Late on Friday, August 2, 2019, the U.S. Administration announced that it would implement a second wave of sanctions under the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991 (CBW Act) against the Russian Federation. These sanctions will;
- prohibit U.S. financial institutions from participating in future primary issuances of non-ruble Russian sovereign debt;
- require the United States to oppose any new assistance to Russia by international financial institutions; and
- prohibit the export to Russia of dual-use goods controlled for chemical or biological warfare reasons.
As we detailed in our previous post, the release of Executive Order 13883 setting out an administrative delegation of authority to the U.S. Department of the Treasury on Thursday night, together with press reports, provided advance warning that an action was imminent. On Saturday, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) issued a directive, effective August 26, implementing two of the three sets of sanctions. OFAC's directive supplements available State Department guidance on these matters.
This action followed a first wave of sanctions arising from allegations relating to the Skripal poisonings in August of last year, described in our memorandum here. In recent weeks, there has been increasing congressional pressure to implement the second stage of sanctions mandated by the CBW Act, culminating in the most recent action.
The United States imposed three sets of sanctions, the minimum required from the list of six statutory sanctions available under the CBW Act (though the statutory scope of some of the prohibitions has been partially waived to narrow them). The sanctions as imposed are the following:
1. Sovereign debt
The first and most important prohibition forbids U.S. financial institutions' "participation in the primary market for non-ruble denominated bonds issued by the Russian sovereign" and "lending non-ruble denominated funds to the Russian sovereign." Under OFAC's directive, the "Russian sovereign" includes "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," but not "state-owned enterprises of the Russian Federation."
The prohibition applies to "U.S. banks," but OFAC has defined that term more broadly than in the statute to include U.S. banks, broker-dealers, exchanges, clearing corporations, and investment funds (including their overseas branches) and the U.S. branches of foreign financial institutions. (Specifically, the definition includes "any U.S. entity (including its foreign branches) 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; including but 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. This term includes those branches, offices and agencies of foreign financial institutions that are located in the United States, but not such institutions' [non-U.S.] branches, offices, or agencies.")
We believe this prohibition likely prevents U.S. financial institutions from accepting any role (including a role as underwriter or agent) in, or investing in, future issuances of Russian sovereign debt, unless that debt is issued in rubles. Under OFAC's explicit guidance, however, it will not affect secondary trading in Russian sovereign debt of any kind. It is unclear at this stage whether "participating in" new issuances of Russian sovereign debt includes clearing U.S. dollar payments associated with Eurobonds. We think that there is a good argument that it does not, but it is possible that U.S. banks will refuse to clear such payments absent guidance from OFAC.
- U.S. funds and financial institutions may not invest in new issuances of debt by Russian governmental issuers, but state-owned or state-controlled enterprises are unaffected.
- It is likely that U.S. institutions also may not accept roles such as agent or custodian with respect to such debt.
- It is unlikely, but possible, that U.S. dollar clearing by financial institutions in connection with such debt is also prohibited.
2. Multilateral lending
The United States will oppose the extension of any loan or financial or technical assistance to the Russian Federation by international financial institutions, which under the CBW Act includes the International Bank for Reconstruction and Development, the International Development Association, the International Finance Corporation, the Inter-American Development Bank, the African Development Fund, the Asian Development Bank, the African Development Bank, the European Bank for Reconstruction and Development, and the International Monetary Fund. The CBW Act contains an exception if "such assistance is directed specifically to programs which serve the basic human needs of the citizens of such country."
3. Export restrictions
The State Department guidance indicates that any U.S. export licenses required for
Under the CBW Act, sanctions are to remain in place for at least one year and may only be terminated upon a certification by the President that the Russian Federation (1) has provided reliable assurances that it will not use chemical or biological weapons; (2) is not making preparations to use chemical or biological weapons; (3) is willing to allow on-site inspections by international observers to verify that it is not making preparations to use chemical or biological weapons; and (4) is making restitution to those affected by any use of chemical or biological weapons. However, the President may also waive the application of sanctions if he certifies to Congress that it is "essential to the national security of the United States" or "there has been a fundamental change in the leadership and policies of that country."
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