Russia sanctions have moved in a new direction. Not only will the Administration continue to push the oil cap proposal with buyers of Russian crude, but friction between the Biden Administration and Congress has now emerged over the designation of the Russian Federation as a state-sponsor of terrorism. China’s actions regarding Taiwan holds the potential for the imposition of sanctions or related actions in the near-term, particularly by Congress. An Iran nuclear agreement may be reached soon as well, paving the way for sanctions relief.
Treasury Assistant Secretary for Terrorist Financing and Financial Crimes Liz Rosenberg was in Singapore this past week (August 10-11) after visiting Indonesia as part of a push to gain support for the global price cap on Russian oil. Various formulas have been put forth as to how it could be done, but expect in October to see more from the U.S. and G-7 regarding the specifics of the proposal, ahead of the EU’s December implementation of oil restrictions. This will be an important space to watch.
On August 2, the Biden Administration designated a wide array of Russian individuals, companies, and others linked to sanctions evasion, including Vladimir Putin’s alleged mistress. Most significant amongst these was Andrey Guryev, the founder of Russia’s largest fertilizer producer PhosAgro, which Treasury has made clear was not designated. On July 29, the U.S. imposed sanctions on two Russians and four Russian entities in connection with claims of Russian interference in U.S. elections, and it formally charged one of the sanctioned individuals with using U.S. citizens and political groups to spread Russian propaganda. Treasury noted that the designated individuals and entities played various roles in Russia’s attempts to manipulate and destabilize the United States and its allies and partners, including Ukraine. This follows prior designations of such “Gray Zone” actors. Expect additional Gray Zone targeting in the future, as there appears to be a decrease in the number and scale of sanctions evasion networks being designated.
In the Russia sanctions space, the Administration did issue additional significant new general licenses, particularly as they relate to the most recent designation. On July 22, the Office of Foreign Assets Control (OFAC) issued GL 45, which extends to October 22 of this year the authorization to engage in transactions for the wind down of financial contracts or agreements entered into before June 6 that deals with or is linked to debt or equity issued by an entity in the Russian Federation. All transactions have to be incident to the wind down of this business. OFAC also issued GL 46, which effectively authorizes U.S. persons to purchase or receive Russian bonds in order to settle the credit default swaps (CDS) contracts permitting the EMEA Credit Derivatives Determinations Committee to hold an auction to settle Russian CDS. Specifically, it authorizes all transactions related to an auction process under the EMEA Credit Derivatives Determination Committee to settle credit derivative transactions with a reference entity of the Russian Federation.
The U.S. also continued to target Russia-related civil aviation including the Justice Department’s seizure of an aircraft owned by sanctioned Russian oligarch Andrei Skoch, and the Commerce Department’s addition of 25 foreign-purchased aircraft to the list of those determined to have violated of export control restrictions on Russia and Belarus.
The Department of Commerce recently issued a rule controlling the exports of foundational technologies used to support advanced semiconductor and gas turbine engine production. Specifically, according to reports the rule will “ban the export of two ultra-wide bandgap semiconductor materials, as well as some types of electronic computer-aided design (ECAD) technology and pressure gain combustion (PGC) technology. The BIS said that the semiconductor materials gallium oxide and diamond will be subject to renewed export controls because they can operate under more extreme temperature and voltage conditions.”
The Administration’s Iran policy is in a state of transition. While nuclear negotiations were deadlocked, the Administration has taken a series of sanctions actions against illicit Iranian oil smuggling networks. The Administration was apparently telegraphing the August 1 announcement by the Treasury of the designation of an additional oil smuggling network on August 1 as a means to pressure Iran to rejoin the deal. Iran, in turn, imposed sanctions on 61 additional U.S. citizens. Recent diplomatic activity, however, has made comprehensive sanctions relief as part of a revived nuclear agreement more likely.
On August 8, Treasury designated the virtual currency mixer Tornado Cash, in relation to laundering money belonging to the Lazarus Group, a front for North Korea.
Central and South America
The last month has been busy for sanctions in the Western Hemisphere. On July 20, the State Department released its list of Central American Corrupt, Undemocratic Actors as part of its efforts to combat corruption in Central America. The report identified dozens of corrupt officials, former officials, and others, who, by virtue of being included in the report, are ineligible for visas and cannot enter the U.S. On August 12, the State Department designated Paraguayan Vice President Hugo Velazquez and Yacyretá Bi-National Entity legal counsel Juan Carlos “Charly” Duarte for their involvement in significant corruption. The State Department also designated former Paraguayan President Horacio Manuel Cartes Jara for corruption. All designations deny visas to these individuals, but do not block their property, although additional designations by Treasury under the Global Magnitsky sanctions regime of these individuals may be forthcoming. Additionally, we could expect more in terms of visa restrictions and Global Magnitsky sanctions as International Anti-Corruption Day (on December 9) nears. Additionally, last month the U.S. moved to seize an aircraft grounded in Argentina linked to Iran.
Within the past two weeks, there has been a shift on Capitol Hill back to dealing with China issues generally, and sanctions and restrictive economic measures. Congress will likely take a more aggressive posture towards China for the foreseeable future given Chinese activities surrounding Speaker Pelosi’s trip to Asia, and their reaction to the visit by the Speaker to Taiwan, including by sanctioning Pelosi and her immediate family. Aside from National Defense Authorization Act (NDAA) provisions and continuing discussion of restrictions on outbound investment, the Senate Foreign Relations Committee announced last week that they are both holding hearings and moving legislation. Specifically, they are marking up the Taiwan Policy Act of 2022 (S. 4428) on September 14, which was originally scheduled for August 3 but postponed. Among other measures, the bill contains comprehensive sanctions against China if that government, including through any of its proxies, “is knowingly engaged in a significant escalation in hostile action in or against Taiwan, compared to the level of hostile action in or against Taiwan before December 1, 2021.” Such an action is one that would have the effect of “undermining, overthrowing, or dismantling the governing institutions in Taiwan; occupying the territory of Taiwan; or interfering with the territorial integrity of Taiwan.” If China takes these measures, mandatory sanctions will be placed on senior government officials, Chinese banks, and sectors of the Chinese economy. Concurrently, on July 20, the commissioners from the U.S. Congressional-Executive Commission on China (CECC) issued a letter to the Biden Administration calling on it to impose sanctions on Hong Kong Department of Justice prosecutors through the Hong Kong Human Rights and Democracy Act and the Hong Kong Autonomy Act.
On July 27, the Senate unanimously passed a nonbinding resolution calling on the Biden Administration to designate Russia as a state-sponsor of terrorism (SSOT). The measure was originally introduced in May and discharged from the Senate Foreign Relations Committee in early July. As this measure was making its way through the Senate Process, Politico reported that House Speaker Nancy Pelosi told Secretary of State Antony Blinken she is supportive of efforts to designate Russia as a SSOT. Such a designation could significantly increase sanctions and other restrictive measures against Russia, particularly if trade goods under the heading EAR 99—low-technology consumer goods and do not require a license in most situations—are prohibited from being exported or reexported to Russia without a license from the Department of Commerce. It would also subject Russia to civil lawsuits from Americans harmed by Russia in Ukraine by waiving sovereign immunity exemptions in U.S. law. Another group of Senators called for imposing sanctions on China’s purchases of Russian petroleum and petroleum byproducts.
Beyond the SSOT designation, expect Congress to push the Administration to designate Chinese state-owned entities and other state-affiliated companies that do business in Russia. Also, Congress may start pressing the Administration to impose secondary sanctions on Russian energy companies given that the administration is still developing a policy that would put a price cap for entities that purchase Russian oil.