Summer 2018 – Skripal case – New US sanctions against Russia

On August 27, 2018, the U.S. Department of State, acting upon the delegation of powers vested by the President of the United States in the executive order n°12851[1], adopted a determination under which the Russian Federation (“Russia”) is held accountable for using chemical arms against its own citizens in violation of international law (especially the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on their Destruction of January 13, 1993) and United States laws, in particular section 306(a) of “Chemical and Biological Weapons Control and Warfare Elimination Act of 1991” (the “Act“).

According to the Act, these new sanctions include two sets, (i) the first one is effective since August 27, 2018, and (ii) the second will intervene, except in the case of a substantial modification of Russia’s behavior, in a 3 month time limit after the first set, i.e. at the latest on November 27, 2018.

First Set of sanctions – effective on August 27, 2018

The first set of sanctions comprises 4 categories:

1. The termination of the sales to Russia of any defense articles, services or design and construction services, and termination of licenses for the export to Russia of any item qualifying as munitions under United States law;
2. The termination of all military financing to Russia under the Arms Export Control Act[2];
3. The denial to Russia of any credit, credit guarantees, or other financial assistance by any department, agency, or instrumentality of the United States Government, including the U.S. Export-Import bank;
4. The general prohibition of any export to Russia of security-sensitive goods.

Should also be noted:

• On the one hand, that the U.S. Department of State waived the application of the sanction pursuant to section 307 (a)(1) of the Act, that is the termination of assistance to Russia under the Foreign Assistance Act[3];
• On the other hand, that the various prohibitions linked to the restrictions on exports of security-sensitive goods (4^th point of the first set of sanctions) are subject to noteworthy exceptions, including
• for the benefit of exports and re-exports of goods, technology and services which meet the criteria defined under one of the specifically designated licenses exception regimes[4] ;
• for the needs of civil aviation security;
• for the benefit of Russian subsidiaries detained in whole by U.S. shareholders;
• for strictly civil and commercial use of dual use goods;
• for space flights;
• for deemed export or re-export to Russian citizens;
• for the export or re-export of goods, services and technology for the benefit of Russian public entities.

The determination of the U.S. Department of the Treasury of August 27, 2018, also provides the following guidelines with respect to the granting the above exceptions licenses:

• every license referred to in paragraphs (ii) to (vi) will be examined on a case-by-case basis in a way consistent with the policy followed prior to the sanctions; and
• the license referred to in paragraph (vii) will be subject to a presumption of denial policy.

Second Set of sanctions –at the latest on November 27, 2018

Section 307(b) of the Act states that the President of the United States shall take, within 3 months after the determination of August 27, a new set of sanctions of at least 3 amongst a list of 6, unless the President determinates and certifies in writing to Congress that:

1. Russia no longer (i) uses chemical and biological weapons in violation of international law, nor (ii) does it use lethal chemical or biological weapons against its own nationals ;
2. the government of Russia provided reliable assurances that it will not in the future engage in any such activities; and
3. the government of Russia accepts on-site observers from the United Nations or other internationally recognized impartial observers, or other reliable means to ensure that the government of Russia (i) is not using chemical and biological weapons in violation of international law, nor (ii) does it use fatal chemical or biological weapons against its own nationals.

The 6 sanctions amongst which 3 shall be applied in the absence of satisfaction of the above-mentioned items are:

1. the opposition of the United States Government to the extension of any assistance, financial or material, of international financial institutions to Russia;
2. the prohibition for U.S. banks to provide financial support to the government of Russia, except in the food or agricultural fields;
3. restrictions on exports concerning any type of goods, excepting for food and agricultural commodities and products;
4. the limitation on imports from Russia on growth, product or manufacture from that country, including petroleum or any product derived thereof;
5. the downgrading or suspension of diplomatic relations with Russia;
6. the prohibition of flights from or to the United States for airlines detained or controlled by the Russian government.

The first set of sanctions does not create a brand new situation in the sense that the most important Russian companies of the defense sector, in particular Rosoboronexport (РОСОБОРОНЭКСПОРТ) since April 6, 2018[5], Rostec (РОСТЕХ) since September 12, 2014[6], Russian Helicopters (Вертолеты России) since December 22, 2015[7], Almaz-Antey («Алмаз-Антей») since September 12, 2014[8], United Shipbuilding Corporation (Объединенная судостроительная корпорация) since July 29, 2014[9], United Aircraft Corporation (Объединенная авиастроительная корпорация) since April 6, 2018[10] and JSC Kalashnikov Concern (Концерн Калашникова) since July 16, 2014[11] are already mentionned in the list of sanctioned personst. As such, arms sales to Russia and the purchase of arms from Russia are already activities subject to coercive measures from United States authorities. In a similar way, the financing to persons sanctionned by the executive order n°13662[12] (defense, energy, financing, mining and metal sectors) is already made difficult if not impossible and the sanctions implemented last August mainly widen these prohibitions by including the government of Russia and Russia as a State.

The peculiarity would rather be in the general nature of these new sanctions, some of which, unlike the previous ones[13], are not limited to specifically designated persons (legal or natural), in particular the prohibition on export of security-sensitive goods.

On top of that, the second set of sanctions contains significant new features, in particular: (i) import and export restrictions likely to cover all Russian exports (manufactured goods and raw materials) and all Russian entities, public or private, notwithstanding their size or involvement in events legitimizing sanctions and (ii) the restriction of air traffic / air transportation with Russia.

Given the reaction of the Russian authorities, who reject the accusations of the use of chemical weapons, it is likely that the second set of sanctions will actually come into force shortly[14].

We remain at your disposal to analyse in detail to what extent these new sanctions can impact your activities.

[1] Executive order n°12851 (Administration of Proliferation Sanctions, Middle East Arms Control, and Related Congressional Reporting Responsibilities) of June 11, 1993.

[2] Arms Export Foreign Control Act of June 30, 1976.

[3] Foreign Assistance Act effective as of September 4, 1961.

[4] Namely, the license exceptions GOV (governments, international organizations, international inspections under the chemical weapons convention and the international space station), ENC (encryption commodities, software and technology), BAG (baggage), TMP (temporary imports, exports, reexports and transfers), TSU (technology and software unrestricted), APR (additionnal permissive reexport), CIV (civil end-users) and AVS (aircrafts vessels and spacecraft), whose regimes are established in the Code of Federal Regulations, title 15, sub-title B, chapter VII, sub-chapter C paragraph 740).

[5] Official press release from the U.S. Department of the Treasury, https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20180406.aspx

[6] Official press release from the U.S. Department of the Treasury, https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20140912.aspx

[7] Official press release from the U.S. Department of the Treasury, https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20151222.aspx

[8] Official press release from the U.S. Department of the Treasury, https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20140912.aspx

[9] Official press release from the U.S. Department of the Treasury, https://www.treasury.gov/press-center/press-releases/Pages/jl2590.aspx

[10] Official press release from the U.S. Department of the Treasury, https://home.treasury.gov/news/press-releases/sm0338

[11] Official press release from the U.S. Department of the Treasury, https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20140716.aspx

[12] Executive Order n°13662 (blocking property of additionnal persons contributing to the situation in Ukraine) of March 24, 2014.

[13] With the notable exception of the sanctions deriving from executive order 13685 and inducing investments ban in Ukraine as well as any import from or export to the Crimea Region.

[14] Dmitry Polyanskiy, first deputy permanent representative of Russia to the UN twitted on August 9, 2017: “No proof, no clue, no logic, no presumption of innocence but only strong likelies. A single rule: accuse Russia of everything, no matter how absurd or fake. Let’s welcome the sanctions from the United States of America.”