On July 27, 2017, the U.S. Congress sent to President Trump’s desk a bill that imposes new financial sanctions against Russia, Iran, and North Korea. It appears nearly certain that the president will sign that bill, now called the “Countering America’s Adversaries Through Sanctions Act” (CAATSA).

The bill, codifies the 2014 sanctions that President Barack Obama imposed in response to the annexation of the Crimean peninsula. The bill also adds new sanctions measures in response to Russian interference in the 2016 U.S. presidential elections. The bill tightens certain existing sanctions and authorizes the President to sanction non-U.S. companies working on certain Russian oil and gas projects.

That last point has rankled Russian and EU leaders, who have imposed retaliatory measures and threatened more. Leaving aside the politics – both international and domestic – we examine the risks to U.S. and non-U.S. businesses affected by the heightened tensions.

Sanctions measures in place

U.S. Sanctions

CAATSA converts the Obama-era executive orders on Russia into statutory law. That means that the President cannot repeal the sanctions on his own (which he would have had the power to do with executive orders). The sanctions contain the following prohibitions, among others:

• U.S. persons are prohibited from dealing in certain types of new debt of Russian companies listed on the Sectoral Sanctions Identifications (SSI) List. Those companies include including major Russian banks and business conglomerates such as Gazprom and the Russian Agricultural Bank.

• U.S. persons are prohibited from providing services or certain U.S.-origin goods to projects supporting Russian deepwater, arctic, or shale oil exploration or extraction.

CAATSA will not only codify these measures into law, it will expand the types of prohibited debt by shortening the prohibited debt periods by about half. CAATSA will also impose sanctions on any persons the President determines were engaged in activities undermining cybersecurity or persons who provide assistance or support to that activity.

Finally, the bill authorizes the President to impose sanctions on any company, U.S. or non-U.S., that invests, sells, leases or provides goods, services, technology, information or support to Russia facilitating the enhancement of its ability to construct, maintain, expend, modernize or repair energy export pipelines.

That last point raised the hackles of Russian and some EU leaders because it would not only punish Russian interests, it would threaten an important new energy project, Nordstream 2, that may be valuable to the European population and key EU businesses. The project is a new pipeline which would bring liquid natural gas (LNG) from Russia, across the Baltic Sea floor, directly into Germany. Certain EU and Russian commentators view the move as advantageous to U.S. LNG exporters, who would be better positioned to sell LNG to the EU if the Nordstream 2 pipeline is not completed.

Russian Countermeasures

As of the date of this publication, Russia has implemented countermeasures closing U.S. diplomatic properties and requiring U.S. embassies and missions to reduce their staff by 755 employees.

EU Proposed Responses

It is not clear what precise steps the EU will take, but reports suggest that “within few days” of the adoption of CAATSA, the EU will take some combination of three possible approaches, as follows:

1. The EU could seek a declaration by President Trump that he will not impose the sanctions measures against European Companies that he is authorized by CAATSA to use;

2. The EU could make use of Regulation (EC) 2271/96, known as the “Blocking Regulation,” which aims to prevent enforcement in the EU of extraterritorial legislation adopted by third countries; and

3. The EU could decide to engage in retaliatory measures, including outright bans on business with certain U.S. companies. The U.S. bourbon industry has been mentioned as a possible target.^[1]

Business Risks in the Escalating Actions

Prohibitions and authorizations – Some measures are prohibitions, others only authorize the president to take action

First, we note that CAATSA only directly prohibits those activities that were prohibited under the 2014 Crimea-related sanctions, with some adjustments to the time periods of the prohibited debt instruments. By contrast, the other sanctions measures in CAATSA, including those that would affect pipeline projects, merely authorize the President to implement sanctions. That distinction may not provide total comfort for companies whose business is put at risk under CAATSA, but it should be noted as those companies calculate and prognosticate their risks and plan their projects accordingly. We do not currently think it is likely that President Trump would exercise his authority to take extreme measures against Russia under CAATSA.

Special caveat: U.S. Companies with Russian customers, suppliers, or partners – Every company with Russian business should know whether a Russian customer, supplier, or other business partner is listed on the SSI or is owned by a company listed on the SSI.

U.S. financial institutions were largely aware of and prepared for the 2014 Russia sanctions, and should be able to readjust compliance protocols to account for timescales in CAATSA. However, some non-banks were caught off guard when their normal invoicing process put them on the wrong side of the 2014 law.

As a typical example: where a U.S. Company provided an invoice to a Russian company on the SSI list, and that Russian company took more than 30 days to pay, suddenly the U.S. company was deemed to be dealing in a debt instrument of longer than 30 days. Now that time limit will drop to 14 days. Every company that has Russian business should determine whether the counterparty is listed on the SSI, and adjust accordingly.

Oil & gas companies worldwide

Any company involved in energy projects involving Russia should be tracking the White House’s actions carefully. The Trump administration actively opposed CAATSA as it moved through Congress, and signaled an initial hesitation to sign the bill. For these reasons, we don’t currently expect President Trump to impose the optional sanctions under CAATSA. However, with overwhelming congressional support behind the bill, and a potential trade advantage to be gained for U.S. energy companies, implementing measures against companies involved in Russian pipeline projects may ultimately prove too tempting for the executive to stand passively by.

Julien Blanquart contributed to this post.

_{[1] For which reason this southern American author, now resident in Brussels, will permit himself a moment of subjectivity to note his deep concern on this particular point.}