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The US Senate passed legislation that imposes new and tougher sanctions on Russia and Iran by a 92-2 vote in late June. The surprisingly speedy passage and big bipartisan vote led many to believe the House would be forced to quickly approve the bill. Instead the House has raised constitutional concerns and delayed consideration of the Senate bill for three weeks and counting.
While we think the current political environment in Washington means the House will eventually pass Russia sanctions legislation this month, we don’t expect the House to rubber-stamp the Senate language. Instead the House will pass a different bill or at least one with significant changes.
Expanded Sanctions on Projects Outside of Russia
For energy investors, we believe the House will rewrite language on expanded Russian energy sanctions. The Senate language contains a provision that will extend sanctions to US companies involved in projects outside of Russia where a Russian company is a partner or member of a consortium.
Section 223 of the bill includes new language that “prohibits the provision, exportation, or reexportation, directly or indirectly, by United States persons or persons within the United States, of goods, services (except financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects – (1) that have the potential to produce oil; (2) in which a Russian energy firm is involved; and (3) that involve any person determined to be subject to the directive or the property or interests in property of such a person.”
The Senate language will have virtually no impact on current energy production inside Russia but will hurt US companies involved in projects elsewhere around the globe that may have a Russian company as a consortium member or investor. Examples might be an offshore Africa project or an upstream project in Iraq.
It’s unclear if this is an unintended consequence of the Senate authors but it could have a perverse impact where Russian companies intentionally seek to become members of project consortiums just to disqualify US companies from participating.
US oil companies are seeking a fix to this provision, and we believe the House will limit the sanctions language to projects inside Russia which is basically current sanctions policy imposed by the Obama Administration.
NordStream 2 Pipeline Santions
Another energy provision in the legislation involves pipelines and is attracting criticism from European countries and companies. Section 232 extends sanctions to “an investment that directly and significantly contributes to the enhancement of the ability of the Russian Federation to construct energy export pipelines” as well as anyone who “sells, leases, or provides to the Russian Federation, for the construction of Russian energy export pipelines, goods, services, technology, information or support.”
The pipeline provision impacts the NordStream 2 pipeline project and the legislation specifically cites US policy “to continue to oppose the NordStream 2 pipeline given its detrimental impacts on the European Union’s energy security, gas market development in Central and Eastern Europe, and energy reforms in Ukraine.”
European governments and companies are lobbying Congress to remove the provision but we think it is likely to remain in the House version. There are no US companies involved in the NordStream project and it theoretically competes with US LNG exports so in our view the language is unlikely to be removed.
Shell would seem to have the most at stake here since it has significant economic exposure in the US and therefore easily subject to sanctions. But the provision will not stop the project from being constructed. It has a fairly low price tag and Gazprom could finance it entirely.
No Impact on Current Russian Crude Production
There is nothing in the Senate bill that would adversely impact current Russian crude production which is at record levels already. It is also unlikely that any new House language will be added to change current production levels.
Limiting Presidential Authority to Lift Sanctions
Finally, the big headline grabber of the Senate bill was a new provision that would limit the President’s ability to lift sanctions or provide waivers without Congressional approval. The language in the bill only applies to Russia sanctions and not to Iran sanctions.
Press reports indicate that the White House is lobbying the House to remove the language limiting the President’s authority. Certainly, any President and White House from either party would oppose such language. It’s the type of provision President Obama would have supported as a Senator but aggressively opposed as President. As a result, we think there is a 60 percent chance the language limiting the President’s authority gets removed by the House. One caveat: we are just a Tweet away from the House keeping the provision.
Regardless of the outcome, we do not believe the Trump Administration will loosen current sanctions on Russia absent some major breakthrough on Ukraine. It is also worth noting that the Trump Treasury Department has denied a request by ExxonMobil for a waiver of Russia sanctions.
