International businesses are facing a more challenging and perilous sanctions environment. Not only are there more sanctions regimes to consider, but those regimes that have been instituted by major jurisdictions are increasingly varied, and in cases such as Iran, in direct conflict. Companies face an uncertain political environment relating to key sanctions regimes in Russia and Iran; the long-reach of U.S. sanctions; and the uncertainties raised by the EU Blocking Regulation. At the same time, there is the potential for a new post-Brexit sanctions regime, as well as questions about the effect of Brexit on the EU regime itself. In this scenario, companies are increasingly looking to manage sanctions risk through contractual drafting, but arriving at an agreed position that covers all the bases can be difficult.
There are more sanctions regimes than businesses think (the UK Office of Financial Sanctions Implementation website lists 32 regimes), but the regimes currently attracting most concern are those relating to Russia and Iran. For both of these sanctions targets, the position of the two most significant sanctioning jurisdictions (the United States and the European Union) have increasingly diverged.
In the case of Russia, the regimes instituted in the U.S. and EU relating to the situations in Crimea and Eastern Ukraine were in step until the U.S. sanctions targeting Russia were expanded as a result of the Countering America’s Adversaries through Sanctions Act (CAATSA). CAATSA codified many of the Russia-related sanctions previously imposed through executive order, thereby requiring the President to obtain Congressional approval before easing the targeted U.S. sanctions relating to Russia. It also expanded so-called “secondary sanctions” that apply to non-U.S. companies even when there is no U.S. nexus. In the context of Ukraine-related Sanctions, these include the risk of becoming subject to sanctions by engaging in “significant transactions” for, or on behalf of, Specially Designated Nationals (SDNs) sanctioned pursuant to Ukraine-/Russia-related sanctions authorities. The U.S. decision to designate almost 40 companies, oligarchs, and officials as SDNs on 6 April 2018 (some of them very active and well-known), raised the exposure of non-U.S. companies to these secondary sanctions.
Two specific areas of secondary sanctions exposure under CAATSA are of interest to the energy industry. The first, relating to investment by non-U.S. parties in Russian crude oil projects. Specifically, the President is required, unless he determines it is not in U.S. national security interests, to impose sanctions on any person that “knowingly makes a significant investment” in a “special Russian crude oil project,” including projects to extract crude from deep waters, Russian Artic offshore locations and shale formations located in Russia.
The second area of risk is investment by non-U.S. companies in Russian energy pipelines. CAATSA gives the President the power to impose (but does not require) secondary sanctions on non-U.S. persons making investments that contribute to enhancing Russia’s ability to construct energy export pipelines, or providing Russia with goods, services, technology, services etc. that could facilitate the construction, modernisation, or repair of energy pipelines. The President is required to impose the above sanctions “in coordination with allies of the United States”. This provision was added to CAATSA to address concerns raised by European allies in light of projects such as the Nord Stream 2 natural gas pipeline from Russia to Germany. The President has not yet used this authority granted him by CAATSA.
In contrast to the developing U.S. sanctions position on Russia, EU sanctions have remained unchanged. This reflects the fact that changes to EU sanctions require unanimity among the EU member states, countries with very different policy positions regarding Russia.