Showdown with EU as USA enacts more Anti-Russia Sanctions
Tuesday, 25 July 2017

Setting up a showdown not between the US and Russia as some hope, but between Washington and the EU which has emerged as the most vocal opponent of ongoing, unilateral anti-Russian escalation by the US vowing swift retaliation, moments ago the U.S. House passed bipartisan legislation codifying and imposing further sanctions on Russia, Iran and North Korea, and preventing the president from acting unilaterally to remove certain sanctions on Russia. Just three Republicans - Reps. Justin Amash (Mich.), Jimmy Duncan (Tenn.) and Thomas Massie (Ky.) - voted against the bill, which passed 419-3.

More importantly, the measure also bars U.S. companies from investing in energy projects in which Russian companies have at least a 33% stake, and may penalize European companies that colaborate with Russian companies on energy projects, the source of Europe's recent fury.

Here are the main details of the draft legislation:

- Codifies existing US sanctions on Russia and requires Congressional review before they are lifted.

- Reduces from 30 days to 14 days the maximum allowed maturity for new debt and new extensions of credit to the state controlled financial institutions targeted under the sectoral sanctions.

- Reduces from 90 days to 60 days the maximum allowed maturity for new debt and new extensions of credit to sectoral sanctions targets in the energy sector, although this largely only brings US sanctions in line with existing EU sanctions, which already impose a 30-day maximum for most energy companies.

- Expands the existing Executive Order authorising sectoral sanctions to include additional sectors of the Russian economy: railways and metals and mining.

- Requires sanctions on any person found to have invested $10 million or more, or facilitated such an investment, in the privatisation of Russian state-owned assets if they have “actual knowledge” that the privatisation “unjustly benefits” Russian government officials or their close associates or family members.

- Authorises (but does not require) sanctions “in coordination with allies” on any person found to have knowingly made an investment of $1 million or more (or $5 million or more in any 12-month period), or knowingly provided goods or services of the same value, for construction, modernisation, or repair of Russia’s energy export pipelines.

- Orders the treasury, in consultation with the Director of National Intelligence and the Secretary of State, to prepare detailed reports within the next 180 days:
on the impact of debt- and equity-related sanctions being extended to include sovereign debt and the full range of derivative products.

- on Russia’s oligarchs and parastatal companies including individual oligarchs' closeness to the Russian state, their involvement in corrupt activities and the potential impact of expanding sanctions with respect to Russian oligarchs, Russian state-owned enterprises, and Russian parastatal entities, including impacts on the entities themselves and on the economy of the Russian Federation, as well as the exposure of key US economic sectors to these entities.

According to Goldman, the most important impact would be that the bill codifies existing sanctions. Both the Obama administration and the Trump administration have argued that this restricts the President’s ability to negotiate a settlement of the Ukrainian conflict, as lifting codified sanctions has proven very difficult in the past.  The bill also asks the treasury to prepare a report in the next six months on the potential impact of expanding debt-related sanctions to include sovereign debt, as well as the potential impact of expanding sanctions to some oligarchs found to be close to the state and parastatal companies. This could be interpreted to suggest that sovereign debt will be added to the sanctions framework once the report has been prepared.

The potentially most controversial and impactful part of the sanctions bill concerns the potential inclusion of Russia’s gas and gas pipeline sector. However, at this stage the text only provides for sanctions imposed in consultation with US allies. As we have described in recent days, there is no appetite across most of Europe to contemplate such an extension.

But more than anything, however, Tuesday’s vote amounted to a rebuke of President Trump, whose administration had pushed to water down the bill’s provisions giving Congress the power to veto the lifting of sanctions.

“This strong oversight is necessary. It is appropriate. After all, it is Congress that the Constitution empowers to regulate commerce with foreign nations,” House Foreign Affairs Committee Chairman Ed Royce (R-Calif.) said, quoted by The Hill.

Ironically, with The House scheduled to depart Washington for the August recess at the end of this week, the latest anti-Russia sanctions package will likely be its biggest legislative accomplishment to date. The GOP-controlled Congress has not been able to send bills fulfilling any of Trump's campaign pledges, such as repealing the healthcare law and reforming the tax code to Trump's desk thus far. However, when it comes to Russia, the laughing stock that is a Republican-controlled Congress has always managed "to come out on top."  As such, its biggest victory heading into the summer recess is the measure constraining the president amid investigations into whether the Trump campaign colluded with the Russian government to sway the 2016 election.

Making matters even more complicated for the Trump administration, which urged lawmakers to ensure the president have flexibility to adjust sanctions policy, the House passed the bill with a veto-proof majority meaning Trump has no choice but to accept it.

In recent days, White House press secretary Sarah Huckabee Sanders offered mixed messages in recent days.  On Sunday, Sanders told ABC’s “This Week” that the administration supports the bill. But on Monday, she told reporters on Air Force One that Trump is “going to study that legislation” before making a final decision.

In addition to binding Trump, the bill establishes new sanctions on Iran and North Korea, in addition to Russia.  White House had lobbied against the Senate-passed measure, arguing it needed flexibility to adjust economic sanctions against Moscow.

Meanwhile, the complaints emerged, and not just from Europe: oil and gas companies raised concerns about provisions limiting the extent to which American and Russian energy companies could interact. Those companies warned that provisions banning American investments supporting the maintenance or construction of Russian pipelines could inadvertently prevent U.S. development near Russian sites.

In an effort to address those concerns, the latest version of the bill clarifies that only Russian energy export pipelines can be sanctioned, something which will not help as Brussels contemplates how to retaliate. It also establishes that the ban on U.S. investments in deepwater, shale or Arctic offshore projects applies only if there are Russian entities with an ownership interest of at least 33 percent.

And now we wait to see how Europe, which over the weekend vowed to "retaliate within days" should the legislation pass, will respond. And, of course, how long until Russia expels some 30 US diplomats now that it is abundantly clear the US won't return the seized Russian diplomatic compounds as Putin has been demanding in recent weeks. 

 




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