John E. Smith, John P. Carlin, David A. Newman, Michael V. Dobson, Panagiotis C. Bayz, Felix Helmstädter, Saqib Alam, and Kristofer G. Readling
National Security, CFIUS, Sanctions + Export Controls
The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) has a well-earned reputation in the sanctions bar for ruining weekends. The agency responsible for implementing and enforcing U.S. economic sanctions has gained a recent notoriety for imposing new sanctions on Fridays, sending sanctions counsel and corporate compliance departments scrambling to rearrange personal schedules in favor of early morning conference calls. This past weekend saw the administration take the practice to a relatively new extreme, resulting in something of a “Saturday Surprise.”
The chain of events actually began Thursday, August 1, when the White House issued an executive order (E.O.) that referenced sanctions but didn’t impose any. People were confused. The only thing that was clear to everyone was that the new E.O. pertained to an old law that has been getting fresh attention lately: the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (CBW Act).
Almost a year ago to the day, the U.S. State Department announced that the U.S. government was imposing five sanctions on Russia under the CBW Act in response to the “Novichok” nerve agent attack against Sergei and Yulia Skripal in the United Kingdom. The sanctions were not insignificant, but they were not the RUSAL designation either.
After that first round of measures, the CBW Act required the president to impose three more severe sanctions on Russia from a menu of options within 90 days unless one of two conditions was met. One involved the Kremlin committing to stop using chemical/biological weapons and agreeing to let inspectors verify the claim. The other was the president waiving the sanctions for the sake of national security interests.
The 90-day period came and went. Russia did not commit to stop using chemical/biological weapons. The president didn’t issue waivers. And yet there were no additional sanctions under the CBW Act. This was the status quo for roughly a year.
Then, this past Thursday, the president issued the new E.O. The E.O. delegates authority to the secretary of the treasury, in consultation with the secretary of state, to implement two of the sanctions options available to the president from the CBW Act menu. Many saw this as a precursor to the long-delayed CBW Act sanctions against Russia. They were right.
On Friday, shortly before midnight, the U.S. State Department announced the three new sanctions. The first is that the United States will oppose loans and other assistance to Russia in international financial institutions like the World Bank. The second is that “U.S. banks will be prohibited from participating in the primary market for non-ruble-denominated bonds issued by the Russian sovereign and lending non-ruble denominated funds to the Russian sovereign.” The third and final new sanction against Russia is that the U.S. Commerce Department will start to review export licenses for specified chemical and biological items to Russia under a presumption of denial. (This last is subject to several exceptions via waivers.) The first two measures were what the new E.O. gave the Treasury Department the authority to implement.
On Saturday, OFAC used its authority under the new E.O. to issue the “CBW Act Directive,” which implements the measure related to U.S. banks and non-ruble-denominated bonds and funds almost exactly as written above, only with the caveat that the restrictions apply to bonds issued and funds loaned after August 26, 2019. The CBW Act also prohibits any transaction that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate any of the directive’s prohibitions, as well as any conspiracy formed to violate any of the prohibitions.
The CBW Act Directive’s definition of “U.S. bank” encompasses any entity in the United States or organized under U.S. law (including foreign branches) that is “in the business of accepting deposits, making, granting, transferring, holding, or brokering loans or credits, or purchasing or selling foreign exchange, securities, commodity futures, or options, or procuring purchasers and sellers thereof, as principal or agent.” The phrase “Russian sovereign,” meanwhile, includes Russian government ministries, agencies, and sovereign funds, but explicitly excludes state-owned enterprises.
In addition to the CBW Act Directive, OFAC also issued several FAQs to explain what it did and why.
The restrictions on what U.S. banks can do with the Russian government are actually quite narrow. In addition to being limited to a relatively small class of U.S. persons, the prohibitions also pertain exclusively to bonds and loans denominated in currencies other than rubles. (Presumably, the restrictions are limited to Russian rubles, though none of the materials presently available indicates that the unlikely scenario of a U.S. bank lending the Kremlin Belarusian rubles is permissible.) An FAQ explicitly states that the bond-related restriction applies only to the primary market, leaving U.S. banks free to deal in secondary trading. Russian state-owned enterprises are left untouched.
Time will tell how this affects plans in the U.S. Congress, which engaged in a lengthy pressure campaign to push the administration to impose the sanctions required under the CBW Act in full. (Just recently, the chairman and ranking member of the U.S. House of Representatives Committee on Foreign Affairs sent the president a letter urging him to “take immediate action.”) As discussed previously, the House and Senate are currently considering several Russia sanctions bills, many of which contain measures related to Russian sovereign debt that are more severe than those implemented this weekend. While it is unlikely that this limited executive action will persuade the legislature to halt its own broader efforts, it will be interesting to see whether Congress sanctions Russian sovereign debt in a way that renders the CBW Act Directive moot. This would not be surprising, as many members of Congress have long criticized the Trump administration for being soft on Russia, and would almost certainly relish the opportunity to upstage the president with overriding legislation.
For now, the new sanctions take effect following the publication of a related Federal Register notice (on or around August 19, 2019, in keeping with a CBW Act timing requirement), and will remain in place for a minimum of 12 months.
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