The Long Reach of U.S. Sanctions in Contested Energy Projects

By Leigh Hansson, Brett Hillis, Alexander Brandt, Noah Jaffe, and Eli Rymland-Kelly

In light of recent U.S. sanctions bills which targeted gas pipelines in the Baltic and Black Sea – met by anger by both Germany and Russia with vested economic interests in the area – what are the wider implications for investment in contested energy projects?

As President Trump unleashes a new wave of sanctions designed to apply maximum pressure on Iran, eyes remain firmly on the Middle East. Yet, for all the attention on deteriorating relations between Washington and Tehran, not to mention the wider European signatories of the Nuclear Deal, the effects of the Russian sanctions continue to be felt just as keenly across Europe.

Just before Christmas, Trump signed into law a new bill that established the Space Force as a new branch of the U.S. military. In the shadow of this eye-catching announcement were several new sanctions bills that target the involvement of foreign companies in constructing Russian-sponsored gas pipelines in the Baltic and Black Seas.

Intended to diminish Russian influence over Europe energy supplies, the new sanctions whipped up significant tension between the U.S. and a number of its allies. Specifically, and controversially, the Protecting Europe’s Energy Security Act of 2019 (PEESA), affects non-U.S. persons’ involvement in the pipelines Nord Stream 2 (running from Russia to Germany) and the TurkStream (from Russia to Turkey). Critically, the Russian government holds majority ownership in Gazprom PJSC, who own the natural gas pipeline projects. With the pipelines caught up in a complex web of investment concerns between Europe, the U.S. and Russia, the sanctions bill has wide-reaching intended – and unintended – consequences.

Intended to diminish Russian influence over Europe energy supplies, the new sanctions whipped up significant tension between the U.S. and a number of its allies.

The announcement was met with a ripple of discontent from across Europe, where many businesses had vested interests in the pipelines. Most notably, the German Finance Minister warned the U.S. against overstepping its reach by interfering in European internal energy affairs. The impact of the sanctions on non-U.S. companies was felt almost immediately. Within hours of the legislation being enforced, a major contributor to Nord Stream 2, the Dutch-Swiss offshore services company Allseas Group, announced it would be suspending its work on the pipeline. Russian President Vladimir Putin acknowledged that the Nord Stream 2 project would be delayed until 2021 because of these new sanctions.  The immediate consequences of PEESA on investment in the region indicates significant global implications for the future development of targeted pipelines.

Who is affected by PEESA?

The Act requires sanctions to be imposed on certain non-U.S. individuals and businesses who have sold, leased or otherwise provided vessels that are used to lay pipes at 100 feet or more below sea level in the construction of Nord Stream 2, TurkStream, or indeed any project that succeeds these. The sanctions apply to any persons who are determined to have facilitated structured or deceptive transactions to provide vessels for the construction of these projects. These determinations of involvement are to be made in a report to Congress by 18 February 2020, and then updated every 90 days.


What do the sanctions prohibit?

  • They prohibit and give the power to block any property transactions and interest in property if the interests are within the U.S., come into the U.S. or fall within the possession of a U.S. person
  • Revoke current visas so that a foreign person involved in these interests cannot enter the U.S. or obtain a visa to allow them to enter the U.S.
  • In the case of non-U.S. entities, the sanctions will be imposed on the principal shareholders, as well as the corporate officers

What is the timescale of the sanctions?

PEESA does allow, to some degree, a wind-down period. Foreign persons have 30 days after the enactment of the sanctions to prove, in good faith, that they have taken adequate steps to wind down their operations. However, any activities that are not geared towards finishing up operations are, in fact, already sanctionable.

In a letter to the chief executive officer of the Allseas Group, Senator Ted Cruz and Senator Ron Johnson (sponsors of the bill) advised that this wind-down period in fact requires immediate action. In this letter, the senators warned the company would face ‘potentially fatal legal economic sanctions’, even if they were to continue their work by just one day. The advanced stage of development of both pipeline projects is likely the reason behind the severity of the wind-down period’s application. Indeed, with the completion of the projects mere weeks away, the U.S. is moving fast to impose control.

Are there any exceptions?

The sanctions allow exemptions for people or activities that fall under certain categories:

  • Authorised U.S. intelligence, law enforcement and national security activities
  • If required under the United Nations’ Headquarters Agreement, foreign persons can be admitted into the U.S.
  • Those looking after the safety of crews or protecting human life aboard relevant vessels; persons maintaining vessels with the aim of avoiding environmental damage or other significant damages
  • Those engaged in necessary repairs or maintenance of the pipeline projects, including environmental remediation
  • The importation of goods into the U.S.


Will the bill be effective in its aims?

The sanctions bill targets Russia’s reliance on Western technology to maintain complex engineering projects in the petroleum industry. However, the effectiveness of the sanctions will rest upon how Russian companies will manage the completion of the Nord Stream 2 pipeline project, with 1,800km of the 2,100km pipeline already finished.

The exception outlined under environmental maintenance activities, may actually, inadvertently, provide a loophole to the sanctions. For instance, companies such as Allseas could prove to be in compliance with PEESA if they can argue it is necessary for them to fix faults in order to prevent environmental damage.

The sanctions bill targets Russia’s reliance on Western technology to maintain complex engineering projects in the petroleum industry. However, the effectiveness of the sanctions will rest upon how Russian companies will manage the completion of the Nord Stream.

What are the financial implications?

In the immediate term, it seems the Russian response to these developments is to plough on regardless. Thus, in defiance of the sanctions, Russia has inaugurated TurkStream in Istanbul. Once fully operational, TurkStream is set to carry Russian gas to Turkey, as well as south-eastern European countries, including Bulgaria and Serbia. Russia has also expressed confidence that it will be able to finish Nord Stream 2. Whether this induces a further response from the U.S. remains to be seen.

Meanwhile, the initial German response to PEESA has been one of stark condemnation. Following the German finance minister’s statement in reaction to the U.S.’ maneuver, one senior German official went as far as to call for retaliatory German sanctions against the U.S.. He suggested these could take the form of sanctions against the U.S.-Canada Keystone pipeline, or a European “firewall” against the U.S. The anger over U.S. involvement stems from strong German investment in gas as an industrial feedstock. Although it has in the past acknowledged the importance of not relying too heavily on Russian energy, it is likely that Germany will no longer support any further U.S. efforts to interfere in Nord Stream 2 and TurkStream.

How will the U.S. respond?

The U.S. has a range of possible mechanisms at its disposal that it could choose to apply to further delay contested energy projects such as these.

One route could be passing contingency sanctions that would, rather than attempting to prevent the completion of the pipeline over concerns of misuse, instead allow the U.S. to penalise Russia for actual misuse of the projects. The U.S. could pass additional sanctions legislation to alter tactics along these lines. Alternatively, President Trump could issue executive orders to allow the U.S. Department of the Treasury to place immediate penalties upon Russia. This would allow the U.S. to cut off – or at least reduce – the flow of gas from Russia to Europe, acting as weighty economic leverage in further discussions.

Alternatively, the U.S. could take a less exact approach by including more severe sanctions on Russia in the next sanctions bill. There are more sanctions coming down the line, with the consequences of the Defending American Security from Kremlin Aggression Act (DASKA), yet to be fully felt. DASKA imposes sanctions on investments in Russian-constructed liquefied natural gas facilities outside of Russia, investments in energy projects outside of Russia in which a Russian person has a significant stake, as well as the provision of goods, services, financing or any other means targeted towards furthering Russia’s influence over its crude oil resources.

The implications for international energy interests PEESA is a significant tool in the U.S.’ sanctions arsenal that allows it to increase its influence over European energy affairs and even penalize entities whose operations it deems to undermine U.S. national security and foreign policy interests. Both U.S. and foreign companies who operate in energy and offshore services, in particular, would do well to keep to keep a close eye on further sanctions developments targeted at contested energy projects.

The decision has the potential to set the tone for further U.S. interventions in European and Russian business interests, with wider repercussions for investment in similar pipelines. Since these sanctions are not actually related to any U.S.-specific concern, they mark a significant escalation in attempts to increase influence over European energy affairs.

About the Authors

Leigh Hansson is a leading partner in the International Trade & National Security team at Reed Smith, with significant experience representing multi-national corporations in trade issues such as sanctions and export controls and CFIUS.

Brett Hillis, partner, has a broad regulatory and transactional practice and is well-known for helping clients navigate the changing shape of financial regulation as it affects derivatives and securities markets.

The article is co-authored by Alexander Brandt (Associate), Noah Jaffe (Associate), Eli Rymland-Kelly (Associate), Reed Smith

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.