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On December 14, 2020, the United States
imposed sanctions on the Republic of Turkey’s
Presidency of Defense Industries (“SSB”), the
country’s defense procurement agency, and four senior officials
at the agency, for knowingly engaging in a “significant
transaction” with Rosoboronexport (“ROE”),
Russia’s main arms export entity, in procuring the S-400
surface-to-air missile system. These measures were a long-time
coming—under
Section 231 of the Countering America’s
Adversaries Through Sanctions Act (“CAATSA”) of 2017, the
President has been required to impose sanctions
on any person determined to have knowingly “engage[d] in a
significant transaction with a person that is part of, or operates
for or on behalf of, the defense or intelligence sectors of the
Government of the Russian Federation.” This includes ROE, and
Turkey’s multi-billion dollar S-400 transaction with ROE has
been public knowledge for at least three years. Indeed, in 2017,
we
forecasted that the deal would “test both the power
of [Section 231]’s deterrence and potentially
Congress’s patience.”
That the President only imposed the sanctions now demonstrates
that despite Congress’ increasing appetite for being involved
in sanctions implementation—which has historically been the
province of the Executive—the legislative branch has limited
ability to push the Executive to impose sanctions even when
requiring such measures by law. Moreover, it also demonstrates
that, as we have discussed in prior updates, the President retains
meaningful discretion when deciding whether to impose
congressionally-mandated sanctions because all similar
“mandatory” sanctions measures are triggered only after
the Executive makes a “determination” of
“significance.” At least in the context of sanctions,
“[t]he President shall impose . . .” turns out
not to have the meaning in practice that Congress arguably thinks
it means. Under CAATSA, the President needs to
“determine” that a transaction was
“significant”—two discretionary gating requirements
that can be used to delay the imposition of measures if the
Executive chooses. This flexibility was also used by the Obama
Administration with respect to certain mandated Iran sanctions; and
we fully expect the incoming Biden Administration to rely on a
similar flexibility as it deems fit when calibrating its foreign
policy.
Since the deal with ROE was announced, the United States has
repeatedly pressured Turkey, a U.S. ally and member of the North
Atlantic Treaty Organization (“NATO”), to abandon the
plan—going so far as to remove Ankara from its F-35 stealth
fighter development and training project—but had thus far
refused to impose the Section 231 sanctions. The United States has
not been so restrained with respect to China. In September 2018,
the Trump Administration
imposed Section 231 sanctions on a Chinese
entity—the Equipment Development Department
(“EDD”)—for facilitating China’s acquisition of
the identical S-400 equipment. Despite U.S. efforts at deterrence
with respect to Turkey, President Erdogan proceeded with formally
acquiring the S-400 system in
July 2019 and reportedly began its testing in
October 2020.
The Sanctions Imposed
The four SSB executives who have been sanctioned (“SSB
Executives”)—Dr. Ismail Demir (President), Faruk Yigit
(Vice President), Serhat Gencoglu (Head of Department of Air
Defense and Space), and Mustafa Alper Deniz (Program Manager for
Regional Air Defense Systems Directorate)—have been added to
the Specially Designated Nationals and Blocked Persons List
(“SDN List”) managed by the Treasury Department’s
Office of Foreign Assets Control (“OFAC”). Any of their
assets under U.S. jurisdiction are blocked and U.S. persons are
prohibited from engaging in nearly any transaction with
them—including as counterparties on contracts (see
OFAC FAQ 400).
The sanctions imposed on SSB are more complex and are novel
enough that OFAC was compelled to construct a new Non-SDN
Menu-Based Sanctions (“NS-MBS”) List solely for
SSB (and any subsequent entity subject to similar sanctions). The
Administration chose to fully sanction China’s EDD and added
the entity to the SDN List in September 2018—so the new list
structure was not needed at that time.
Section 231 of CAATSA requires the imposition of at least five
of the 12 “menu-based” sanctions described in
Section 235. The five menu-based sanctions imposed on SSB
are:
- Prohibition on granting U.S. export licenses and authorizations
for any goods or technology transferred to SSB (CAATSA
Section 235(a)(2)); - Prohibition on loans or credits by U.S. financial institutions
to SSB totaling more than $10 million in any 12-month period
(CAATSA Section 235(a)(3)); - Prohibition on U.S. Export-Import Bank assistance for exports
to SSB (CAATSA Section
235(a)(1)); - Requirement for the United States to oppose loans benefitting
SSB by international financial institutions (CAATSA Section
235(a)(4)); and - Full blocking sanctions and visa restrictions (CAATSA
Section 235(a)(7), (8), (9), (11), and (12)) on the SSB
Executives.
While the designation of the four SSB Executives is impactful
for them personally—and potentially for SSB to the extent any
or all are directly involved in dealings—the most meaningful
restriction for SSB itself is likely to be the prohibition on the
granting of U.S. export licenses under Section 235(a)(2).
Pursuant to this prohibition, the State
Department’s Directorate of Defense Trade
Controls (“DDTC”) and the
Commerce Department’s Bureau of Industry and
Security (“BIS”) announced that they will not
approve any export license or authorization applications where SSB
is a party to the transaction. However, even this restriction may
be less than it seems. In our experience, SSB is rarely identified
as a party to export licenses, which more typically identify a more
specific Turkish Armed Forces component, companies owned by SSB, or
joint ventures these companies might form with non-Turkish defense
contractors. Moreover, DDTC clarified that it will construe the
prohibition to not include temporary import authorizations,
existing export and re-export authorizations, and licenses
involving subsidiaries of SSB—although any licenses submitted
in relation with SSB subsidiaries will be “subject to a
standard case-by-case review, including a foreign policy and
national security review.” Furthermore, because many of the
existing export authorizations have four- and ten-year terms, it
may be many years before any change in DDTC or BIS treatment of
SSB-associated licensing requests have a practical impact on SSB or
the Turkish Armed Forces. Notwithstanding these facts, it is
possible that the mere listing of SSB will prove
impactful—and it is also possible that, if Turkey continues
its activities, the regulations could become stricter and
additional designations (including to the SDN List) could be
imposed.
Conclusion and Implications
The sanctions imposed on SSB mark the first time that CAATSA
measures have been imposed against a member of the NATO alliance.
According to the
State Department, the Administration’s “actions are
not intended to undermine the military capabilities or combat
readiness of Turkey or any other U.S. ally or partner, but rather
to impose costs on Russia in response to its wide range of malign
activities.” That might explain why the menu-based sanctions
chosen, while consequential, do not go so far as to add SSB to the
SDN List. This was not the first time the Trump Administration
sanctioned major Turkish actors. It is, however, a far more nuanced
approach than that the Trump Administration took in October 2019
when it sanctioned the Turkish defense and natural resources
ministries (and their ministers) in connection with Ankara’s
military operations in Syria (see our
October 18, 2019 Client Update). In that case, the
entities and individuals were added to the SDN List—and then
promptly de-listed a short time later following a ceasefire in
Syria.
The SSB sanctions may have a longer life under the Biden
Administration. Not only is the new administration likely to be
more keen on imposing meaningful measures against Russia, but also
Congress is seeking to tie the Executive’s hands further with
respect to the CAATSA sanctions. On December 11, 2020, Congress
passed the
National Defense Authorization Act for the Fiscal Year
2021 (“NDAA FY 2021”). Though President Trump has
threatened to veto the bill, it has passed both Houses of Congress
with a veto-proof majority. Section 1241 of NDAA FY 2021
requires the President to impose sanctions on persons involved in
Turkey’s S-400 deal, under Section 231 of CAATSA, within
30 days. The bill further provides that the sanctions cannot be
terminated without reliable assurances that Turkey no longer
possesses and will not possess the S-400 “or a successor
system” (a reference to an S-500 missile system Turkey and
Russia have talked about since
May 2019). This would require a public reversal of Turkey’s
defense policies and acquisitions, which seems unlikely in the near
term. As such, there may not be a colorable statutory basis to lift
the sanctions. Indeed, rather than indicating a retreat from its
S-400 purchase, immediately following the sanctions decision, the
Turkish Ministry of Foreign Affairs issued a
statement that Turkey “will retaliate in a manner and
timing it deems appropriate” and urged the United States
“to reconsider this unfair decision.” Considering
Turkey’s status as a NATO ally and the presence of U.S. forces
in Turkey, the Biden Administration will almost certainly face
pressures in the early days to articulate its view of the bilateral
relationship going forward.
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