January 13, 2017
By Anthony Rapa, Alexis Early and Peter Jeydel*
President-elect Trump has made bold and surprising pronouncements about what he may do after January 20 in the field of international affairs, and these foreign policy choices are likely to have a significant impact on the future course of U.S. economic sanctions programs targeting Iran, Cuba, Russia and other areas. Mr. Trump has said he would terminate the Iran nuclear deal, and with it the sanctions rollback that has taken place over the past year, although actually convincing the rest of the world to re-impose sanctions on Iran would be a monumental feat of diplomacy. On Cuba, Mr. Trump has given reasonably clear signals both that he would support the recent easing of sanctions and that he would reverse it, so the actual policy of the incoming Administration is hardly better than a 50/50 guess at this stage, though with the odds slightly favoring some tightening of sanctions. Russia may be different. That is one area in which Mr. Trump’s statements and actions point to a real possibility of a wholesale change in U.S. policy, although bipartisan congressional concerns with Russia may present a major obstacle to radically changing the current state of affairs, at least without significant concessions by Russia.
What we can say at this stage is that President Trump will have the power to undo all or nearly all of the changes that President Obama has enacted in these economic sanctions programs. But, taking a step back, any moves on sanctions are likely to get caught up in a broader set of discussions about trade policy and diplomacy that will start to take form early next year. Any aggressive moves on trade policy could, for example, scuttle chances of revisiting the global consensus on Iran sanctions, and could complicate efforts to enforce recent UN sanctions on North Korea. Cuba is something that the US could change unilaterally, without facing the likelihood of any major blowback. But Russia will be a complicated topic – the incoming Administration will do a great deal to shape it, but it may ultimately be influenced in significant part by the storms on the horizon in European politics, and, most importantly, by the U.S. Congress.
While significant change is possible, the process is likely to be considerably more drawn-out and complex than observers have suggested.
As President-elect Donald Trump and his transition team plot his incoming administration’s priorities before his January 20, 2017 inauguration, the global business community and international regulatory compliance community are seeking clues about what these priorities mean for cross-border transactions and the legal authorities that regulate them. In the context of Iran, questions include the future of the Iran nuclear agreement, whether the Trump administration will implement new sanctions authorities and increase enforcement, and how a Republican president may leverage a Republican-controlled Congress.
Fate of the Iran Nuclear Agreement
The Joint Comprehensive Plan of Action (“JCPOA”) agreement between Iran, the United States, and other world powers is an “executive agreement,” which means that the Obama administration signed it without the advice and consent of the US Senate. Therefore, it is not binding the same way a treaty is, and President-elect Trump could try to make good on his campaign promise to renegotiate the deal, e.g., by imposing more stringent conditions on Iran or applying new nuclear-related sanctions. However, as a diplomatic matter, he would need the consent of the other world powers who signed the deal, and they are less likely to support more US “secondary sanctions” that penalize non-U.S. companies for conducting business with Iran.
If President-elect Trump were to try to reopen the deal to impose more conditions on Iran, Iran would certainly assert that such measures are inconsistent with the JCPOA obligations and trigger the JCPOA’s dispute resolution system, which calls for a 50-80 day process of meetings by the Joint Commission (essentially a UN body that has been involved in reviewing the nuclear commitments), foreign ministers of each party to the JCPOA, and an advisory board, culminating in an opinion issued on the matter. The advisory board would consist of the two dispute participants—the United States and Iran—and a third independent member. If the advisory board opinion concludes that the Trump administration’s conditions are inconsistent with the JCPOA, Iran can stop abiding by its JCPOA commitments. If Iran took that step, the United States would still have recourse through a UN Security Council resolution to reinstitute prior UN sanctions, and the United States could “snap back” its suspended Iran sanctions. Specifically, the United States could enter a motion at the UN Security Council to continue the sanctions lifting. Unless there is unanimous support for that resolution by the Security Council, the sanctions would “snap back.”
The JCPOA is designed so that no party can quickly or easily walk away from its obligations, and any attempt by the United States to alter the deal would not be likely to succeed. Moreover, ensuring widespread implementation of snapped-back UN-mandated sanctions would be a challenge if the trigger was perceived to be a unilateral US withdrawal from the JCPOA. In other words, the likely end-state of a unilateral U.S. withdrawal would be (a) a substantially weaker set of global sanctions against Iran that those which were in place prior to the JCPOA and (b) a strained multi-lateral relationship with key allies that could compromise other sanctions initiatives, let alone other foreign policy priorities of the Administration.
Other Potential Executive Branch Actions
The United States is only obligated to suspend certain nuclear-related sanctions under the JCPOA. Therefore, the Executive Branch may continue to enforce sanctions pursuant to statutory and regulatory authorities targeting Iran’s WMD/ballistic missile proliferation, support for terrorism (including the Islamic Revolutionary Guard Corps), regional destabilization, and human rights abuses. In addition to enforcing these existing authorities, the Executive Branch could also impose new authorities targeting non-nuclear activities such as these.
However, the JCPOA provides that the parties “commit to implement this JCPOA in good faith and in a constructive atmosphere, based on mutual respect, and to refrain from any action inconsistent with the letter, spirit and intent of this JCPOA that would undermine its successful implementation.” In light of this language, which presumably is reflective of the multi-lateral consensus that comprises the JCPOA, the new Administration may need to engage in quiet diplomacy to garner support for even non-nuclear sanctions, and be prepared to make its case to a wider audience.
Legislative Prospects in the 115th Congress
On December 15, 2016, the White House Press Secretary released a statement that President Obama would allow the Iran Sanctions Extension Act (H.R. 6297) to become law, but that the President declined to sign it. This bill extends the current Iran Sanctions Act (“ISA”) through December 31, 2026 and passed Congress with overwhelming support, passing the House 419-1 and the Senate 99-0. The Administration, however, made clear that it did not believe an extension of the ISA was necessary and that the United States maintains the ability to enforce sanctions outside the JCPOA and to reimpose sanctions if Iran were to fail to meet its JCPOA commitments.
There are a number of other Iran sanctions bills currently pending in the House and the Senate – targeting everything from terrorism finance to offshore dollar-clearing transactions to sales of civil aircraft. None of these bills appear likely to pass by the end of the 114th Congress.
For example, Senate Foreign Relations Committee Chairman Bob Corker’s (R-TN) Countering Iran Threats Act (S. 3267) would authorize new sanctions targeting non-nuclear-related Iranian behavior that Senate Republicans believe is not protected by the JCPOA. Although this bill is unlikely to advance in 2016, it provides a potential blueprint for new sanctions priorities for Republicans in the 115th Congress that convenes in 2017. Republicans will have more leverage come January because they will still control both chambers of Congress and will also have a Republican president. While Democrats still have enough votes in the Senate to block any of these bills, there are limitations on how often they can block sanctions legislation because they also anticipate needing to block a number of other Trump legislative priorities. Moreover, a number of vulnerable Democratic senators will face reelection in 2018, so they do not want their votes against Iran legislation to be held against them by their constituents.
The future Trump Administration may take a harder line on Cuba than the Obama Administration, and would have the authority to undo all of the steps towards loosening the embargo that the current President has implemented over the past eight years. Indeed, the coming Trump Administration would have the authority to impose an even tighter embargo on Cuba than the one that existed when President Obama took office in 2009. While this is probably not likely, President Trump could even undo the more modest steps towards liberalization that President Clinton implemented in the 1990s.
However, what the Trump Administration will in fact do is anyone’s guess, and there has been no shortage of guesswork already. The one thing that can be said at this early stage is that it does not appear as though Cuba is going to be immediately on the top of the new administration’s priority list.
Discounting Mr. Trump’s past statements on Cuba, which have varied, the only concrete signals on the intentions of the future Trump Administration have pointed to a more hawkish stance on Cuba. But exactly what that may mean for the details of the economic sanctions regime on Cuba is still an open question. For example, Mr. Trump tweeted that he “will terminate the deal” President Obama struck with Cuba if “Cuba is unwilling to make a better deal.” Taking Mr. Trump’s words literally, some concessions from Cuba may lead him to maintain the current trajectory of the relationship, and presumably not unwind the recent steps towards easing sanctions. Similarly, incoming chief of staff Reince Priebus stated that Mr. Trump would be willing to reverse President Obama’s opening of diplomatic relations with Cuba, without saying he would in fact do so. A vocal critic of President Obama’s policies towards Cuba has been appointed to the Trump transition team for the Treasury Department, which administers the embargo, but that kind of appointment is not likely to have a clear impact on policy. Kellyanne Conway was more direct when she stated that “nothing is definite” about the incoming Administration’s Cuba policies.
On the other side, reports from earlier this year that Mr. Trump’s business partners may have in the past been exploring business opportunities in Cuba may show that the future President has – or at least at one time had – some level of interest in Cuba. It is hard to discount the possibility that the incoming administration could view Cuba as an opportunity for U.S. businesses and demonstrated U.S. leadership in the region. Moreover, the business landscape in Cuba has changed dramatically in recent years with the entry of major hospitality brands such as US-based Starwood (recently acquired by Marriott), Spain-based Meliá and others. Candidate Trump made clear his frustration with the advantages non-U.S. companies enjoy over their U.S.-based competitors, and he may be interested in leveling the playing field for U.S. companies. Nor should it be ignored that Mr. Trump has, even as recently as last year, called President Obama’s Cuba policy “fine,” and only objected to say he would have gotten a “better deal” – but apparently supported the general thrust of the rapprochement, commenting that “50 years is enough.”
The deciding factor could be Congress, but even there the landscape is fractured on many levels. On the one hand, the Republican Party platform could not be more clear about where it would take the U.S.-Cuba relationship, beginning with its vision of Cuba “after their corrupt rulers are forced from power and brought to account for their crimes against humanity.” Such a starting point could make negotiations a bit awkward. The platform states that the Cuban people “have been betrayed by those who are currently in control of U.S. foreign policy” and calls “on the Congress to uphold current U.S. law which sets conditions for the lifting of sanctions on the island: Legalization of political parties, an independent media, and free and fair internationally-supervised elections.” But despite a history of Republican Party unity on Cuba, some Republicans – in particular agricultural state senators whose constituents seek increased access to Cuban markets – have broken with the party platform to support bills introduced over the past two years seeking to lift aspects of the embargo and continue President Obama’s opening. These actions may indicate a trend of increased support by the pro-commerce wing of the Republican Party, and the Democrats by and large are likely to continue to support the current approach and the easing of tensions with Cuba on its own merits.
So, as we said, it is anyone’s guess where U.S.-Cuba policy will go. One possibility is that the new Administration may seek to appease its hawkish elements by slowing the tangible elements of improved diplomatic relations, communicating to Mr. Castro some milestones for economic and political reform within Cuba, and then evaluate the situation in the first half of the Administration to determine if adequate progress has been achieved to support a lifting of the embargo. For those who credit the idea that the Trump Administration may buck the party line and continue to seek business ties with Cuba, see our previous post explaining the broad authority the President has to lift the entire Cuba embargo, except the narrow aspects that are specifically mandated by statute.
Possible ties between the Trump campaign/transition team and the Putin regime in Russia have been the subject of extensive media speculation, with the Washington Post publishing a blistering article regarding a secret CIA assessment that the Russian state intervened in the U.S. presidential election to get Mr. Trump elected. Mr. Trump’s tone regarding the prospect of warm relations with the Putin regime, along with his selections of General Michael Flynn as National Security Advisor and Rex Tillerson as Secretary of State, have intensified the speculation.
At the very least, a sort of détente with Russia seems reasonable to expect, and there is a good chance the Trump Administration could go well beyond that. While campaigning, Mr. Trump indicated that he would consider recognizing Crimea as Russian territory and lifting sanctions against Russia, which would be a sharp break from the Obama Administration, as well as the EU position.
The Tillerson pick in particular could telegraph Mr. Trump’s intentions regarding Russia policy. Mr. Tillerson, in his capacity as Exxon Mobil CEO, repeatedly criticized the Obama Administration’s sanctions against Russia, describing them as futile and as inflicting collateral damage on industry. Of course, Mr. Tillerson made these comments while acting as the chief executive of a company directly impacted by the sanctions, and it is reasonable to view the comments through the lens of a CEO acting in the best interest of his company. However, during a presidential transition period in which the public is scrambling to divine the intentions of the incoming administration, the potential policy implications of Mr. Tillerson’s stated position cannot be ignored.
On the other hand, there is a developing bipartisan effort in Congress to maintain various forms of pressure on Russia, such as the recently proposed investigations into possible Russian influence operations impacting the U.S. elections. It is possible that these efforts could impact the Administration’s approach—politically even if not legally—when it comes to dramatically altering U.S. policy towards Russia. It will also be important to watch for steps early in the next Congress to move legislation codifying Russia sanctions into statute, or otherwise restricting the President’s authority in this area.
What would Russia sanctions relief look like? In the most extreme case, the Trump Administration could simply lift all sanctions since no congressional approval is currently needed. But if it takes a more gradual approach, which seems likely (but by no means assured), then it is useful here to summarize what sanctions are in place, and on what bases.
The United States has imposed three main types of sanctions targeting Russia (and to a lesser extent, certain individuals and entities in Ukraine):
- Designation of individuals and entities as SDNs
- “Sectoral” sanctions restricting U.S. persons from transacting or dealing in “new debt” with a maturity of greater than 30 days of designated Russian banks and defense companies; “new debt” with a maturity of greater than 90 days of designated Russian energy companies; and “new equity” issued by designated Russian banks
- Export restrictions targeting the Russian defense and energy industries.
It is important to note that U.S. sanctions against Russia largely overlap with EU sanctions, although certain EU member states have voiced loud opposition to the sanctions. A detailed summary of the U.S. and EU sanctions can be found here.
Additionally, as discussed here, the United States has imposed a comprehensive trade embargo against Crimea, and the European Union has imposed extensive trade restrictions targeting Crimea.
As stated by President Obama and the European Council in various executive orders and council decisions, respectively, the sanctions described above are based on Russia’s annexation of Crimea, support for separatist movements in Ukraine, undermining of Ukraine’s democracy and territorial integrity, and misappropriation of Ukrainian state assets. Although the Minsk Protocols have achieved and preserved a fragile peace in eastern Ukraine, the grounds for sanctions are still in place. However, whether to impose U.S. sanctions on these grounds remains at the discretion of the President.
So how might the Trump Administration ease sanctions, if it proceeds gradually? There are several possibilities. First, it could simply de-list certain SDNs and entities designated under “sectoral” sanctions. For entities subject to “sectoral” sanctions—which are designed to restrict designated entities’ access to certain financing—the Administration could ease the applicable maturity thresholds on new debt and lift the restrictions on new equity issued by Russian banks. Additionally, with regard to export restrictions—in particular those targeting the Russian energy industry—the Trump Administration could lift the policy of license denial for oil projects, could curtail the list of items that are subject to control, or could lift the restrictions entirely. The Administration also could lift or ease the embargo against Crimea, perhaps paving the way for recognizing the annexation and encouraging US business into that part of newly-expanded Russian territory. It seems unlikely that the Administration would be in a rush to ease sanctions targeting Russia’s defense industry, but this remains a possibility. Whether the new President would attempt to leverage such changes into concessions from Mr. Putin (either in Ukraine or in some other aspect of the bilateral relationship) remains to be seen. But one could envision a scenario where the new Administration secures some tangible results in specific areas of Russian behavior in exchange for sanctions relief.
If the United States does ease Russia sanctions, one particularly fascinating question is what that would mean for EU sanctions. It is not often that the European Union finds itself imposing sanctions more aggressively than the United States. However, despite vigorous opposition to sanctions in some corners of the European Union, EU policymakers seem dead set against recognizing the annexation of Crimea and are deeply troubled by perceived Russian aggression in eastern Ukraine, the Baltic states, and elsewhere in Europe, as well as Russia’s intervention in Syria. While a possible election of Francois Fillon as the President of France early next year would have the potential to upend the EU’s approach to Russia, it is still not at all clear that the European Union would follow suit in the event of U.S. sanctions relief.
In fact, that is a recurring theme for this post: not at all clear. It is important to note that Mr. Trump and his transition team, at this early stage, have not discussed publicly the contours of possible sanctions policy going forward. However, lack of clarity notwithstanding, the public should brace itself for significant change to U.S. sanctions policy regarding Russia.
*Article reprinted with permission from its original posting on December 20, 2016 at Steptoe International Compliance Blog. Read the Blog at: http://www.steptoeinternationalcomplianceblog.com Mr. Rapa is Of Counsel at Steptoe and Johnson LLP. He can be reached at firstname.lastname@example.org. Mr. Jeydel, and Ms. Early are Associates with Steptoe and Johnson LLP. They can be reached at email@example.com and firstname.lastname@example.org, respectively.