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August 02, 2017

Recommendations for Implementing Sanctions on Russia

Featuring Peter Harrell

The new sanctions that Congress passed against Russia on July 27 have the potential to increase economic and political pressure on Moscow and represent an important U.S. response to Russia’s intervention in the 2016 U.S. presidential election and Russia’s ongoing support for pro-Russian separatists in Ukraine and Syrian dictator Bashar al-Assad. However, major questions remain on how the Trump administration will implement the law and how European governments, which have expressed concern about some of the law’s provisions, will respond. This CNAS commentary makes recommendations to U.S. policymakers on strategies to effectively implement the law to maximize pressure on Russia while limiting unintended costs.

Overview of the Russia, Iran, and North Korea Sanctions Act (RINKSA)

The Russia, Iran and North Korea Sanctions Act (RINKSA) imposes numerous new restrictions on Russia, building on existing U.S. and European sanctions that have been in place since 2014. The law also includes new sanctions on Iran and North Korea that are beyond the scope of this commentary. Major new sanctions on Russia include:

Congressional oversight of moves to ease or terminate U.S. sanctions on Russia

The new law effectively prevents the Trump administration from easing sanctions on Russia without giving Congress an opportunity to review any proposed sanctions easing action. Under the law, Congress has 30 days either to block or approve any major step the administration takes to ease sanctions on Russia; the administration can also move forward with the action if Congress does not take an action to block or approve it within the 30-day window. 

Tightened restrictions on U.S. lending to large Russian banks

Prior U.S. sanctions prohibited U.S. banks and companies from lending money to Russian banks if the loan is for more than 30 days. These sanctions have deprived Russian banks from access to long-term international capital markets and forced the Russian government to bail out many of its banks. The new sanctions require the U.S. government to cut the current maximum lending window from 30 days to 14 days, further increasing pressure on the Russian financial sector. 

Expanded sanctions on Russian oil companies

Prior U.S. sanctions prohibit U.S. companies from providing goods and services to oil projects in the Russian arctic, deepwater, and shale projects. These sanctions deny Russia the technology and expertise it needs to develop its next generation oilfields. RINKSA will expand these prior sanctions to cover arctic, deepwater, and shale oil projects that are joint ventures between Russian companies and Western companies outside of Russia, curbing Russian energy companies’ global footprint in arctic, deepwater, and shale oil projects. RINKSA also cuts the limit on U.S. banks lending to Russian energy companies from the current 90 days duration to 60 days. Finally, the new law directs the Trump administration to sanction foreign oil companies, such as European and Asian oil companies, that engage in arctic, deepwater, and shale projects in Russia that U.S. companies are prohibited from engaging in.

Sanctions on the Russian defense and intelligence sectors

RINKSA includes tough new sanctions that bar both U.S. and foreign companies from doing most business with the Russian defense and intelligence sectors, including selling equipment to Russian defense companies and purchasing Russian military hardware. However, the Trump administration has significant flexibility in defining the specific Russian companies and entities that will be blacklisted by these new sanctions. In addition, Congress gave the Trump administration flexibility to waive sanctions on countries that purchase Russian military hardware as long as those countries commit to reducing their purchases of such hardware. This is intended to give countries like India and Egypt that purchase Russian defense equipment time to find alternative suppliers.

Potential sanctions on pipelines for the transport of Russian energy

RINKSA authorizes, but does not require, the Trump administration to impose sanctions on companies involved in constructing or expanding pipelines used to transport Russian oil and gas. These sanctions are designed to increase pressure on Russia’s energy sector and to discourage countries from increasing their reliance on Russian energy—Russia’s leading export and an important source of Russia’s global economic leverage. However, these sanctions provisions have run into sharp opposition from a number of European governments concerned about the impact on planned European gas pipelines, notably the Nord Stream II pipeline.

Potential sanctions on Russian state-owned railways, mining, and metals companies

RINKSA authorizes, but does not require, the Trump administration to impose a ban on lending to state-owned Russian railways, mining, and metals companies, such as Russian Railways and diamond mining firm Alrosa. Such a ban would restrict the companies’ access to international capital markets while allowing U.S. companies to continue purchasing these companies’ products and services inside Russia and on global markets, so that the sanctions do not impact global markets or supply chains.

Other provisions

In addition to these major provisions, the new law also includes sanctions on Russian companies and entities that engage in cyber attacks, provide military support to Syria, or help privatize Russian government assets in ways that facilitate Russian government corruption.

 

Recommendations For Implementation

The Trump Administration is likely to make decisions about how to implement these new sanctions over the next one-to-two months. Indeed, the new law requires the Trump Administration to make some determinations regarding the new sanctions within 60 days of the law entering into force. Given the flexibility that Congress provided in the implementation of many of these sanctions, the Trump Administration’s approach to implementation will be critical in determining how much bite the sanctions have. In addition, effective U.S.-European cooperation in implementing the new sanctions has the potential to increase their bite, while U.S.-European discord will undermine their effectiveness.

U.S. officials can take a number of steps to effectively implement the new sanctions on Russia. 

1. The Trump Administration should negotiate an implementation understanding with the European Union

Europe has closer direct trading and financial ties to Russia than does the U.S., and cooperation between the European Union and the United States since 2014 has been an important element of the success of existing sanctions on Russia. A key first step for effective implementation of the new sanctions is for the Trump Administration to negotiate an understanding with the E.U. on how to implement them.

European officials have sharply criticized several provisions of RINKSA, notably sanctions against Russian energy pipeline projects, which Europe worries will affect Europe’s Nord Stream II pipeline. However, as described above, the final text of the law provides the Trump Administration with discretion in implementing the pipeline sanctions, including the flexibility to delay implementation or waive them outright. 

The Trump Administration should be prepared to use its flexibility in implementing the pipeline sanctions to implement the sanctions a manner that mitigates European Union concerns. However, in exchange the Trump Administration should press the European Union to join with the U.S. in imposing other sanctions included in the new law. For example, the Trump Administration could offer to delay pipeline sanctions with respect to the Nord Stream II pipeline if the European Union agrees to modify and expand its existing sanctions to bring them more into line with the new U.S. sanctions, such as asking the European Union to modify its on E.U. financial sanctions on Russia to reflect the new, shorter timelines for prohibited lending in U.S. law. The E.U. should also join the U.S. in imposing tough new sanctions on the Russian defense and intelligence sectors and new sanctions on lending to Russian state owned railways and mining and metal companies. This kind of joint approach would send a powerful political message of transatlantic unity against Moscow while maximizing the economic bite of the new law. 

2. The Trump Administration should take a tough approach to implementing sanctions on Russia’s defense and intelligence sectors.

Russia’s defense and intelligence sectors are key instruments or Russian power: U.S. intelligence agencies have concluded that it was Russia’s intelligence services that intervened in U.S. elections last year, and Russia’s military provides support to pro-Russian separatists in Ukraine, and to Syria, Iran, and other U.S. adversaries. The defense sector is also a major revenue-earner for the Russian government, with Russia exporting at least $6.5 billion in defense sales in 2016.

The new U.S. sanctions have the potential to impact Russia’s ongoing efforts to upgrade its military by depriving Russia of the ability to purchase sensors and other high-tech equipment. They also have the potential to curb Russia’s defense export revenues and its global defense footprint. However, effective implementation will be key.

The Trump Administration should take several steps to ensure that the new defense and intelligence sector sanctions are tough, but also sensible.

First, the Administration should issue public guidance clarifying that a large range of Russian companies and government ministries, including large defense exporters like Rosoborneskport, are covered by the new sanctions. This will make sure that Russia cannot circumvent the intent of the sanctions by using companies that are not on U.S. sanctions lists to continue international defense trade.

Second, the Trump Administration should be prepared to use provisions in the new law that allow the Administration to waive or defer the sanctions for foreign governments that are purchasing Russian defense equipment if the governments commit to winding down their purchases of Russian defense equipment. These provisions are in some ways modeled on the “significant reduction” framework in Iran sanctions that successfully reduced Iran’s oil exports by more than 50% between 2012 and 2014. A number of U.S. partners and allies, from Israel to India, purchase defense equipment from Russia, and the Trump Administration should be prepared to allow those countries time to wind down those purchases so that they can find other suppliers for their defense needs. 

3. The Trump Administration should use new sanctions to level the playing field between U.S. and foreign companies.

While U.S. energy companies had to cease participating in Russia arctic, deepwater, and shale oil companies as a result of sanctions in 2014, a number of European and Asian companies have continued to engage in such projects under exceptions that exist in European and other foreign government sanctions laws. The Trump Administration should make clear to global oil companies that it intends to use the new sanctions to punish any foreign companies that ‘backfill” such oil projects in Russia that U.S. companies are not legally allowed to participate in.

4. Congress should ensure that the Trump Administration takes a strong approach to implementation.

Given the high degree of flexibility the new law gives the Trump Administration in implementing sanctions, Congress should exercise oversight over implementation. For example, Congress should consider holding hearings on implementation and should push the Trump Administration to take a strong approach.

5. Congress should exercise its oversight provisions over sanctions easing judiciously.

Congress included tough oversight provisions in RINKSA to ensure that the Trump Administration cannot ease sanctions on Russia unless Russia changes its aggressive behavior and there is a compelling reason for the U.S. to ease sanctions. These oversight provisions include several provisions that do not have precedent in congressional oversight of other sanctions laws, including congressional oversight of Administration decisions to remove individual companies from U.S. sanctions lists and congressional oversight of certain licenses (exemptions) that the Administration might grant U.S. companies doing business in Russia. While Congress is correct to ensure that the Administration cannot change policy towards Russia without congressional oversight, Congress should be prepared to approve periodic small changes in Russia sanctions, such as individual company delisting and licenses for U.S. companies, where individual circumstances merit.

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