On July 15, 2020, the U.S. Department of State updated its public guidance on Section 232 of the Countering America’s Adversaries Through Sanctions Act (“CAATSA”), which authorizes (but does not require) the president to impose sanctions on “a person” that “knowingly” invests in Russian energy export pipelines, or that sells Russia goods, technology or services for such pipelines where certain monetary thresholds are met.
The Department of State announced that the purpose of the updated guidance is “to expand the focus of implementation of Section 232 to address certain growing threats to U.S. national security and foreign policy interests related to Russian energy export pipelines, particularly with respect to Nord Stream 2 and the second line of TurkStream.” This is a significant change, as the prior public guidance stated “The focus of implementation of Section 232 sanctions would be on . . . [Russian] energy export pipeline projects initiated on or after August 2, 2017 . . . For the purposes of Section 232, a project is considered to have been initiated when a contract for the project is signed. Investments and loan agreements made prior to August 2, 2017 would not be subject to Section 232 sanctions.” This prior guidance had suggested that the focus of implementation of Section 232 would not be on Nord Stream 2 or Turkstream (either line), because these projects were “initiated” before August 2, 2017.
The Department of State’s updated guidance indicates that it will not impose sanctions under Section 232 on persons that carried out and completed activities prior to July 15, 2020, as long as those activities were consistent with the public guidance that was in force at the time. In addition, the Department of State will not impose sanctions under Section 232 based on activity that is “ordinarily incident and necessary to the wind down of operations, contracts, or other agreements” in force prior to July 15, 2020, as long as the investments or activities are:
- consistent with the pre-July 15, 2020 guidance;
- executed pursuant to an agreement dated prior to July 15, 2020; and
- “the person making such investments or engaging in such activities is taking reasonable steps to wind down the operations, contracts, or other agreements as soon as possible after July 15, 2020.”
However, Section 232 sanctions may be applied to persons that continue to maintain, rather than wind down, sanctionable activity, such as “persons facilitating the construction or deployment of the pipelines such as financing partners, pipe-laying vessel operators, and related engineering service providers.” The guidance states that there is no “grandfathering,” except under the wind-down policy described above. Accordingly, with the release of the updated public guidance, activities – other than wind-down operations – to maintain existing agreements related to Nord Stream 2, and the second line of Turkstream, carry the risk of sanctions under CAATSA Section 232.
The State Department has reiterated that “Implementation of Section 232 sanctions would not target investments or other activities related to the standard repair and maintenance of pipelines in existence on, and capable of transporting commercial quantities of hydrocarbons, as of August 2, 2017.” But it has clarified that this policy does not apply to Nord Stream 2 or the second line of Turkstream, and therefore “investments or other activities related to the standard repair and maintenance of these pipelines could be the target of sanctions.”
The guidance makes clear that the first line of Turkstream, “which is designed exclusively to supply Turkey’s domestic natural gas market, is not the focus of Section 232 implementation efforts.”
Finally, the guidance provides a broad definition of the term “investment” that may include normal banking services such as overdrafts and currency swaps.
Related Congressional Activity
In addition to this expanded sanctions policy implemented by the administration, Congress has been active in seeking to increase the pressure on these pipeline projects. For example, Senator Ted Cruz (R-TX) has sought to include within this year’s National Defense Authorization Act (“NDAA”) a provision to impose additional sanctions on activity relating to Nord Stream 2 and Turkstream (S. 3897, the Protecting Europe’s Energy Security Clarification Act of 2020), which would broaden the scope of the similar sanctions provisions contained in last year’s NDAA to include foreign persons that provide services or facilities, such as insurance or tethering, to vessels engaged in pipe-laying activities at certain depths; and to cover foreign persons that provide “services for the testing, inspection, or certification necessary for, or associated with the operation of, the Nord Stream 2 pipeline.” Representative Adam Kinzinger (R-IL) has introduced in the House a similar bill with the same name (H.R. 7361). If either of these legislative proposals is to become law, their differences will need to be reconciled.
The scope of sanctions in Section 232 of CAATSA is broader in some respects than these enacted and proposed NDAA provisions, although it is subject to certain monetary thresholds, which may limit the applicability of Section 232 to more significant activities. Given the focus in Congress on Nord Stream 2 in particular, and statements from the administration regarding that pipeline, we view this as an area of increasing U.S. sanctions risk.
The Department of State press release announcing the updated public guidance concludes by “encourag[ing] companies to reassess their participation in Russian energy export pipelines subject to Section 232, and to take appropriate steps to mitigate their exposure to sanctions” under the updated public guidance. As the U.S. Congress continues to consider additional legislation imposing sanctions for activity relating to Nord Stream 2 and potentially other Russian energy export pipelines, this remains an area of U.S sanctions risk that bears close monitoring.