United States: Second Round Of U.S. Sanctions On Russia Pursuant To The Chemical And Biological Weapons Control Act

Key Points

  • The U.S. Department of State and the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC) have imposed three new sanctions on Russia:
    • Effective August 26, 2019, U.S. banks (as defined below) are prohibited from (1) participating in the primary market for non-ruble denominated bonds issued by the “Russian sovereign” (which does not include state-owned enterprises) and (2) lending non-ruble denominated funds to the Russian sovereign.
    • Effective on or around August 19, 2019, subject to certain exceptions, license requests for exports to Russia of dual-use chemical and biological items controlled by the Department of Commerce will be subject to a “presumption of denial” policy, meaning that there is a high likelihood that all such license applications will in most if not all cases denied.
    • Also effective from on or around August 19, 2019, the United States will oppose the extension of any loan or financial or technical assistance to Russia by international financial institutions, such as the World Bank and International Monetary Fund.
  • These new limited sanctions targeting Russia are required by the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (CBW Act) after Russia failed to provide adequate assurances that it would stop using chemical weapons following the administration’s determination last year that Russia used a “Novichok” nerve agent in an attempt to assassinate United Kingdom citizen Sergei Skripal and his daughter Yulia Skripal in March 2018.
  • Several bills proposing additional new sanctions on Russia are pending in the U.S. Congress, which call for additional sanctions on Russian sovereign debt, among other measures. It is too soon to predict how the Administration’s latest actions will affect the prospects in Congress for enactment of such additional sanctions measures.

Background

Enacted in 1991, the CBW Act requires the President to determine, based on available information, “whether a country has used chemical or biological weapons in violation of international law or has used lethal chemical or biological weapons against its own nationals,”1 and if such a determination is made, then two progressively restrictive rounds of sanctions on the offending country are required (subject to certain waiver authority).

In March 2018, Russia is alleged to have used a chemical agent in attempt to assassinate the Skripals in Salisbury, England. On August 6, 2018, the U.S. Department of State determined, pursuant to the CBW Act, that the Government of Russia had used chemical or biological weapons in violation of international law or had used lethal chemical or biological weapons against its own nationals and, on August 27, 2018, imposed, at least in part, four of the five initial sanctions provided under the CBW Act (including termination of certain arms sales and arms sales financing and certain prohibitions of exports to Russia of certain national security-sensitive goods and technology).2

A second tranche of sanctions was required under the CBW Act unless, by November 6, 2018, the President determined and certified in writing to Congress that Russia:

  1. was no longer using chemical or biological weapons in violation of international law or using lethal chemical or biological weapons against its own nationals,
  2. had committed to ceasing such practices in the future and
  3. was willing to allow inspections by the United Nations or other internationally-recognized, impartial observers or other reliable means exist to ensure that Russia was not using chemical or biological weapons in violation of international law and was not using lethal chemical or biological weapons against its own nationals.

In November 2018, the President informed Congress that he could not certify that Russia met the above conditions and, as a result, under the CBW Act, the President was required to impose on Russia, subject to waiver authority, at least three additional sanctions from the list provided in the CBW Act.3

The Trump Administration delayed the imposition of this second tranche of sanctions for nine months. Under increasing and bipartisan pressure from Congress, most recently seen by a late July letter from House Foreign Affairs Chairman Eliot Engel (D-NY) and Ranking Member Michael McCaul (R-TX) that urged the President “to immediately impose the legally-mandated additional sanctions against Russia to hold it responsible for such brazen behavior,” President Trump imposed this second round of sanctions in early August 2019.

Second Tranche of CBW Act Sanctions

On August 2, in furtherance of newly issued Executive Order 13883,4 the State Department selected the following three of the menu of options for the second round of CBW sanctions to be imposed on Russia following a required Congressional notification period:5

  1. Russian Sovereign Debt: Effective August 26, 2019, U.S. banks will be prohibited from (1) participating in the primary market for non-ruble denominated bonds issued by the “Russian sovereign”6 and (2) lending non-ruble denominated funds to the “Russian sovereign.”7The term “U.S. bank” is defined broadly to mean “any entity organized under the laws of the United States or any jurisdiction within the United States (including its foreign branches), or any entity in the United States, that is engaged in the business of accepting deposits, making, granting, transferring, holding, or brokering loans or credits, or purchasing or selling foreign exchange, securities, commodity futures, or options, or procuring purchasers and sellers thereof, as principal or agent.”As a result, OFAC’s guidance explains that “U.S. bank” includes but is not limited to depository institutions, banks, savings banks, trust companies, securities brokers and dealers, commodity futures and options brokers and dealers, forward contract and foreign exchange merchants, securities and commodities exchanges, clearing corporations, investment companies, employee benefit plans and U.S. holding companies, U.S. affiliates, or U.S. subsidiaries of any of the foregoing. “U.S. Bank” also includes branches, offices and agencies of foreign financial institutions that are located in the United States and otherwise meet the definition of “U.S. bank,” but not such institutions’ foreign branches, offices, or agencies.8The term “Russian sovereign” means “any ministry, agency, or sovereign fund of the Russian Federation, including the Central Bank of Russia, the National Wealth Fund and the Ministry of Finance of the Russian Federation.” Importantly, this term does not include state-owned enterprises of the Russian Federation.9OFAC’s guidance explicitly provides that trading of Russian sovereign debt in the secondary market is not prohibited.10
  2. Further Export Restrictions: Effective on or around August 19, 2019, license requests for exports to Russia of dual-use chemical and biological items controlled by the Department of Commerce will be subject to a “presumption of denial” policy. However, the new export restrictions will only apply to items controlled for Chemical and Biological Weapons (CB) reasons.As a general matter, if an item subject to the U.S. Export Administration Regulations (EAR) is described on the Commerce Control List and controlled for CB reasons, then a license is required for export, re-export, or transfer to Russia, unless a license exception would authorize the particular item and transaction.Before the new sanctions were imposed, when applying for a license, the Commerce Department’s Bureau of Industry and Security (BIS) and other reviewing agencies would review such applications on a case-by-case basis to determine whether the item would: (a) make a material contribution to the design, development, production, stockpiling or use of chemical or biological weapons, or (b) make a direct and significant contribution to Russia’s military capabilities. If so, in either case, the application would be denied. Under the newly announced export restrictions, such applications for Russia will now be reviewed under a general policy of denial, regardless of the item’s impact on chemical or biological weapons or military capabilities. In particular, licenses for exports of CB items to state-owned or state-funded entities in Russia will be subject to a “presumption of denial” policy. Exceptions to BIS’s export licensing requirements will continue to be available for U.S. firms fulfilling existing contracts with Russian customers and license requests for certain types of transactions will continue to be considered for approval on a case by case basis.11Companies should review whether they export any CB controlled items to Russia.Even though most license applications for export of CB items to Russia will now be reviewed under a general policy of denial, the carve outs implemented by the U.S. government for certain transactions, including fulfillment of existing contracts, commercial end users/end uses in Russia, wholly-owned subsidiaries of U.S. and other foreign companies in Russia and deemed export licenses for Russian nationals, will mitigate the impact of this new policy of denial.
  3. Multilateral Development Bank Assistance: Effective on or around August 19, 2019, the United States will oppose the extension of any loan or financial or technical assistance to Russia by international financial institutions, such as the World Bank and International Monetary Fund. In practical terms, this is not intended to have a significant impact as Russia has not been seeking such loans or assistance from these international financial institutions.

Conditions for Removal of Second Tranche of CBW Sanctions Unlikely to be Met

The above sanctions will take effect on or around August 19, 2019 (with the exception of the Russian Sovereign Debt sanction, which takes effect on August 26, 2019) and will remain in place for a minimum of 12 months. Thereafter, lifting the sanctions requires a determination by the President that Russia has met several conditions described in the CBW Act, including providing reliable assurances that:

  1. Russia is not making preparations to use chemical weapons;
  2. Russia has provided assurances it will not use chemical weapons in the future;
  3. Russia has allowed international inspectors to verify those assurances; and
  4. Russia has paid restitution to the victims of the Skripal incident in Salisbury, UK.

As these conditions are unlikely to be met, we would expect these sanctions to remain in effect for the foreseeable future.

Potential Further Restrictions on Russian Sovereign Debt

While this second tranche of CBW sanctions meets the requirements of the CBW Act, they are expected to have a limited practical impact.

Facing increasing calls for action against Russia, it is unclear at this time whether the U.S. Congress will take further action with respect to Russian sanctions and in particular, with respect to Russian sovereign debt. Legislation has been pending in Congress for quite some time that would further target Russian sovereign debt. These bills include sanctions that would apply regardless of currency and to any U.S. person (not only U.S. Banks) dealing in Russian sovereign debt (whether on the primary or secondary market) issued a certain period (e.g., 90 or 180 days) after date of enactment of the specific legislation.

The following bills include provisions that would restrict dealing in Russian sovereign debt:

  1. Sherman/Waters Amendment to the National Defense Authorization Act (NDAA) for FY 2020
    • Provides that “[n]ot later than 90 days after the date of the enactment of the [NDAA], [t]he President shall issue regulations prohibiting United States persons from engaging in transactions with, providing financing for, or in any other way dealing in Russian sovereign debt that is issued on or after the date that is 180 days after such date of enactment,” but that the President shall suspend this prohibition if the Director of National Intelligence (DNI) determines that Russia has not knowingly engaged in interference in the most recent election for Federal office, and Congress has passed a joint resolution certifying this determination.
    • Status: This provision was passed in the House version of the NDAA (not the Senate), but the two chambers will reconcile difference in conference committee in the coming months. Senators Marco Rubio (R-FL) and Chris Van Hollen (D-MD) have recently urged the senators leading the conference committee to “modify and strengthen” the final NDAA by “[m]ak[ing] the sovereign debt sanctions contingent on a finding of election interference by the DNI.”12
  2. Defending American Security from Kremlin Aggression Act of 2019 (DASKAA)
    • Provides that “[n]ot later than 60 days after the date of the enactment of [DASKAA], the President shall prescribe regulations prohibiting United States persons from engaging in transactions with, providing financing for, or otherwise dealing in, Russian sovereign debt issued on or after the date that is 90 days after such date of enactment.” There is no relationship between the provision and any finding of election interference by the DNI.
    • Status: Referred to the Senate Foreign Relations Committee. Senate Foreign Relations Committee Chairman Jim Risch (R-ID) stated on July 31 the committee would consider DASKAA, although the timing is not yet clear.
  3. Defending Elections from Threats by Establishing Redlines Act of 2019 (the “DETER Act”)
    • Provides that not later than 30 days after a determination by the DNI that Russia “knowingly engaged in interference in a United States election,” the Secretary of the Treasury “shall, pursuant to such regulations as the Secretary may prescribe, prohibit all transactions within the United States or by a United States person, in (A) sovereign debt of the Government of the Russian Federation issued on or after the date of enactment of this Act, including governmental bonds; and (B) debt of any entity owned or controlled by the Russian Federation issued on or after such date of enactment, including bonds.”
    • Status: Referred to the Senate Banking Committee. However, the bill’s sponsors, Sen. Rubio and Sen. Van Hollen, are attempting to include this provision in the final NDAA, as described in point (1) above.

While the DETER Act does not define “Russian sovereign debt,” the Sherman-Waters Amendment and DASKAA broadly define “Russian sovereign debt” to include:

  • bonds issued by the Central Bank, the National Wealth Fund, or the Federal Treasury of the Russian Federation, or agents or affiliates of any of those entities, with a maturity of more than 14 days;
  • foreign exchange swap agreements with the Central Bank, the National Wealth Fund, or the Federal Treasury of the Russian Federation with a duration of more than 14 days; and
  • any other financial instrument, the duration or maturity of which is more than 14 days, that “(A) was issued by a Russian financial institution on behalf of the Government of the Russian Federation; or (B) the President determines otherwise represents the sovereign debt of the Government of the Russian Federation.”

Footnotes

1 22 U.S.C. § 5604(a).

2 Id. § 5605(a).

3 Id. § 5605(b).

4 On Thursday August 1, President Trump issued Executive Order 13883 (EO 13883), which amended existing authority delegating the implementation of two specific types of sanctions under the CBW Act to the Secretary of the Treasury, in consultation with the Secretary of State. While EO 13883 refers to two sanctions, the CBW Act mandates the President to impose at least three sanctions from a menu of six options.

5 Fact Sheet, U.S. Dep’t of State, Second Round of Chemical and Biological Weapons Control and Warfare Elimination Act Sanctions on Russia, (Aug. 2, 2019), https://www.state.gov/second-round-of-chemical-and-biological-weapons-control-and-warfare-elimination-act-sanctions-on-russia/.

6 New OFAC FAQ #675 makes clear that the sanctions above “do not apply to bonds or loans denominated in rubles” (e.g., Russia’s OFZ treasury bonds).

7 To implement these sanctions, OFAC issued a Directive (“the CBW Act Directive”) pursuant to EO 13883. U.S. Dep’t of Treasury, Russia-Related Directive Under Executive Order of August 1, 2019, https://www.treasury.gov/resource-center/sanctions/Programs/Documents/20190803_cbw_directive.pdf.

8 See CBW Act Directive; FAQ #676.

9 Id.

10 FAQ #678 clarifies that the CBW Act Directive “does not prohibit U.S. banks from participating in the secondary market for Russian sovereign debt.”

11 Licenses will continue to be considered for approval on a case-by-case basis for: (1) Exports needed for space flight activities, including those involving government space cooperation and commercial space launch; (2) Exports needed to ensure the safe operation of commercial passenger aviation; (3) Exports to commercial end-users in Russia for civil end-uses; (4) Exports to wholly-owned subsidiaries of U.S. and other foreign companies in Russia; and (5) Deemed export licenses for Russian nationals working in the United States.

12 Press Release, Office of Sen. Chris Van Hollen, Van Hollen, Rubio Push for DETER Act in NDAA Conference Negotiations, (July 29, 2019), https://www.vanhollen.senate.gov/news/press-releases/van-hollen-rubio-push-for-deter-act-in-ndaa-conference-negotiations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Sheppard Mullin Richter & Hampton
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Sheppard Mullin Richter & Hampton
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions