The US, UK and EU have threatened to impose a range of measures to deter Russian activities in or against Ukraine. The scope and severity of such measures will likely give rise to serious compliance challenges for companies with Russian counterparties or who do business in Russia. In this post, we consider the types of measures which could be imposed by the US and their potential impact.
Current Status of US Legislation
The two houses of US Congress are nearing a vote on legislation that would impose new sanctions on Russia in relation to the current situation in Ukraine. This new package of measures is intended to form part of coordinated action with the UK and EU (see our previous post in relation to steps taken by the UK).
The US Senate is currently in bipartisan negotiations over the final terms of S.3488, the Defending Ukraine Sovereignty Act (DUSA). Senator Bob Menendez (D-NJ), Chairman of the Senate Foreign Relations Committee, introduced DUSA on January 12, 2022 and described the bill as the “mother of all sanctions“. At present, the bill has 40 Democratic co-sponsors. 60 votes are required for DUSA to pass in the Senate, and thus, Republican support is required for its passage.
Senators are presently discussing compromise legislation which incorporates demands by Republican senators to strengthen the measures contemplated in the original draft of DUSA, and the imposition of immediate sanctions ahead of any further steps taken by Russia in or against Ukraine. Another point of discussion seems to be the scope of measures against the Nord Stream 2 pipeline and waivers which could be granted by the President.
House of Representatives
Around the time DUSA was introduced in the Senate, a companion bill – H.R. 6470 – was introduced in the House of Representatives by Representative Gregory W. Meeks (D-NY). At a press briefing on February 3, 2022, Speaker Nancy Pelosi stated that: “We want to be as close to the Senate Bill as possible so there’s no delay in getting something to the President’s desk“, suggesting that the Speaker is seeking to fast track any vote in the House.
The original draft bill of DUSA had White House support. However, the White House has not yet expressed a view on compromise legislation.
With the two houses of US Congress seeking to align as much as possible, we expect that any sanctions package could be imposed swiftly and with little notice.
What Potential Measures Might be Imposed?
Though DUSA seems to be the Russia sanctions legislation most likely to pass in Congress, there is still some uncertainty as to its final form given ongoing negotiations.
If DUSA is passed in its original form, it would require the President to determine within 15 days of its passage whether:
- The Government of Russia, including through its proxies, is “engaged in or knowingly supporting a significant escalation in hostilities or hostile action in or against Ukraine, compared to the level of hostilities or hostile action in or against Ukraine prior to December 1, 2021“; and
- “if so, whether such escalation has the aim or effect of undermining, overthrowing, or dismantling the Government of Ukraine, occupying the territory of Ukraine, or interfering with the sovereignty or territorial integrity of Ukraine“.
If such a determination is made, DUSA authorises or requires the President to impose a number of measures, which include:
- Mandatory designation of certain Russian officials: SDN designations and visa bans for twelve specified officials, which include: (i) President Vladimir Putin; (ii) Prime Minister Mikhail Mishustin, (iii) Foreign Minister Sergei Lavrov, (iv) Defence Minister Sergey Shoygu; and (v) eight senior military officials.
- Mandatory designation of Russian financial institutions: SDN designations of at least three of twelve specified major Russian financial institutions, which include: (i) Sberbank; (ii) VTB; (iii) Gazmprombank; (iv) VEB RF; (v) the Russian Direct Investment Fund; (vi) Credit Bank of Moscow; (vii) Alfa Bank; (viii) Rosselkhozbank; (ix) FC Bank Otkritie; (x) Promsvyazbank; (xi) Sovcombank; and (xii) Transkapitalbank.
- Discretionary designation of specialised financial messaging services which service designated Russian financial institutions: Authorisation to designate providers of specialised financial messaging services, such as SWIFT, that continue to provide services to designated Russian financial institutions 90 days after they have been designated. Recent reports have suggested, however, that this measure may no longer form part of any ultimate sanctions package.
- Mandatory prohibitions and sanctions targeting certain Russian sovereign debt: Prohibitions on: (i) US Persons dealing with Russian sovereign debt issued on or after the enactment of DUSA, including governmental bonds; and (ii) SDN designation of non-US Persons that engage in transactions involving the debt of “not less than 10 entities owned or controlled by the Government of the Russian Federation“.
- Mandatory designations targeting Nord Stream 2 pipeline: SDN designation of any entity “established for or responsible for the planning, construction, or operation of the Nord Stream 2 pipeline“, and directors of such entities.
- Mandatory designations targeting extractive industries: The President is required to identify and designate entities that he believes should be sanctioned in the interests of US national security involved in: (i) oil and gas extraction and production; (ii) coal extraction, mining, and production; (iii) minerals extraction and processing; and (iv) “any other sector or industry with respect to which the President determines the imposition of sanctions is in the United States national security interest“.
Other measures which have been proposed or discussed include:
- Expansion of export controls targeting goods and technologies to be used by Russia’s tech industry, including expansion of the Foreign Direct Product Rule to Russia.
- A separate bill proposed by Senator Marco Rubio (R-FL) – S.3513 ‘Deterring Authoritarian Hostilities Act of 2022’ – contains measures expressly targeting Russian defense and aerospace companies. It has been reported that Republican lawmakers may be seeking to incorporate elements of Senator Rubio’s bill into DUSA, though the extent to which they are seeking to do so is unclear.
- SDN blocking sanctions targeting the assets of oligarchs and citizens close to President Putin, pursuant to Executive Order 14024, ‘Executive Order on Blocking Property With Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation’, which authorized new sanctions on Russia for a variety of “malign” activities, including violations of the territorial integrity of other countries.
If one or more measures set out in DUSA are implemented, we expect that it will likely give rise to sanctions exposures along supply chains, resulting in their fragmentation and/or realignment. For an article on what companies can do to prepare for the impact of additional US sanctions on Russia, please see our previous post here.