Congress Re-Enters The Nord Stream 2 Fight With Amendment To NDAA - Export Controls & Trade & Investment Sanctions

In the latest turn of events in the seemingly never-ending political saga of the Nord Stream 2 pipeline, the U.S. House of Representatives (the "House"), via an amendment to the 2022 National Defense Authorization Act ("NDAA"), mandated new sanctions on foreign entities and individuals responsible for the planning, construction, and operation of Nord Stream 2, a Russian-backed natural gas pipeline that w,ould connect Russia and Germany and skirt an existing pipeline through Ukraine. The amendment to the NDAA, which the House passed on September 23, 2021, also removes the national interest waiver under existing law that the Biden Administration invoked earlier this year to avoid sanctions against the project. The invocation of the national interest waiver received significant criticism from both sides of the aisle in Congress, as evidenced by the House's move to ratchet up sanctions on the Nord Stream 2 pipeline through the NDAA (a bill that is considered "must-pass" legislation as it funds the U.S. military).

Takeaways from NDAA Amendment

The amendment, introduced by Rep. Michael McCaul (R-TX) and Mary Kaptur (D-OH), was included in the version of the NDAA passed by the House. If it is passed by the Senate and becomes law, the amendment would mandate traditional OFAC "blocking sanctions" on any entity responsible for the planning, construction, or operation of the Nord Stream 2 pipeline, as well as visa bans on any corporate officer of or principal shareholder with a controlling interest in any such entity.
The NDAA now goes to the Senate. It is unclear if this amendment will be in the final version of the NDAA passed by the Senate and signed by President Biden; if so, it would contradict his Administration's invocation of the "national interest" waiver contained in the Protecting Europe's Energy Security Act ("PEESA").
Despite the tension between Congress and the White House on the issue, it remains clear that activity involving the Nord Stream 2 pipeline continues to carry significant legal, reputational, and political risk.

Background on Nord Stream 2

Over the last several years, the Nord Stream 2 pipeline has become a hot-button geopolitical issue, pitting the United States against political leaders in Germany, one of its strongest allies. As a general matter, the outgoing German Government (formed by a coalition of the Christian Democratic Union and the Social Democratic Party) defended the Nord Stream 2 pipeline as an economic project driven by the private sector that would enhance Germany's energy security. Senior officials in both the Trump and Biden Administrations, however, have strongly opposed the pipeline, contending that it will prop up Moscow, allow Russia to turn off gas to and through Ukraine, and render Germany excessively reliant on Russian energy. Despite U.S. opposition, which has been significant at times, Germany and Russia completed the Nord Stream 2 pipeline in September.

While the pipeline is now complete and is currently being filled with gas for testing purposes, it still faces a number of obstacles in Germany and is unlikely to be operational during the upcoming winter period. The pipeline needs to be certified by German regulators, with EU Commission involvement required. This process could take several months. Moreover, court proceedings initiated by Nord Stream 2 against German regulators in order to secure an exemption from general EU energy market regulatory requirements (designed to ensure, amongst others, non-discriminatory access to pipeline infrastructure) are still pending. Finally, it is unclear whether the incoming German Government will support the pipeline project. The Social Democratic Party, generally supportive of the pipeline, is expected to lead a new coalition Government. The Social Democrats, however, face fierce pushback from the Green Party, the most probable second member of the new coalition. The Green Party has expressed concern about the pipeline due to environmental and foreign policy considerations. The Free Democratic Party, a potential third member of a new German Government coalition, hopes to identify a common position within the EU concerning foreign policy in the energy sector. At the same time, gas and oil prices are soaring in Germany, putting additional pressure on the yet to-be-formed German Government to identify a common position on the future of energy supplies in Germany and the EU generally, and on the role and fate of the pipeline project specifically.

U.S. Efforts to Block the Pipeline

For years now, the U.S. government has attempted to thwart the construction of the Nord Stream 2 pipeline, including through the use of sanctions. The two methods primarily used to sanction the project were PEESA and the Countering America's Adversaries Through Sanctions Act of 2017 ("CAATSA"). Specifically, PEESA requires the Secretary of State to issue reports identifying (1) vessels that engaged in pipe-laying at depths of 100 feet or more below sea level for the construction of the Nord Stream 2 pipeline or any successor project; and (2) foreign persons determined to have knowingly (i) sold, leased, or provided those vessels for the construction of any such pipeline; or (ii) facilitated deceptive or structured transactions to provide those vessels for such a project. Identified individuals and entities are then subject to mandatory sanctions, unless waived. Additionally, Section 232 of CAATSA targets persons involved in financing or contributing to the expansion of Nord Stream 2, including any persons facilitating the construction or deployment of the pipeline, such as pipe-laying vessel operators and related engineering service providers, or those involved in financial aspects of such activities.

In an effort to ramp up pressure on the project, the Trump Administration announced in July 2020 that it was removing an exemption that had spared Nord Stream 2 from certain CAATSA sanctions. As we discussed in a previous alert, the State Department deleted portions of its public guidance in effect prior to July 15, 2020 that limited the focus of implementation of Section 232 of CAATSA to Russian energy export pipeline projects for which a contract was signed on or after August 2, 2017 (the date CAATSA took effect, which the Nord Stream 2 project pre-dated). By removing this exemption, the Nord Stream 2 pipeline was then subject to sanctions under both PEESA and CAATSA.

Moreover, in October 2020, the Trump Administration again broadened the scope of sanctions applicable to the Nord Stream 2 project by publishing guidance expanding PEESA sanctions authority. As we covered in an another previous alert, the October 2020 guidance indicated that sanctions would apply to companies providing services, facilities, or funding for "upgrades or installation of equipment" for vessels working on the projects. Previously, the focus of sanctions had been on the vessels themselves and individuals selling or leasing them to the projects.

Despite the tough rhetoric, however, it was not until January 19, 2021, the last day of the Trump Administration, that the U.S. sanctioned a Russian entity and vessel for work on Nord Stream 2. Thus, while President Trump criticized the Nord Stream 2 project for much of the final year of his Administration, actual sanctions did not materialize until his final day in office.

Biden Changes Course

Much to the chagrin of many members of Congress, the Biden Administration did not continue to ratchet up a tough U.S. stance against Nord Stream 2 (presumably in an effort to repair relations with Germany, which frayed during the Trump Administration). Specifically, on May 19, 2021, the U.S. Department of State submitted a report to Congress as required by PEESA identifying four vessels, five entities, and one individual involved in construction of the Nord Stream 2 pipeline. Pursuant to PEESA, the individual, entities, and vessels identified in the report are subject to menu-based economic sanctions. However, Secretary of State Antony Blinken determined that it is in the national interest of the United States to waive the application of sanctions to the most significant entities and individuals named in the report, namely: Nord Stream 2 AG (the company overseeing the Nord Stream 2 project), its CEO Matthias Warnig, and Nord Stream 2 AG's other corporate officers.

While the Biden Administration invoked the "national interest" waiver to PEESA sanctions, the U.S. Treasury Department's Office of Foreign Assets Control ("OFAC") followed up the State Department report on May 21, 2021 by adding 16 Russia-related entities and vessels to its sanctions lists, pursuant to PEESA, along with a new general license and additional guidance. It appears that the Biden Administration wanted to continue pressuring the Russian-related portions of the project, but to do so in a way that did not strain relations with Germany. In doing so, however, key players in the completion of the pipeline?Nord Stream 2 AG and its corporate officers?were left unscathed.

Looking Forward

It is unclear if the amendment will survive the Senate's review of the NDAA. It is even less clear how President Biden will handle the amendment, which directly contradicts his actions earlier this summer concerning the "national interest" waiver and whether his Administration would take further action to issue Nord Stream 2 sanctions. As Congress proceeds with its deliberations on the NDAA, MoFo's National Security team will continue to monitor noteworthy developments, including those targeting Nord Stream 2.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.