United States sanctions Russian parties involved in Nord Stream 2

At a Glance…

On January 19, 2021, the U.S. Department of State designated KVT-RUS and its vessel, Fortuna, for engaging in pipe-laying activities for the Nord Stream 2 gas pipeline. These sanctions are the first taken by the U.S. government with respect to Nord Stream 2. As a result of these sanctions, U.S. persons are prohibited from engaging in virtually any transaction with Fortuna and KVT-RUS as well as its subsidiaries. Additionally, non-U.S. persons will risk exposure to secondary sanctions if they engage in significant transactions with Fortuna or KVT-RUS.

Authors:  Leigh Hansson, Eli Rymland-Kelly, Alexander Brandt, William Young, Claire E. Don and Ozra O. Ajizadeh

In its final week, the Trump administration took one last pass at derailing pipe-laying activities on Nord Stream 2 by designating Russian-based owner KVT-RUS and its vessel, Fortuna. These sanctions were imposed pursuant to section 232 of the Countering America’s Adversaries Through Sanctions Act (CAATSA), which authorizes sanctions on persons who knowingly invest in, or sell, lease, or provide to the Russian Federation “for the construction of Russian energy export pipelines, goods, services, technology, information, or support.” Sanctions will only be imposed where the investment or provision of goods or services has a fair market value of at least $1 million or, during a 12-month period, has an aggregate fair market value of $5 million or more.

Section 232 of CAATSA calls for the imposition of five or more sanctions listed in section 235 of CAATSA. In this instance, the U.S. government imposed the following sanctions on KVT-RUS:

• Export sanctions: U.S. government agencies are prohibited from issuing any specific license or any other specific permission or authority to export goods or technology to the sanctioned person.

• Foreign exchange: This sanction prohibits any transactions in foreign exchange that are subject to the jurisdiction of the United States in which the sanctioned person has any interest.

• Banking transactions: This sanction prohibits any transfers of credit or payments between financial institutions or by, through, or to any financial institution, to the extent that such transfers or payments are subject to the jurisdiction of the United States and involve any interest of the sanctioned person.

• Property transactions: Dealings in property or interest in property of the sanctioned person that are subject to U.S. jurisdiction are prohibited.

• Ban on investment in equity or debt of sanctioned person: This sanction prohibits U.S. persons from investing in or purchasing significant amounts of equity or debt instruments of a sanctioned person.

Meanwhile, Fortuna was identified as blocked property of KVT-RUS. Because the U.S. government chose to block the property of KVT-RUS the other sanctions imposed have limited practical effect. Under section 228 of CAATSA, non-U.S. persons determined to have “knowingly” facilitated a “significant transaction(s)”, including deceptive or structured transactions, for or on behalf of” Fortuna or KVT-RUS run the risk of sanctions.

Earlier this year, the U.S. Department of State updated its guidance on CAATSA “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 guidance signaled a shift in State Department policy as its prior guidance suggested that Nord Stream 2 was not the focus of section 232, stating that “the focus of implementation of section 232 sanctions would be on … [Russian] energy export pipeline projects initiated on or after August 2, 2017.

Although the U.S. government chose CAATSA to designate KVT-RUS and its vessel, Fortuna, this action comes just weeks after the 2019 Protecting Europe Energy Security Act (PEESA) was amended by the National Defense Authorization Act for fiscal year 2021. This amendment expanded the scope of activities sanctionable under PEESA to include persons providing pipe-laying, inspections, insurance, and other services necessary for the final stages of construction on Nord Stream 2. Specifically, the PEESA Clarification Act, as discussed in our previous client alert, broadened the sanctions on “pipe-laying” to include “activities that facilitate pipe-laying, including site preparation, trenching, surveying, placing rocks, backfilling, stringing, bending, welding, coating, and lowering of pipe.” Before this amendment, PEESA only required that sanctions be imposed on vessels engaging in pipe-laying for Nord Stream 2, Turkstream, or any successor project, at depths of 100 feet (30.48 meters) or more below sea level. PEESA also required that sanctions be imposed on non-U.S. persons who knowingly sold, leased, or provided those construction vessels and knowingly “sold, leased or provided those vessels for construction of that project; or facilitated deceptive or structured transactions to supply those vessels for such projects.”

Nord Stream 2 has long caused bipartisan concern in the United States regarding the undue leverage over Germany that the pipeline could provide Russia. Berlin insists that the Nord Stream 2 pipeline’s construction is a critical component in furthering Germany’s goal to develop renewable energy sources, phasing out nuclear power and the use of coal. However, following the arrest of Russian opposition leader Aleksei Navalny, European lawmakers voted on January 21, by an overwhelming majority, to call on the European Union and its member states to critically review collaboration with Russia regarding a number of foreign policies, projects, and Nord Stream 2. Meanwhile, on January 19, U.S. President Biden’s nominee for secretary of state, Antony Blinken, said at his Senate confirmation hearing that the new administration also opposes Nord Stream 2. With such different viewpoints between the United States and Germany, it remains to be seen how the Biden administration will address this developing situation.

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This post was initially made available from Reed Smith‘s website.