A Potential EU Complaint over the US Sanctions on Russia

Guest blogger Katie A. Hutchison is a member of the WVU Law Class of 2018. She specializes in international law and immigration law and has worked as an immigration intern at the International Rescue Committee and as a Civil Division intern at the US Attorneys Office for the Northern District of West Virginia. She is fluent in German and Russian and conversant in Spanish.

Recently, some Congressional Democrats criticized the Trump Administration for failing to impose sanctions against Russia under the the Countering America’s Adversaries through Sanctions Act when the Treasury Department published a list of Russian official and oligarchs.

 The underlying legal question to this controversy is whether U.S. sanctions against Russia are permissible. This post compares the recent U.S. sanctions against Russia with the much-maligned Helms-Burton Act of 1996 to determine whether a potential EU complaint at the WTO over the Russian Sanctions would be successful. As the EC did in the Helms-Burton complaint, the EU can potentially claim that the cybersecurity Russian Sanctions nullify or impair Article I MFN and Article III National Treatment, trade benefits the EU can reasonably expect under the GATT.

Presumably, the United States would defend a claim on the grounds of national security. Several WTO Agreements include a national security exception which operates as a defense to a claim: GATT Article XXI, TRIPS Article 72, and GATS Article XIV.

Most controversial of these is GATT Article XXI(b) which states that the rest of the GATT is not intended “to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests . . . (iii) taken in time of war or other emergency in international relations.”

Since the founding of the GATT in 1947, Article XXI has only been proposed as a defense once, in response to the European Communities (EC) complaint United States — The Cuban Liberty and Democratic Solidarity Act. Ultimately, the WTO panel’s authority lapsed without decision, but the Helms-Burton Act represents the only challenge under the WTO national security exception and, therefore, the only point of comparison in determining whether an EU complaint over the Russian Sanctions would succeed at the WTO or whether Article XXI would be a viable defense for the US.

Background on the August 2017 Codification of the Russian Sanctions

The recent August 2017 sanctions are significant as they codified existing executive orders on Russia in a throwback to the Cold War and created new cybersecurity sanctions in an attempt to prevent meddling in democratic elections.

President Trump reluctantly signed the Countering America’s Adversaries through Sanctions Act into law on August 2, 2017, creating new sanctions on North Korea, Iran, and Russia and codifying existing measures created under executive order into law.

The stated purposes of the newly-added sanctions in Title II, Countering Russian Influence in Europe and Eurasia (“Russian Sanctions”), is preventing the Russian government from meddling in western democratic elections. As quoted in the statute, in a January 2017 report, the US Intelligence Community found that “Moscow will apply lessons learned from its Putin-ordered campaign aimed at the U.S. Presidential election to future influence efforts worldwide, including against U.S. allies and their election processes.”

Currently, the US Treasury, Department of National Intelligence, and the State Department reviewed whether investments in Russian state-owned companies, like Rosneft and Gazprom, fall under Sec. 224 of the Russian Sanctions. The Treasury Department published a report listing individuals associated with the Russian government on January 30, 2018. This report, however, does not impose sanctions on these individuals as Congress delegated that responsibility to President Trump, which he expressly refused to impose on January 29, 2018. However, Treasury Secretary Steven Mnuchin stated that although the Treasury Report did not impose sanctions, "[t]here will be sanctions that come out of this report."

The new cybersecurity sanctions included in the Russian Sanctions allow the US to block assets, prohibit all transactions in all property and interests in property, revoke visas, and exclude from US borders:

(1) any person that the President determines (A) knowingly engages in significant activities undermining cybersecurity against any person, including a democratic institution, or government on behalf of the Government of the Russian Federation; or (B) is owned or controlled by, or acts or purports to act for or on behalf of, directly or indirectly, a person described in subparagraph (A);

(2) impose five or more of the sanctions described in section 235 with respect to any person that the President determines knowingly materially assists, sponsors, or provides, material, or technological support for, or goods or services (except financial services) in support of, an activity described in paragraph (1)(A)

The cyber security sanctions also include a third option for persons that knowingly provide financial services to any person described in paragraph 1(A). None of these options for the cybersecurity sanctions is limited to persons of US citizenship or specifically targets persons of Russian citizenship.

Background on the Helms-Burton Codification of Cuban Sanctions

The Helms-Burton Act codified sanctions against Cuba in 1996 and was the target of a European Communities complaint at the WTO.

The European, Canadian, and Mexican officials, and even President Clinton himself publicly condemned the Helms-Burton Act before it passed. In March 1996, however, Clinton reluctantly signed the bill into law after the Cuban Air Force shot down two private US planes flown by an anti-Castro organization, Brothers to the Rescue, which helped Cuban refugees flee the regime.

Helms-Burton had three parts: (1) freezing the US embargo on trade with Cuba applicable to US firms and firms owned by “US persons”; (2) creating a cause of action in the US for Americans who formerly owned Cuban property “that could result in damages equal not to the value of trade being conducted by the defendants, but to the value of the property once owned by the American plaintiffs, and possibly even to three times that value”; and (3) barring from admission to the US controlling businessmen—shareholders, officers, and their families—of companies “trafficking” in property formerly owned or claimed by American nationals.

The international community found the creation of an extraterritorial cause of action most troubling because the US failed to cite existing treaty law or customary international law allowing it to do so. Under The Lotus Case (France v. Turkey), the Permanent Court of International Justice found that jurisdiction exercised by States must be territorial, unless there is an international custom or controlling convention to the contrary.

On May 3, 1996, the European Communities (EC) (today the European Union (EU)) complained to the WTO about the US Helms-Burton Act and its effect on EC citizens. While the complaint was pending, the EC and the US negotiated a deal obviating the need for the Panel to decide on the EC complaint, and the Panel’s authority lapsed on April 22, 1998, under Article 12.12 of the DSU. Under the deal, the US agreed not to prosecute any European companies under Helms-Burton, and every six months since 1996, Presidents Clinton, Bush, and Obama have waived the Helms-Burton Act’s authorization to file suit.

Comparing Helms-Burton and Countering Russian Influence in Europe and Eurasia to Understand the Possible Trajectory of the Russian Sanctions in International Trade

The EU can likely claim that the new cybersecurity sanctions of the Russian Sanctions nullify or impair GATT Article I Most Favored Nation (MFN) and Article III National Treatment due to the strong influence of Russian energy companies, like Gazprom and Rosneft, in the European market and the broad language of Russian Sanctions Sec. 224 “any person.”

Nullification or Impairment of Trade with the EU

The EC’s Helms-Burton complaint included six grounds for complaint, but most applicable here are the complaint about its extraterritorial application, which in turn would have affected “trade between the EC and Cuba or trade between the EC and the US” and potentially resulted in denial of visas to foreign business executives found in violation.

Similarly, if the EU complains to the WTO about the Russian Sanctions, the EU must show that the Russian Sanctions impair benefits reasonably expected to accrue to the EU under the WTO, in particular GATT Article I Most Favored Nation (MFN) and Article III National Treatment.

MFN generally requires that benefits given to one nation must be immediately and unconditionally applied to all other WTO Member States. National Treatment prevents Member States from using national measures to discriminate between domestic and imported goods.

Section 224 of the Russian Sanctions broadly includes any person, not just of Russian nationality, who by the President’s determination “knowingly engages in significant activities undermining cybersecurity against any person, including a democratic institution, or government on behalf of the Government of the Russian Federation” or is directly or indirectly owned, controlled by, acts on behalf of, or purports to act on behalf of any of those persons.

The alleged impairment here would stem from the close economic ties between the EU and Russia. One dramatic example is the EU’s relationship with the Russian state-owned natural gas company, Gazprom. Gazprom and Rosneft were notably absent from the Treasury Department’s list of entities from January 30, 2018, although they might be included in a separate classified annex. 

In 2016 Gazprom sold 228.3 billion cubic meters of natural gas amounting to $36 million to 25 European countries. EU citizens doing business with Gazprom would likely fall under Section 224 because Gazprom is owned and controlled by the Russian government, the intended target of the language in subparagraph (1)(A).

Congress’s stated policy for Section 224 of the Russian Sanctions is to prevent the Russian Government from undermining democratic elections. Therefore, under Section 224(2), an EU citizen who engages in conduct that violates the Russian Sanctions can be subject to the denial or revocation of his visa or blocking of his assets.

In the real world, the Russian Sanctions could sweep broadly, capturing very common conduct by EU citizens.

For example, if an EU citizen sells goods, like Ethernet cables, to Gazprom he may be “knowingly selling goods in support of significant activities undermining cybersecurity.”

Gazprom is owned by the Russian government, the primary target of the sanctions. The Russian government may be found to be per se participating in significant activities undermining cybersecurity, since Congress found in the Russian Sanctions that “the Russian Federation has made significant efforts to reduce the number and intensity of cyber intrusions conducted by that Government.”

Reading this broadly, the Russian Sanctions might apply to any person who “knowingly” sells Ethernet cables to Gazprom, since that person could be said to be “knowingly” helping to undermine cybersecurity. The same analysis may apply with respect to EU citizens doing common business with the Russian state-owned oil company, Rosneft.

Some EU members have been advocating since 2016 to end the EU’s more-limited sanctions on Russia. These sanctions have caused major contracting delays: in Italy, for example, $32 billion in signed contracts have been on hold for three years as a result of the sanctions.

The statute does contain potential safeguards, parallel to those in the Helms-Burton Act, that the U.S.  might rely on to defend a claim under the GATT. The sanctions are subject to the President’s discretion and the President may, under limited circumstances, waive the application of the sanctions. The US might agree to a non-enforcement waiver of the Russian Sanctions similar to the deal it struck with the EC not to enforce the Helms-Burton Act against EC citizens.

Relying on Presidential discretion and repeated waivers may have assuaged the EC in 1997, but in 2017, EU leaders are less likely to find comfort in relying on Trump’s discretion. Germany and EU leadership have already expressed concerns that US sanctions on Russian energy companies will harm EU trade interests and that “if diplomacy fails, the EU will consider complaining at the WTO” but that requires all EU Member States to support the complaint.

Unlike in Helms-Burton, where the EC presented a united pro-Cuban trade front, the EU is split internally on the topic of its own Russian sanctions. As support for the EU’s Russian Sanctions wanes, will the EU accept the extraterritorial application of the US Russian Sanctions? If not, affected EU Member States could complain in their own right.

Does the Article XXI National Security Exception provide a Real Defense?

If the EU or EU Member States complain to the WTO, the US could raise the GATT Article XXI national security exception in defense of the Russian Sanctions, but it is an open question of how the WTO will interpret the exception. Article XXI reads, in part, that agreement shall not be read:

(b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests . . . (iii) taken in time of war or other emergency in international relations; or

(c) to prevent any contracting party from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security.

With Helms-Burton, the US had a stronger case for the National Security Exception than in the Russian Sanctions because Clinton signed the Helms-Burton Act immediately after Cuba attacked private US planes (although there was speculation as to whether the planes were over international waters or Cuban territory at the time).

To defend the Russian Sanctions, the US would need to argue that (1) the Russian Sanctions were a direct result of Russian tampering in the 2016 US elections and that tampering in that election threatens US essential security interests, or (2) that Russian tampering threatens the maintenance of international peace and security as construed in the UN Charter.

Neither option is sound as a matter of US foreign policy or the comity of nations that the UN Charter is intended to promote.

If the US raises the election tampering as the main purpose of the Russian Sanctions, the US could argue that attacking US democracy in cyberspace is akin to an emergency in international relations and that the sanctions were “necessary for the protection of its essential security interests” under GATT Article XXI(b)(iii).

The WTO Panel will need to be careful to show respect for US interests in interpreting Article XXI(b)(iii) because the structure of the WTO and the GATT, like all international legal institutions, continues to function due to the respect for the sovereign equality of nations.

However, respecting sovereignty to too high a degree could easily lead to the degrading of the international trade structure, since allowing each country to protect all of its own idiosyncratic interests would create barriers to free trade. Although the WTO Panel could construe Article XXI to allow for broad interpretation of what is necessary for the protection of essential security interests, it is unlikely to do so because this construction is contrary to the goal of free trade and, in this case, violates international law’s prohibition on the extraterritorial application of laws declared in The Lotus Case.

As to the second option, under GATT Article XXI(c), the UN Security Council decides when there is a threat to international peace and security. Because both the US and Russia are permanent UN Security Council Members, it is unlikely that the US would ever succeed in passing some version of the Russian Sanctions as a resolution of the Security Council, as demonstrated by the Security Council’s forty-year gridlock of the Cold War era.

In comparing the EC Helms-Burton complaint of 1996 to the possible EU Russian Sanctions complaint, it becomes apparent that it is in the US’s best interests to find a way to waive the application of the Russian Sanctions as to EU citizens as it continues to do with respect to the Helms-Burton Ac. A WTO Panel would be unlikely to construe the GATT Article XXI National Security exception in the US’s favor and the US would then be faced with a choice between either conforming its measure to the GATT or facing economic retaliation countermeasures from the EU or other affected trade partners.