31 July 2017

US Congress approves new sanctions on the Russian oil and gas sector

Last week, the US Congress approved a bill providing for additional sanctions against Russia, Iran and North Korea. This Legal Alert provides a brief summary of the bill, focusing on the sanctions against the Russian oil and gas industry, which are expected to have the most practical impact on both US and non-US companies, even when acting outside of the US.

Background

Regarding Russia, the purpose of the bill is twofold. First, it curtails the power of the President to lift or ease US sanctions against Russia, requiring him to get Congressional approval for any such measures. Second, it imposes new sectoral sanctions, including:

  • ‘primary sanctions’, restricting US persons’ business with Russia; and
  • ‘secondary sanctions’, threatening non-US persons engaging in certain transactions with Russia, even if they have no ties with the US.

President Trump is expected to sign the bill into law, in which case it will be referred to as the Countering America’s Adversaries Through Sanctions Act (CAATSA).

Expanded sectoral sanctions

In 2014, both the US and the EU introduced “sectoral sanctions” targeting the main Russian oil and gas companies, including many of their subsidiaries. The bill significantly expands those sanctions.

Primary sanctions
The current US sectoral sanctions against Russia prohibit US persons from providing financing to any targeted oil or gas company, including debt with a maturity of 90 days. The bill shortens this maturity term to 60 days. The practical importance of this lies in the fact that this prohibition is interpreted to also cover payment terms for goods and services. This means that, once the bill is enacted, US persons would be in violation of US sanctions if they allow a targeted Russian oil or gas company a payment term of 60 days or more.

The current US sectoral sanctions against Russia also prohibit US persons from providing goods, technology or services to any targeted Russian oil or gas company or their subsidiaries for exploration and production in Russian deep water, arctic offshore, or shale oil and gas field projects. The bill broadens this prohibition to new projects in deep water or the arctic offshore, as well as shale projects anywhere in the world (not just in or offshore Russia), if any targeted oil or gas company has at least a one third ownership interest in such a project.

These primary sanctions only concern “US persons”, including:

  • citizens and permanent residents of the US (including dual nationals);
  • any business entities organised under the laws of any US state;
  • owned-or-controlled foreign affiliates of a US company; and
  • non-US entities and individuals acting in the US.

Non-US companies acting outside the US are not bound by these primary sanctions. Nonetheless, it is important for non-US companies to be aware that (i) their US employees are prohibited from being involved in any such transactions in any way, even when acting outside the US, and (ii) their non-US employees cannot be involved in such transactions when they are in the US, even if this is for a short term, e.g. on a business trip.

Secondary sanctions
The bill also provides for a variety of secondary sanctions that can be imposed on non-US companies engaging in:

  • investments or the provision of goods, technology or services significantly contributing to Russian energy export pipelines (such as Nord Stream 2 and Bluestream) and having a value of USD 1 million, or USD 5 million in any 12 month period; or
  • investments in new deep water, arctic offshore and shale projects anywhere in the world, i.e. not just in or offshore Russia, if any targeted oil or gas company has at least a one third ownership interest in such a project.

These secondary sanctions can be imposed on any non-US company engaging in such activities, even if this company has no ties with the US. Secondary sanctions do not include monetary or prison sentences, but they can have severe adverse effects on non-US companies. Potential sanctions include exclusion from US governmental procurement, exclusion from US financing, non-eligibility for export licenses for strategic (dual-use and military) goods, exclusion from the US and revocation of US visa and sanctions on principal executive officers.

It is important to note, however, that the bill leaves the imposition of these secondary sanctions to the discretion of the President. Given the current position of the Trump administration towards Russia, it remains to be seen whether any of these measures will ever be implemented, as it is currently uncertain whether or not President Trump will choose to make use of this authority.

EU response

Once enacted, it is the European Commission’s view that he above sanctions may undermine EU energy security and that they overstep US jurisdiction, harming EU companies. For these same reasons, Austria, France and Germany already publicly raised objections against the bill. Even when they may never actually be imposed, the mere risk of US secondary sanctions may have a chilling effect on EU energy companies and companies servicing the oil and gas industry when considering to enter into any relevant projects. The European Commission has therefore indicated that, should the bill be enacted, it stands ready to hit back. Measures mentioned so far include:

  • seeking a public declaration from the Trump administration that no secondary sanctions will be imposed on European companies;
  • prohibiting compliance with, as well as the enforcement of, any such measures within the EU by way of adding the CAATSA to the EU Blocking Order; and
  • seeking World Trade Organization retaliatory measures.

What it means

As noted above, the primary sanctions do not bind non-US companies. Nevertheless, non-US companies should be careful not to involve US persons, or non-US persons acting in the US, in any project covered by these sanctions.

As regards secondary sanctions, the extent of the risk of any such measures actually being imposed remains to be seen. However, in view of the expected enactment of the bill, companies should:

  • assess their exposure by mapping their involvement in any:
    • projects contributing to Russian energy export pipelines; as well as
    • new deep water, arctic offshore and shale projects anywhere in the world, in which any targeted oil or gas company has at least a one third ownership interest; and
  • closely monitor the development of the US position towards Russia, as well as any EU response to the same.