The United States is engaging in a new form of warfare. Russia
invaded Ukraine just over two months ago and, rather than join the
fight directly by sending troops to defend Ukraine, the United
States is fighting indirectly by engaging in unprecedented
financial warfare against the Russian Federation. The initial
export and sanctions actions were swift and severe – but somewhat
expected. As the invasion persists, the U.S. Federal Government and
individual States also have begun to leverage procurement policy to
amplify the financial harm to Russia. This Guide will try to help
make sense of the current efforts targeting Russia, the potential
impact to government contractors, and proactive steps to mitigate
risk.
1. Sanctions and Export Controls on Russia
Before we get to the specific issues government contractors will
face with respect to Russia, we should lay out a bit of a
landscape. We have covered the broader restrictive measures on
Russia here and have updated them steadily as those
measures have broadened and deepened.
Generally, U.S. export controls prohibit nearly all exports of
U.S.-origin items to Russia, and U.S. sanctions prohibit U.S.
persons from transacting-directly or indirectly-with a host of
Russian persons, businesses, and financial institutions, as
discussed in greater detail below.
1.1 Sanctions
The increased Russia sanctions will present a compliance
concern, but most companies with solid protective measures already
in place will not need to change too much to address it. For
instance, if your company uses a third-party screening service to
identify potentially sanctioned parties in your proposed
transactions, your company may reasonably rely on that service to
update the lists against which it screens. Further, most screening
services can identify sanctioned parties in a prospective
transaction partner’s ownership chain where that information is
readily available. In light of the increased sanctions and
increased scrutiny, however, it may be worth confirming that your
screening vendor is making that check for you and request it if
they are not.
It is most likely that the sanctions that will limit payments to
Russia-sanctions on banks, on government agencies, and on the
Russian Central Bank-will create supply chain difficulties for
government contractors in the near term. The first and most obvious
supply impact will be on oil and gas-by far the largest Russian
export. Restrictions on Russia have increased, and will continue to
increase, prices until the world market can adjust.
Additionally, there are other supplies that may become more
scarce and, it follows, more expensive. Russia supplies platinum,
titanium, and vanadium to the fuel cell, hydrogen, and 3D printing
industries. Russia also is the world’s third largest supplier
of nickel used for electric vehicle batteries, and is heavily
involved in the production of stainless steel, a basic commodity in
countless industries.1
1.2 Export Controls
Many companies that supply the U.S. Government, particularly the
U.S. Military, will have limited sales in Russia because of
long-standing restrictions on supplies to Russia for military
end-uses. However, the new export controls may affect commercial
suppliers as they decide what to do with the commercially available
off-the-shelf items they supplied to offices, restaurants, or civil
aircraft in Russia just a few months ago.
For those companies, we note that Russian businesses desperately
are trying to get their supplies into the country, and some do not
shy away from a little dissembling to do so. For example, we have
seen customers and distributors suddenly request their supplies be
delivered to neighboring Kazakhstan-a huge red flag that the
supplies would be reexported to Russia in violation of U.S. law, a
practice called “transshipment” by the regulators who
would be keen to catch and level penalties against those engaged in
it. Similarly, requests for software programs, updates, and patches
are being made to U.S. companies in ways designed to disguise a
Russian end-user, such as delivery to third-country servers.
So, for government contractors, as for many U.S. companies, a
nimble shifting of logistics chains, and a hard look at any
customer requests that don’t quite pass the sniff test, appear
to be in order.
2. Federal Procurement Legislation
As the Russian invasion of Ukraine has persisted, the U.S.
Government continues to identify new ways to punish Russia
economically beyond sanctions and export limitations. Not wanting
to let the Executive Branch have all the fun, on March 21, 2022,
Congress took action of its own – Representative Carolyn Maloney
(D-NY) introduced the Federal Contracting for Peace and Security Act
(H.R. 7185). The purpose of the legislation is simple: to
“[p]rohibit the federal government from purchasing products or
services from companies that continue to conduct business in Russia
during its war of aggression.” The legislation specifically
targets “covered entities” that conducted business in
Russia during the “covered period.” Specifically, the
bill would:
- Prohibit any agency from awarding, extending, or renewing any
contract with a covered entity; - Prohibit any agency from awarding, extending, or renewing a
contract with a company that issued a major subcontract to
a covered entity; and - Require the termination of existing contracts with covered
entities.
As currently drafted, the reach of the proposed legislation is
staggering, and would cover any Federal contractor with an
affiliated entity (including any parent, subsidiary, successor
entity, or beneficial owner of such company) that conducted
business in Russia during the covered period. The proposed
legislation defines “conducted business” broadly, and
includes acquiring, developing, selling, leasing, or operating
equipment, facilities, personnel, products, services, personal
property, real property, or any other apparatus of business or
commerce.
This isn’t the first time we’ve seen the Federal
Government actively leveraging its procurement power to affect
policy change (see, e.g., Section 889 of the FY19 NDAA, the Federal Contractor Vaccine Mandate), but this
legislation may be the most powerful attempt to use procurement
policy as a substitute for more traditional warfare.
On April 7, 2022, the House Oversight and Reform Committee
passed an amended version of the proposed legislation
(which added details around the exceptions, rulemaking process, and
adopted a process for “good faith extensions”). The
legislation now will move to the full House for consideration. If
the proposed legislation is signed into law, the Office of
Management and Budget will have only 30 days to issue emergency
regulations to implement the statute. Even if this particular
legislation doesn’t become law, it is likely something similar
impacting Federal contractors will be implemented (perhaps even via
Executive Order), and therefore contractors currently conducting
business in Russia should develop a proactive plan to mitigate the
likely impact.
3. Current and Proposed State Actions
From condemning Russia to banning the sale of Russian-origin
liquor, more than 35 States also have exercised their Executive and
Legislative powers to respond to Russia’s actions against
Ukraine, all while encouraging private entities to do the same.
Some actions largely are symbolic-such as lighting the State
Capitol the color of Ukraine’s flag-but others may have
significant impact on State economies, and, even more so, on
contractors operating within or in conjunction with these
States.
Most relevant to contractors, certain States (including
California, Colorado, Florida, Massachusetts, Minnesota, Missouri,
Mississippi, New Jersey, New York, North Carolina, Ohio, Texas,
Vermont, and Washington, to name a few) have announced their intent
to terminate all agreements with entities tied to
Russia,2 whether directly via Russian ownership or
control, or indirectly by operating in Russia or providing
Russian-origin goods. Though many of these State actions are short
on specifics at the moment, Ohio is a bit ahead of the curve and
already has made clear this prohibition likewise will extend to
subcontracts and subcontractors. We expect other States to follow
suit.
Certain states have indicated they intend to enforce this
prohibition, at least in part, by requiring contractors to submit
new representations and certifications regarding their business
dealings in Russia (including the business dealings of their
subcontractors). Ensuring these representations and certifications
are accurate will be critical to mitigate risk in the States with
False Claims Act statutes.
Other States have banned the sale, provision, or import of
certain Russian-origin products. Though many of these bans involve
the sale of Russian-made liquor, some States have extended these
prohibitions to products that may more directly affect contractor
performance, including oil and gas (Louisiana and Hawaii), and iron
and steel (Louisiana). Other States, such as Texas, have taken a
more sweeping approach, banning all Russian-origin products
outright. The impact on each contractor’s supply chain will
vary based on the specific State prohibitions, though given the
widespread action across States, there’s certain to be
some impact to every contractor’s supply chain.
We have compiled this table here as an overview of current and
pending State actions impacting government
contractors.3
4. Proactive Steps to Mitigate Risk
In light of this flurry of activity across all levels of the
U.S. Government, we’ve compiled this preliminary list of
proactive steps government contractors should consider to help
ensure compliance (and, maybe, recover additional costs). This is
not an exhaustive list – but it’s a good start given the
current state of actions against Russia.
- Rely on your existing screening software to ensure you are not
doing business with a sanctioned entity (including an analysis of
the ultimate beneficial owner of your customer). - Track increased costs tied directly to Russian sanctions (e.g.,
fuel, iron, alternative sources of supply), and analyze whether you
can seek an equitable adjustment for those costs. - Monitor whether customers are making unusual requests, like
relocating shipments to countries neighboring Russia and
Belarus. - Evaluate your corporate family’s business dealings in
Russia. Given the public pressure against companies currently doing
business in Russia, these efforts likely already are underway. - Begin assessing the entities in your supply chain (including
your subcontractors) to determine if they conduct business
operations in Russia. A multi-phased approach that first analyzes
the principal place of business of each entity before progressing
to certifications from suppliers seems to make the most sense.
Where practical, begin to identify alternative suppliers. - Monitor Federal and State contracts for modifications
incorporating new language restricting business with Russian
entities and providing new representation or certification
requirements. - Carefully review any new representation or certification
provisions and ensure your company’s responses are current,
accurate, and complete to minimize risks of False Claims Act
liability at both the Federal and State levels.
We’ll continue to track and report additional prohibitions
against Russia. In the interim, feel free to reach out with any
questions concerning your company’s compliance plan.
Footnotes
2 In some instances even local and municipal governments
have jumped in on the action. For example, on March 9, 2022, the
Dallas City Council approved a resolution proposed by Mayor Eric
Johnson that, inter alia, restricts the Council’s
ability to approve future contracts with entities that have ties to
Russia.
3 In providing this table, we do not weigh in on the
legality of any such action, especially where the Federal
Government typically is tasked with primary authority over
diplomatic relations and sanctions. Nor do we proclaim this table
offers a comprehensive summary of every relevant State action-we
not only expect additional resolutions in the days and weeks to
come, but also expect that many actions may be amended as they make
their way through State legislatures. In providing this summary, we
only aim to assist contractors in identifying new and evolving
restrictions and requirements impacting contractor performance in
those named States.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
