On February 13, 2019, a bipartisan group of senators introduced a draft bill that, if adopted, would significantly strengthen sanctions relating to the Russian Federation.  Introduced as the “Defending American Security from Kremlin Aggression Act of 2019” (“DASKA”), the wide-ranging bill covers a number of subjects, in particular a range of new cybersecurity provisions.  This note focuses on the sanctions provisions, which would:

  • Broaden sanctions on the Russian energy sector to include all new investment in oil production and projects outside the Russian Federation supported by Russian parastatal or state-owned entities;
  • Prohibit dealings in new financial instruments issued by or on behalf of the Government of the Russian Federation with a duration of more than 14 days;
  • Target Russian politicians and businessmen involved in allegedly corrupt activities by President Putin for sanctions and require a refreshed “oligarchs list”;
  • Add miscellaneous other sanctions targeting interference with freedom of navigation through the Kerch Strait, malicious Russian cyber activities, and election interference; and
  • Create reporting requirements designed in part to identify individuals and entities that are sanctionable under existing authorities.

DASKA expands upon an bill of the same name that was introduced last August, but never adopted, following allegations of Russian electoral interference and misconduct.  Based on the sponsors (a bipartisan group of senators in senior positions on the key sanctions committees) and content of the bill, we would expect that if new sanctions legislation is adopted this year it would likely be based on DASKA.  There is, as of the date of publication, no indication that the bill is likely to move forward in the short term.  However, both domestic and international political considerations can shift rapidly, and the bill is fully enough developed that it could be moved forward quite quickly at any time.  We also note that it is not unusual for proposed sanctions bills to be amended at the last moment in response to Administration concerns, often in conference committee.  We would view the current version of DASKA as a draft of the likely next step in U.S. sanctions policy on the Russian Federation, should the U.S. decide to tighten sanctions incrementally.

I.  Energy-Related Sanctions

DASKA would require the President to impose at least five of 12 “menu-based” secondary sanctions—currently listed under Section 235 of the Countering America’s Adversaries Through Sanctions Act (“CAATSA”) and ranging from relatively mild (e.g., denial of export credit assistance) to severe (e.g., designation as a Specially Designated National (“SDN”))—against any person who knowingly engages in certain activities relating to the Russian energy sector:  

  • Foreign Energy Projects: Investments after the enactment of DASKA of any amount in an energy project outside of the Russian Federation that is (1) “supported by” a Russian parastatal entity or owned or controlled by the Russian Government, and (2) reasonably expected to exceed $250 million.[1] The bill does not define “supported by.”
  • Crude Oil: The provision of goods, services, technology, financing, or support to the Russian Federation, valued above $1 million in any instance or $5 million in the aggregate over any 12-month period, that could “directly and significantly contribute to” the production of or ability to develop crude oil resources within the Russian Federation, including the construction, modernization, or repair of infrastructure that facilitates the development of crude oil resources. This provision excludes “maintenance of projects that are ongoing” as of the date of enactment of DASKA, and the State Department is directed to issue additional guidance clarifying the scope of both the prohibition and the exemption.
  • Liquefied Natural Gas (“LNG”): Investments valued above $1 million in any instance or $5 million in the aggregate over any 12-month period that “directly and significantly” contribute to the ability of the Russian Federation to construct LNG export facilities outside of the Russian Federation.[2]

Existing secondary sanctions under CAATSA only target persons who make a “significant investment” in the extraction of crude oil from deepwater, Arctic offshore, or shale oil projects within the Russian Federation or specified investments in Russian energy export pipelines.

II.  Sovereign Debt

DASKA requires the President to issue, no more than 60 days after enactment, regulations prohibiting transactions within U.S. jurisdiction (including U.S. dollar transactions or services provided by U.S. persons) involving sovereign debt of the Russian Federation issued after the date that is 90 days from enactment.  This prohibition must include:

  • Bonds, FX swaps, and other financial instruments with a duration of more than 14 days issued by the Central Bank, the National Wealth Fund, or the Federal Treasury;
  • Any other financial instrument issued by a Russian financial institution on behalf of the Government of the Russian Federation with a duration of more than 14 days; and
  • Any other instrument identified by the President as sovereign debt of the Russian Federation with a duration of more than 14 days.

“Russian financial institution” is defined as any financial institution organized under Russian law, located in the Russian Federation, owned or controlled by the Government of the Russian Federation, or owned or controlled by any of the foregoing.

III.  Russian Elites

DASKA requires that the President identify and designate as SDNs “political figures,” “oligarchs,” “Russian parastatal entities,” and other persons that directly or indirectly “facilitate illicit and corrupt activities on behalf of the President of the Russian Federation, Vladimir Putin,” as well as persons acting on behalf of such persons and family members of such persons that derive “significant benefits” from such activities.  Persons (including financial institutions) engaging in significant transactions with any person or entity engaging in the foregoing activities may also be sanctioned (and the statute does not require that the person or entity in question already have been designated as an SDN).  This appears to overlap substantially with Executive Order 13661, which since 2014 has provided authority to sanction senior Russian government officials and those supporting them (and has been used to sanction persons alleged to be close supporters of President Putin).

DASKA also requires that within 180 days the Department of the Treasury produce an updated version of the CAATSA Section 241 “oligarchs report.”  However, as in CAATSA, no consequence is attached to inclusion in the report.  It is also worth noting that a recent report from the Office of the Inspector General of the Department of the Treasury concluded that the original Section 241 report was consistent with the statutory obligation in all material respects (the only significant criticism of the report was that it failed to analyze adequately the exposure of the United States economy to the identified Russian persons and entities).  We would therefore expect the updated report to be similar to the original report issued under CAATSA.

IV.  Additional Sanctions

DASKA also targets additional groups of individuals and entities for potential designation as SDNs (subject to a complete ban on transactions and blocking of assets within U.S. jurisdiction, as well as U.S. secondary sanctions threatening the imposition of sanctions on third parties engaged in significant transactions with a Russian SDN):

  • Ukraine Naval Detention: A minimum of 24 senior officers of the Russian Federal Security Service (not already targeted by U.S. sanctions) are to be named as SDNs, with such sanctions to remain in effect until the U.S. Secretary of State determines that the Ukrainian naval personnel detained by the Russian Federation on November 25, 2018 are no longer in detention.
  • Russian Shipbuilding Sector: In the event that the U.S. Secretary of State determines that the Government of the Russian Federation has interfered with the freedom of navigation of any vessels, in particular in the Kerch Strait between Crimea and Krasnodar, the bill would require that all entities “operating in the Russian shipbuilding sector” be “subject to the same restrictions” as SDNs, an odd formulation that implies that these entities would not actually become SDNs subject to secondary sanctions. These sanctions would remain in place until the Secretary of State determines that there has been no Russian interference with freedom of navigation during the preceding three years and the Government of the Russian Federation has provided assurances that it will not engage in future interference.
  • Cyber: Persons (including financial institutions) who knowingly engage in “significant transactions” with any Russian person that supports or facilitates malicious cyber activities, as well as those who are knowingly owned, controlled by, or act on behalf of a person that engages in such transactions may be named as SDNs.
  • Election Interference: Any Russian financial institution that, after the date of DASKA’s enactment, has provided financial or other support for interference in non-Russian elections by the Government of the Russian Federation.

V.  Other Sanctions-Related Provisions

Chemical and Biological Weapons Act: As we previously reported, the State Department designated the Russian Federation for sanctions under the Chemical and Biological Weapons Control and Warfare Elimination act of 1991 (“CBW Act”) in August of 2018.  Designation under the Act is supposed to result in two rounds of sanctions, the first upon designation and the second 90 days later, unless either the foreign government provides credible assurances backed by international inspection that it no longer uses or will use such weapons or the President issues a national security waiver.  In November, the State Department announced that it could not certify that the conditions were met, but to date sanctions have not been imposed.  DASKA requires an annual report on whether sanctions have been imposed and the steps the Russian Federation has taken to avoid sanctions, presumably to increase political pressure for their imposition.  (The sanctions are nominally mandatory, but they do not take effect without affirmative Administration action imposing them.)

If second-round sanctions under the CBW Act are imposed, they will consist of at least three of the following:

  • U.S. Government opposition to loans, or financial or technical assistance, by international financial institutions to the Russian Federation;
  • a prohibition against any U.S. bank’s providing any credit to the Government of the Russian Federation (except for urgent humanitarian assistance, food or other agricultural products);
  • a prohibition on all exports of goods and technology to the Russian Federation (except for food or other agricultural products);
  • restrictions on the import into the United States of articles (including petroleum) manufactured in the Russian Federation;
  • the downgrade or suspension of diplomatic relations between the United States and the Government of the Russian Federation; and
  • suspension of the authority of air carriers owned or controlled by the Government of the Russian Federation to provide service to or from the United States.

“State Sponsor of Terrorism” Determination: DASKA requires the Secretary of State to determine whether the Russian Federation meets the criteria for designation as a State Sponsor of Terrorism (“SST”) and provide a report to Congress.  If listed as an SST, the Russian Federation would become subject to an especially stringent set of export controls that would reach U.S.-origin goods routinely exported elsewhere.  Moreover, the United States would be required to deny Export-Import Bank financing and to oppose financial assistance to the Russian Federation from the IMF, World Bank, and other international financial institutions.

AML Controls: The bill requires the Financial Crimes Enforcement Network (FinCEN), the U.S. anti-money laundering regulator, to expand an existing “geographical targeting order” to include reporting by title insurance companies on the beneficial owners of 25% or more of residential real estate properties acquired in “high-value transactions” anywhere in the United States.

Cooperation with the EU: DASKA includes “sense of Congress” language on the importance of coordination of EU and U.S. sanctions on the Russian Federation.  However, this language appears at least as much aimed at pushing the EU to adopt additional sanctions as at restraining unilateral U.S. action.  The bill explicitly calls for the closing of “loopholes” in EU sanctions, including the allowance of extended prepayment terms for Russian goods and commodities (which can replicate the economic effect of a loan repaid in kind), and for a periodic report on discrepancies between U.S. and EU sanctions targets and the reasons for such discrepancies.

Additional Reporting Requirements: The bill significantly expands reporting obligations of (and political pressure on) the Executive Branch by requiring the periodic submission of reports to Congress concerning a number of secondary sanctions under CAATSA.  In particular, DASKA directs the President, every 90 days, to submit to Congress lists of persons sanctionable under CAATSA’s secondary sanctions programs concerning:

  • facilitation of significant transactions on behalf of persons targeted by U.S. Russia-related sanctions;
  • activities undermining cybersecurity;
  • investments in certain crude oil projects;
  • investments contributing to certain privatizations; and
  • support for Syria’s acquisition of significant weaponry.

In addition, the bill requires a report on the murder of Russian opposition leader Boris Nemtsov in 2015 and on the personal net worth and assets of President Putin, as well as the previously noted reports updating the list of oligarchs, senior political figures, and parastatal entities and on the CBW Act.

While these reports do not in themselves impose sanctions, again they could increase political pressure to do so or have negative reputational consequences for the subjects of the reports.

[1] S.482, 116th Cong., § 603 (to be inserted in CAATSA as 239A).

[2] Id. § 602 (to be inserted in CAATSA as Sec. 237).