Client Alert

Trump Administration Broadens Sanctions on Russian Pipeline Projects (Again)

23 Oct 2020

On October 20, 2020, the U.S. Department of State (“State”) broadened, yet again, the scope of sanctions applicable to Russian energy export pipeline projects, most notably the Nord Stream 2 pipeline, a nearly finished Russian-backed natural-gas pipeline that has been a hot-button geopolitical issue in recent years. Specifically, State published guidance that expands existing sanctions imposed by the Protecting Europe’s Energy Security Act of 2019 (“PEESA”), which targeted the underwater vessels used for construction of Russian energy export pipelines such as the Nord Stream 2 and TurkStream pipeline projects, indicating that sanctions would now apply to companies providing services, facilities, or funding for “upgrades or installation of equipment” for vessels working on the projects. State’s action comes only a few months after a similar announcement in July 2020 removed a grandfather clause that the Trump administration created in 2017 that had exempted the Nord Stream 2 and TurkStream pipelines from broad sanctions under Section 232 of the Countering America’s Adversaries Through Sanctions Act of 2017 (“CAATSA”). 

Key Takeaways

  • Expanded Scope of Sanctions. Sanctions can now be imposed on entities and individuals anywhere in the world providing services, facilities, or funding for “upgrades or installation of equipment” for vessels that work on the Nord Stream 2 and TurkStream energy export pipeline projects. Previously, the focus of sanctions had been on the vessels themselves and individuals selling or leasing them to the projects. 
  • A Trend to Oppose Russian Energy Export Pipeline Projects. State’s recent guidance follows revised guidance it issued in July 2020 that similarly honed in on the Nord Stream 2 and TurkStream pipelines, among others, by permitting the projects to be sanctioned under CAATSA Section 232, which authorized sanctions on certain high-value investments or sales for the construction of Russian energy export pipelines. Previously, State took the position that only projects initiated after CAATSA’s enactment would be subject to Section 232 sanctions, thereby effectively excluding the Nord Stream 2 pipeline and the second line of the TurkStream pipeline from its purview.
  • More Sanctions Are Coming. A bipartisan group of senators introduced a bill on June 4, 2020, that would add additional sanctions on the projects. The follow‑on bill, the “Protecting Europe’s Energy Security Clarification Act,” was repackaged as an amendment to the FY2021 National Defense Authorization Act (“NDAA”), which, given its funding of the military, is considered “must pass” legislation and is expected to be approved by Congress before the end of the year.
  • Too Little Too Late? As the Nord Stream 2 project chugs along, despite existing U.S. sanctions and strong opposition, concern within the U.S. government continues to grow that its actions may be too little, too late. Reports suggest, for example, that the Nord Stream 2 pipeline is over 94 percent complete and that Germany, for one, assumes it will be completed.

The Pipeline Projects

  • Nord Stream 2 Project: The Nord Stream 2 pipeline is an underwater natural gas pipeline that will connect Russia and Germany via the Baltic Sea, skirting a current pipeline through Ukraine. Despite the current U.S. sanctions on certain aspects of the project, the Nord Stream 2 pipeline is nearing completion.
  • 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.

The U.S. opposition to these pipelines centers on concerns that their completion will make Europe overly dependent on Russian energy sources, thereby increasing Russia’s influence in the region. Germany takes a different position, however, viewing the Nord Stream 2 pipeline, in particular, as playing a critical role in its future energy security.

The U.S. sanctions against Nord Stream 2, as well as other “secondary” (or “extraterritorial”) sanctions, continue to cause tensions between the EU and the United States and foster debates in Europe about how to protect European sovereignty against perceived U.S. sanctions overreach. In addition to debates about the economic impact of U.S. sanctions on the Nord Stream 2 project and its stakeholders, instruments that are being proposed as defense options, for example recently by the European Council on Foreign Relations (ECFR), a leading European think tank, include countermeasures such as issuing counter-sanctions (presumably against the United States), strengthening of the EU “Blocking Statute,” and creating stronger independence from U.S. dollar transactions. In Germany, while the August 20, 2020 poisoning of Russian opposition leader Alexei Navalny – widely attributed to the Kremlin – seemed to have changed momentarily the political calculus in Europe toward Nord Stream 2, the German government recently resumed its pursuit of its goal to finalize the project, stressing that the Navalny case and the pipeline project discussions should be decoupled. Indeed, the EU reacted to the Navalny poisoning separately last week, by imposing sanctions against individuals and one organization under its chemical weapons sanctions program, although the views among EU Member State governments toward the Nord Stream 2 project continue to widely differ.

State’s October 20 Guidance

In accordance with Section 7503 of PEESA, the Secretary of State, in consultation with the Secretary of the Treasury, is required to submit a report to Congress within 60 days of the passage of the act, and every 90 days thereafter, identifying (A) vessels that engage in pipe-laying at depths of 100 feet or more below sea level for the construction of the Nord Stream 2 pipeline project, the TurkStream pipeline project, or any project that is a successor to either such project; and (B) foreign persons that the Secretary of State, in consultation with the Secretary of the Treasury, determines have knowingly sold, leased or provided those vessels for the construction of such a project; or facilitated deceptive or structured transactions to provide those vessels for the construction of such a project.  State’s October 20, 2020 guidance provides clarity on the definition of “provided” under Section 7503. Specifically, it clarifies that the phrase knowingly “provide[d] those vessels for the construction of such a project” may cover foreign firms or individuals who provide certain services or goods that are necessary or essential to the provision or operation of a vessel engaged in the process of pipe-laying for such projects. Such activities subject to sanctions pursuant to PEESA or other authorities may include, but are not limited to, providing services or facilities for upgrades or installation of equipment for those vessels, or funding for upgrades or installation of equipment for those vessels. Based on this guidance, companies providing services, facilities, or funding for upgrading existing equipment or installing new equipment on vessels used in the construction of the Nord Stream 2, TurkStream, or other successor projects are now firmly in the crosshairs of the U.S. government.

State’s guidance carves out a few exceptions to its new crackdown on activities related to the pipelines; it notes, for example, that sanctions will not apply to persons providing provisions to a relevant vessel if such provisions are intended for the safety and care of the crew aboard the vessel, the protection of human life aboard the vessel, or the maintenance of the vessel to avoid any environmental or other significant damage.

Additionally, the guidance provides a bit of respite to anxious observers in that it establishes a wind-down period to allow potentially violative activities to cease before the imposition of sanctions. Specifically, State’s guidance notes that the United States will not impose sanctions on persons determined to meet the above criteria for having knowingly “provided those vessels for the construction of such a project” under Section 7503(a)(1)(B) of PEESA, if those persons immediately engage in, and complete within 30 days, a good-faith wind-down of such activities.

The NDAA

The amendment to PEESA contained in the 2021 NDAA, which likely will become law later this year, 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.

Conclusion

It appears clear that sanctions targeting Russian energy export pipelines – and particularly Nord Stream 2 – will continue to be a common area of agreement between the Trump Administration and Congress. It also may be one area where the two U.S. Presidential candidates agree. In a 2016 speech in Stockholm, Vice President Biden called Nord Stream 2 a “bad deal” for Europe, and his campaign has reiterated this position.     

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