Since the beginning of August 2018, the United States has taken multiple actions that will affect U.S. trade with Russia.  The actions cover exports to Russia, doing business with Russian partners, and potential Russian investment in the United States.  These actions have added to the already challenging landscape of conducting business in and with Russia.

Economic Sanctions in Place Since 2014 Are Expanded Again

The United States has maintained targeted economic sanctions on Russia since 2014.  Most of these sanctions are administered by the U.S. Treasury Department, Office of Foreign Assets Control (OFAC).

These sanctions ensnare many prominent Russian individuals and entities.  They have also ensnared prominent U.S. companies: see our July 2017 blog post on penalties imposed against Exxon for Russia sanctions violations.  For an example of how sanctions have been periodically and consistently extended, see our September 2016 blog post.

There are also more recent examples.

First, in Executive Order 13,848, issued on September 12, 2018, President Trump established a process to investigate and impose sanctions against foreign parties and their agents that interfere in U.S. elections.  Under the Order, no later than 45 days after an election is concluded, if there is an indication of actions taken to interfere with the outcome of the election, an assessment must be conducted.

When the assessment is concluded, the outcome must be reported to the President, the Attorney General, and the Secretaries of Defense, Homeland Security, State, and Treasury.  Within 45 days of receiving that assessment, the Attorney General and Secretary of Homeland Security must report on whether there was foreign interference in the election.  Any party deemed to have been involved in that interference can be designated as a Specially Designated National (SDN).  As a general matter, U.S. persons cannot conduct any business with an SDN.

In addition, the Order authorizes the imposition of sanctions against the largest business entities licensed or domiciled in a country whose government authorized, directed, sponsored, or supported election interference, including at least one entity from each of the following sectors: financial services, defense, energy, technology, and transportation (or, if inapplicable to that country’s largest business entities, sectors of comparable strategic significance to that foreign government).

While the Executive Order does not say so specifically, it is safe to conclude that the Order is directed at least in substantial part toward Russia.

Second, sanctions were imposed pursuant to the Countering America’s Adversaries Through Sanctions Act (CAATSA).  (More information about CAATSA is available in our August 2017 blog post.)  Under CAATSA, among other things, the U.S. government designates parties that are affiliated with the Russian government’s defense or intelligence sectors, and can impose sanctions against persons that transact with those designated parties.

On September 20, 2018, the U.S. State Department designated 33 such parties and added them to the list of 39 parties designated previously.  Those 72 parties are listed on the CAATSA section 231 List of Specified Persons (the LSP).

There is no outright prohibition on conducting business with these 72 parties.  However, any person – regardless of nationality – that engages in a “significant transaction” with a party on the LSP is subject to sanctions, including designation by OFAC as an SDN.

What constitutes a “significant transaction” is not well-established in OFAC regulations or guidance.  But some insight was offered on September 20.  On that day, acting in concert with the State Department, OFAC designated one Chinese individual and one Chinese entity as SDNs for involvement in a significant transaction with parties on the LSP.

The designations, and additional trade restrictions imposed on these two Chinese parties by the State Department, were made because the Chinese parties were involved in a transfer to China from Russia of combat aircraft and surface-to-air missile system-related equipment. The State Department characterized this as a significant transaction which triggered designation under CAATSA, though State did not specify whether the size of the transaction, the nature of the equipment transferred to Russia, and/or other factors rendered this a significant transaction.

New Export Restrictions Announced Under Chemical and Biological Weapons Law

On August 6, the State Department announced its determination that the government of Russia used chemical weapons in England in an effort to assassinate Sergei Skripal, a former Russian spy, and his daughter.  The determination was made pursuant to the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (the CBW Act).

On August 27, acting in accordance with the CBW Act, the State Department announced the following restrictions on Russia:

-Termination of sales to Russia of defense articles and defense services, including termination of existing licenses for exports of such articles and services, except for exports in support of government and commercial space activities; and

-The prohibition on exports to Russia of commercial products and technology (e., items controlled for export under the Export Administration Regulations) subject to national security controls, with exceptions for certain exports specifically authorized under new licenses and specific license exceptions.

The State Department also imposed limits on certain financial assistance and aid for Russia.

The restrictions, which will remain in place for at least one year, augment existing restrictions on exports to Russia of certain oil and gas exploration equipment and exports to military end-users and for military end-uses.

Russian Investment in United States Likely to Be Subject to Greater Scrutiny

In August 2018, President Trump signed the Foreign Investment Risk Review Modernization Act (FIRRMA) into law. FIRRMA expands the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) to review more types of transactions for potential national security concerns.

Much attention has understandably been paid to the impact that FIRRMA will have on investment from China. The impact on investment from Russia is likely to be significant, too.

For one, FIRRMA specifically contemplates scrutiny of investments originating in countries of “special concern.” In addition, the new law anticipates careful review of transactions that could create or expose U.S. cybersecurity vulnerabilities, including if the acquisition could facilitate election interference.

Russia is one of the countries that will be most impacted by these new provisions. Moreover, Russian investment in the United States will likely trigger CFIUS interest simply given how aggressively the Trump Administration has used national security as a basis for implementing trade restrictions. (In one particularly obscure example, OFAC recently emphasized how North Korea is using a large number of North Korean laborers in Russia to evade U.S. sanctions.)

Conclusion

We do not foresee the U.S. government easing trade restrictions on Russia anytime soon. To the contrary, we believe the U.S. government will continue to expand restrictions on Russia using mechanisms such as those described in this article.

It is therefore essential for companies to fully understand the scope of their Russia business. Screen transaction parties against the U.S. government restricted and prohibited parties lists, including – now – the LSP. Recognize that many U.S. exports to Russia are restricted based on the recipient or end-use of the product. Beware that Russian investment in the United States may face extra scrutiny.

Unfortunately, due diligence on Russian counterparts presents unique challenges. The ownership and organizational structures of such entities can be convoluted and obscure.  Accordingly, if a company has any reason to think a Russian business partner is affiliated in any way with a sanctioned entity, it is essential to enlist expert assistance to fully tease out ownership and control before proceeding.

Thad McBride is a partner in Bass, Berry & Sims PLC’s Washington, D.C. office in the firm’s International Trade Practice Group. They focus on counseling clients on compliance with economic sanctions and embargoes, US export regulations (ITAR and EAR), and the Foreign Corrupt Practices Act (FCPA). He may be reached at tmcbride@bassberry.com.