U.S. Warns that Nord Stream 2 and second line of TurkStream are now in scope for U.S. secondary sanctions

Today the U.S. State Department published updated guidance indicating that significant transactions related to Nord Stream 2 and the second line of TukStream may be subject to U.S. secondary sanctions penalties under Section 232 of CAATSA.

Section 232 authorizes the U.S. government to impose a bevy of sanctions on non-U.S. parties that make investments in Russian energy export pipelines or that provide goods, services, technology, information, or other support that directly and significantly facilitates the maintenance or expansion of Russian energy export pipelines. Previous guidance exempted Nord Stream 2 from the threat of secondary sanctions by excluding projects for which a contract was signed before August 2, 2017. The new guidance removes that provision and now states explicitly that Nord Stream 2 is within scope for Section 232.

The new State Department guidance includes a safe harbor that allows non-U.S. companies to engage in activities “ordinarily incident and necessary” to wind down operations and agreements involving Nord Stream 2, but it includes three important caveats:

• The activities must be consistent with prior State Department guidance;
• The activities must be undertaken pursuant to pre-existing written agreements; and
• Persons engaging in the activities must take reasonable steps to wind down those activities.

Standard repair and maintenance activities related to Nord Stream 2 are now sanctionable, unless they qualify for the wind down safe harbor.

Secondary sanctions are discretionary and highly political. The changes do not prohibit transactions related to Nord Stream 2, nor do they mean that non-U.S. parties will automatically be subject to sanctions for supporting the project. That said, the U.S. government is strongly signaling that enforcement of Section 232 secondary sanctions may soon be coming. Secondary sanctions penalties under CAATSA can include restrictions on doing business with the U.S. government, export financing and licensing limits, travel bans, and more significant penalties to prohibit sanctioned persons from doing business in the United States or with the U.S. financial system.