongly opposes the pipeline, which it contends will prop up Moscow, allow Russia to turn off gas to and through Ukraine, and render Germany excessively reliant on Russian energy.  Despite the current U.S. sanctions on certain aspects of the project (see below), the Nord Stream 2 pipeline is nearing completion. Indeed, while U.S. sanctions succeeded in persuading Allseas, a Swiss pipe-laying company, to not carry out its planned operations on the Nord Stream 2 Project, Russia has vowed to continue construction of the remaining 100 miles of the pipeline, led primarily by state-owned Gazprom.

TurkStream Project

The TurkStream pipeline project consists of two lines that run together underwater from Russkaya, Russia, through the Black Sea to Kiyikoy, Turkey. Each pipeline has an annual capacity of 15.75 billion cubic meters. The first of the TurkStream project pipelines was completed in early January 2020, while the second line, which will service other countries in Eastern Europe, remains under construction. Like the Nord Stream 2 pipeline, the United States views the TurkStream project as a Russian geopolitical tool aimed at increasing the country’s market share in Turkey, and by extension Europe, while simultaneously allowing Russia to pressure Ukraine by threatening to cut off, and actually cutting off, gas through the existing Ukraine pipeline, as Russia has done in the past.  

Sanctions Under CAATSA

In 2017, Congress passed CAATSA, which, among several other provisions, includes a measure that allows the Administration to target certain high-value investments or sales for the construction of Russian energy export pipelines.

Specifically, Section 232 of CAATSA authorizes the President to impose sanctions on the following actors with respect to the development of pipelines in Russia:

  • Persons who knowingly make an investment of $1,000,000 or more, or an aggregate investment of $5,000,000 or more over a 12-month period, that directly or significantly contributes to the enhancement of the ability of Russia to construct energy export pipelines.
  • Persons who sell, lease, or provide to Russia, for the construction of Russian energy export pipelines, goods, services, technology, information, or support (defined as being able to directly or significantly facilitate the maintenance or expansion of the construction, modernization, or repair of energy export pipelines).

The authority within Section 232 of CAATSA to sanction such transactions, however, is discretionary, and its implementing agency, the U.S. Department of State, issued guidance indicating that only projects initiated after CAATSA’s enactment would be subject to sanctions, thereby effectively excluding the Nord Stream 2 pipeline and the second line of the TurkStream pipeline from its purview.

Fast forward to Secretary Pompeo’s June 15, 2020 announcement. Per his statement, the Trump Administration is updating the public guidance for CAATSA sanctions authorities under Section 232 to include additional Russian pipeline projects, particularly the Nord Stream 2 and TurkStream projects, effectively eliminating the grandfather clause that had previously exempted the projects from sanctions under CAATSA. Secretary Pompeo was unequivocal in his support for additional sanctions and his repudiation of the projects: “It’s a clear warning to companies aiding and abetting Russia… Get out now, or risk the consequences.”  

Sanctions Under PEESA

As we discussed in a previous alert, President Trump signed into law the Protecting Europe’s Energy Security Act of 2019 (“PEESA”), as part of the National Defense Authorization Act for Fiscal Year (“NDAA”) 2020, on December 20, 2019. PEESA requires the Secretary of State to issue a report within 60 days, and every 90 days thereafter, on (1) vessels that engaged in pipe‑laying at depths of 100 feet or more below sea level for the construction of the Nord Stream 2 pipeline, the TurkStream pipeline, or any successor project; and (2) foreign persons determined to have knowingly: (i) sold, leased, or provided those vessels for the construction of any such pipeline; or (ii) facilitated deceptive or structured transactions to provide those vessels for such a project. As a result of being identified in any of the reports, the following sanctions would be mandatory: (A) assets subject to U.S. jurisdiction of any foreign persons identified in (2) above would be frozen; and (B) corporate officers and principal shareholders of any company owning a vessel identified in (1) above, as well as any foreign persons identified in (2) above, would be denied visas and prohibited from entering the United States.

Irked by the continued progress of the two projects, a bipartisan group of senators introduced a bill on June 4, 2020, that would add additional sanctions on the projects. Like PEESA, the follow‑on bill, the “Protecting Europe’s Energy Security Clarification Act,” was repackaged as an amendment, in this case Senate Amendment #1886, to the FY2021 NDAA. It appears likely that this provision will ultimately be included in the final version of the bill and that it will likely become law, as the NDAA, which funds the U.S. military, is viewed as “must-pass” legislation.

The amendment would expand sanctions to include penalties on parties involved in a wider range of pipe-laying activities, defined in the amendment as “activities that facilitate pipe-laying, including site preparation, trenching, surveying, placing rocks, backfilling, stringing, bending, welding, coating, and lowering of pipe.” Furthermore, the amendment also targets foreign persons that support the expanded definition of pipe-laying activities, for example, by providing underwriting services, insurance, or reinsurance for vessels; services or facilities for technology upgrades or installation of welding equipment for, or retrofitting or tethering of, those vessels; or services for the testing, inspection, or certification necessary for, or associated with the operation of, the Nord Stream 2 or TurkStream pipelines.

MoFo’s National Security practice will continue to closely monitor developments related to Russian pipeline projects. Given the recent Executive and Legislative Branch activity, it appears that the United States is launching a whole-of-government approach to stop both pipeline projects in their tracks.

Raymond Rif, a Legal Analyst in the Morrison & Foerster LLP National Security practice, contributed to this alert.

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