New Delhi (ABC Live): CAATSA Effects : On August 2, 2017, the President signed into law the “Countering America’s Adversaries Through Sanctions Act” (Public Law 115-44) (CAATSA), which among other things, imposes new sanctions on Iran, Russia, and North Korea.
Under Section 241 of CAATSA, the Secretary of the Treasury, in consultation with the Director of National Intelligence and the Secretary of State, was required to submit a report to Congress by January 29, 2018, regarding “senior foreign political figures and oligarchs in the Russian Federation” and “Russian parastatal entities.”
Additionally, under Section 242 of CAATSA, the Secretary of the Treasury, in consultation with the Secretary of State and the Director of National Intelligence, was also required to submit a report to Congress by January 29, 2018, describing in detail the potential effects of expanding existing U.S. sanctions that prohibit transactions or dealings by U.S. persons in “new debt” of longer than 14 days’ maturity of sanctioned Russian financial institutions to also target sovereign debt issued by the Russian Federation and “the full range of derivative products.” As with the “oligarchs” report described above, this report on sovereign debt will not automatically impose any new sanctions, but it could be a precursor to future sanctions targeting Russian sovereign debt, depending on how U.S.-Russia relations evolve.
Expansion of Directive 4 to Cover New Deepwater, Arctic Offshore and Shale Projects Worldwide
With respect to other CAATSA provisions, OFAC has amended Directive 4 of Executive Order 13662 to prohibit U.S. persons from providing, exporting or re-exporting, directly or indirectly, goods, services (except for financial services) or technology in support of exploration or production for deepwater, Arctic offshore or shale projects (unconventional projects) worldwide that involve Russian companies subject to Directive 4 that meet all three of the following criteria:
- The project was initiatedon or after January 29, 2018.
- The project has the potential to produce oil in any location.
- Any entity subject to Directive 41has either (i) a 33 percent or greater ownership interest or (ii) ownership of a majority of the voting interests in the project.
State Department Guidance on Section 225: Mandatory Secondary Sanctions for Significant Investments in Deepwater, Arctic Offshore or Shale Projects in Russia
On October 31, 2017, the State Department released public guidance on Section 225 of CAATSA, which requires the President to impose sanctions on “foreign persons” who knowingly, on or after September 1, 2017, make a “significant investment” in deepwater, Arctic offshore or shale oil projects in Russia (absent a presidential determination that such action is not in the U.S. national interest).
This guidance states that, in considering whether or not an investment qualifies as “significant” under these provisions, the State Department “will consider the totality of the facts and circumstances surrounding the investment and weigh various factors on a case-by-case basis,” including the following factors:
- the significance of the transaction to U.S. national security and foreign policy interests, in particular, where the transaction has a significant adverse impact on such interests
- the nature and magnitude of the investment, including the size of the investment relative to the project’s overall capitalization
- the relation and significance of the investment to the Russian energy sector.
State Department Guidance on Section 232: Discretionary Secondary Sanctions Related to Development of Russian Energy Export Pipelines
The State Department also issued guidance on Section 232 of CAATSA, which provides the President with discretionary authority to impose sanctions related to Russian energy export pipelines. This provision has raised concerns in Europe due to its potential negative impacts on energy export pipelines from Russia to Europe. Specifically, Section 232 of CAATSA permits, but does not require, the President to impose sanctions on persons who knowingly (i) make an investment that “directly and significantly contributes to the enhancement of the ability of the Russian Federation to construct energy export pipelines;” or (ii) sell, lease or provide to Russia, for the construction of Russian energy export pipelines, goods, services, technology, information or support that “could directly and significantly facilitate the maintenance or expansion of the construction, modernization, or repair of energy pipelines,” provided that, in either case, the value of such investments, goods, services, technology or information exceed specified value thresholds.
OFAC Guidance on Section 226: Mandatory Secondary Sanctions Targeting Foreign Financial Institutions
Section 226 of CAATSA requires the President to prohibit the use of correspondent accounts in the United States by “foreign financial institutions” (FFIs) that knowingly facilitate “significant transactions” involving “significant investment” in Russian deepwater, Arctic offshore or shale projects, or certain defense-related transactions, as well as significant financial transactions on behalf of any Russian person included on the Specially Designated Nationals and Blocked Persons List (“SDN List”) maintained by OFAC.
OFAC Guidance on Section 228: Mandatory Secondary Sanctions Targeting Transactions with “Foreign Sanctions Evaders”
Among other measures, Section 228 of CAATSA generally requires the President to impose sanctions on any foreign person who “knowingly . . . facilitates a significant transaction or transactions, including deceptive or structured transactions, for or on behalf of” persons subject to U.S. sanctions against Russia, subject to certain waiver authority.
OFAC Guidance on Section 233: Mandatory Secondary Sanctions Targeting Privatization of Russian State-Owned Assets
Section 233 of CAATSA requires the President to impose sanctions on any person who, “with actual knowledge,” makes or “facilitates” an investment of $10 million or more (or a combination of investments, each of $1 million or more and totaling $10 million or more during any 12-month period) that “directly and significantly contribute to the ability” of Russia to privatize state-owned assets in a “manner that unjustly benefits” officials of the Russian government or “close associates” or family members of those officials. As discussed in a previous client alert following the enactment of CAATSA, this measure is broadly written and is subject to discretionary application by OFAC. Accordingly, transactions associated with the privatization of Russian assets should be evaluated carefully to ensure that they do not provide exposure to secondary sanctions under CAATSA.
The new sanctions measures mandated by CAATSA significantly increase the need for both U.S. and non-U.S. companies to ensure that their business activities do not expose them to sanctions enforcement risks, particularly with respect to activities intersecting with the Russian energy sector. Despite the guidance provided by OFAC and the State Department in recent months, key terms in CAATSA are broadly defined, allowing the agencies broad latitude to enforce particular sanctions measures. Adding to the complexity of ensuring compliance with Russia sanctions, U.S. relations with Russia remain fluid, and there are many variables that could affect the way in which U.S. sanctions against Russia evolve this year that are impossible to predict. U.S. and non-U.S. businesses engaging in business with Russia should continue to monitor Russia sanctions developments and potential Russian responses to any additional sanctions to determine their potential impact and take steps designed to ensure compliance.
As per information some of the oligarchs on the Kremlin Report list are certainly President Vladimir Putin’s close group and supporters out of these some reside in Russia and are already under sanctions, and others are abroad and in disagreement with the Kremlin.
Putin’s human rights advisor Mikhail Fedorov was included on the list. The chair of the Moscow Helsinki Group, Soviet-era dissident and US citizen Lyudmila Alexeyeva (90), expressed astonishment and bewilderment at Fedorov’s inclusion: “He is not rich or powerful—Fedorov is a human rights defender.” Whereas, according to the Kremlin’s human rights advisor, “I believed there was some serious analytical work going on in Washington, but my secretary could have put together such a list in ten minutes—what was the US administration doing spending months compiling it?” (Newsru.com, January 31).
After the publication of the Kremlin Report, there was something of a collective sigh of relief from the Russian elite: The exaggerated fears subsided since an extended list that covered almost everyone and did not distinguish specifically between friend or foe seemed to be, in essence, harmless. President Donald Trump opposed CAATSA when it was passed by Congress last year; he signed it into law only because it had bipartisan support and any veto would have been easily overruled by the Legislative Branch. The poor quality of the Kremlin Report list thus raises the question whether the Trump administration might be deliberately trying to sabotage CAATSA and turn it into a toothless paper tiger. Will any further proposed sanctions materialize? CAATSA was passed in part specifically to punish the Kremlin for its covert involvement in the 2016 US presidential election. But if Trump does not believe the Russians promoted his victory, why punish them?
According to the main shareholder of the Russian financial institution Alpha-group, billionaire Mikhail Fridman, “My partners and I are in the Forbes’ ranking, so we are in the Kremlin Report in accordance with the standards used by the US Treasury; but this will probably not hamper business.” Fridman is in the process of merging DEA AG—an international oil and gas company headquartered in Hamburg, Germany, which he acquired in 2015 for $6.1 billion—with Wintershall Holding GmbH, Germany’s largest oil and natural gas producer, owned by BASF. The multi-billion-dollar merger would give Fridman control of a third of the joint conglomerate or maybe more after a pending initial public offering (IPO). Fridman told journalists the process of merging Wintershall and DEA “is going as planned, and I do not see any additional risks because of the Kremlin Report.” Wintershall is financing the building of the Nord Stream Two underwater natural gas pipeline from Russia to Germany, which will allow Moscow to terminate transit through Ukraine. Washington opposes Nord Stream Two. According to Fridman, the joint Wintershall/DEA “will consider continued financing of Nord Stream Two” (TASS, February 1).
Putin summarized the overall attitude in Moscow after the Kremlin Report’s release: “It is an unfriendly act, but we will watch and see what it means in practice and are ready to rebuild relations.” Putin continued, “We were ready to take serious retaliatory action, to reduce our relations [with the US] to zero, but at present we will refrain doing it,” apparently implying the published Kremlin Report is meaningless and harmless. The United States and Russia can work together in combating terrorism: According to Putin, “The Americans give us intelligence on terrorists, and we, in turn give too, as just recently in Washington [during the visit of Aleksandr Bortnikov] our FSB [Federal Security Service] director.” “But,” continued Putin, “It is stupid—the US lumps us together with Iran and North Korea and then asks for our help in containing Iran and North Korea” (Interfax, January 31).
Indeed, the three top Russian intelligence chiefs secretly visited Washington last week—Bortnikov, the director of the FSB, Sergei Naryshkin, the head of the Foreign Intelligence Service (SVR), and Colonel General Igor Korobov, the chief of Russian military intelligence (GRU). Little is currently known about the visit. Apparently Naryshkin and Bortnikov met with Central Intelligence Agency (CIA) Director Mike Pompeo. Korobov it could be assumed, met with his US counterparts from the Defense Intelligence Agency (DIA). Bortnikov is under European Union sanctions, but has not been sanctioned by the US. Both Naryshkin and Korobov are under US personal sanctions. Korobov was sanctioned in December 2016 for alleged interference in the 2016 elections. Meetings of Russian and US top intelligence officials do happen: In May 2017, Pompeo visited Moscow. But a joint visit by all three top Russian intelligence chiefs to Washington—and with two of them under sanctions—is unprecedented (Interfax, February 1).
According to official readouts, the US and Russian intelligence chiefs “discussed terrorism and national security.” According to the leading Duma deputy from the ruling United Russia party, Vyacheslav Nikonov, “The Americans wanted to discuss Syria and the Kurdish problem as well as the Taliban in Afghanistan” (Regnum, January 31). Putin also insinuated—Iran and North Korea. Maybe by sending a big intelligence posse to Washington and dangling the prospect of cooperation on important issues, which the Trump administration has been long seeking, the Kremlin dodged a bullet. Reportedly (Atlanticcouncil.org, January 30), at the last minute, the Kremlin Report was diluted (expanded) into a harmless call-all list. If so, that was indeed good timing.