Companies Turning Down More Projects, Deals Over Fears Regarding US Sanctions, Panelists Say

As the U.S. continues to impose broad sanctions, companies are increasingly turning away from deals, fearing compliance risks, sanctions lawyers and experts said. While the Trump administration has tried to mitigate sanctions impacts on industry through advance notices, guidance and wind-down periods, the experts said, some of the damages have been unavoidable.

“I think the administration is trying to approach these problems with a more nuanced set of tools. And that is commendable,” said Peter Flanagan, a trade lawyer with Covington & Burling, at a Center for Strategic and International Studies July 31 panel. “But they may not fully appreciate the consequences of some of the measures.”

The unpredictability of U.S. sanctions is causing uncertainty among companies and leading to more risk-averse approaches to trade, the panelists said. If targets of U.S. sanctions are clear, most companies are willing to divest from the target areas, Flanagan said. “But when the target is unclear, there are breakdowns -- breakdowns operationally because of the complexities of these businesses and the projects, but also the challenges of responding to policies that lack a focus,” he said.

Flanagan said his clients are placing more of a focus on risk, “heightened diligence” on compliance and an emphasis on sanctions guidance, such as the Treasury's May 2 compliance guide (see 1905020036). He also said there’s a “tremendous investment” in trying to understand the compliance guidelines. And when companies are uncertain, they are simply beginning to turn away from risks. “I see some companies stepping back from projects they might have otherwise tried to pursue” if they’re not “absolutely certain on the compliance front,” Flanagan said.

To mitigate risks, the administration has done a fairly “good job” of issuing guidance and “telegraphing when things are going to happen,” to give companies time to divest or withdraw from trade deals, said Kevin Book, lead researcher on oil, gas and coal policy with ClearView Energy Partners. He said most companies “have a sense of what’s coming most of the time.” But the sensitive and strategic nature of sanctions sometimes makes the impacts on U.S. companies unavoidable. “The secrecy unfortunately wraps up a whole bunch of companies into a mess. They’re left with uncertainty,” Book said during the panel. “And the best decision in response to uncertainty is to not risk.”

Book pointed to the Office of Foreign Assets Control’s July 29 renewal of General License 8, which extended the time frame for which certain companies can trade with Petroleos de Venezuela, Venezuela’s state-owned and U.S.-sanctioned oil company (see 1907260026). The move was surprising, Book said, adding there was “a lot of uncertainty about whether” the license would be extended. But while it may have caught U.S. industries off-guard, Book said the secrecy is necessary to “executing economic statecraft.”

“I’m not sure you can do much better than that,” Book said. “But it creates investment challenges for the companies involved, for sure.”

When sanctions are announced, some companies are not able to back out of deals without significant losses, Book said. The administration can help by giving lengthy, six-month wind-down periods, he said, but even then “there are some things you can’t unwind.”

“At some level, there’s a willingness to shoot the hostage that comes with this,” Book said. “And that isn’t an appealing part of the tool.”

Flanagan said the administration needs to be more “nimble in exercising” its licenses authorities, provide more “prompt guidance” and give substantial wind-down periods, which is a “discretionary matter” and not a matter of statute. But even then, companies will still likely suffer, Book said. “Time doesn’t solve all things,” he said. “If most of your business is in a given operating environment and you can’t operate in that environment, that’s simply bad news.”