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A Hobson's Choice: Congress Mulls Draft Legislation Requiring Companies to Choose Between U.S. Federal Contracting or Doing Business in Russia

Litigation Alert

U.S. government contractors with economic ties to the Russian Federation should closely monitor a bill making its way through Congress, the Federal Contracting for Peace and Security Act (the proposed Act), which would prohibit the U.S. government from contracting with any company that conducts business in Russia during the ongoing war in Ukraine. Specifically, the proposed Act would prohibit federal agencies from entering into, continuing, extending, or renewing "a covered contract to procure any product or service from a company conducting business operations in territory internationally recognized as the Russian Federation during the covered period of aggression."

If passed into law, the legislation could have a major impact on government contractors with global operations and supply chains and ultimately force some companies to make tough business decisions based on the status of an unpredictable war. In this alert, we summarize the background of the bill, its key provisions, and its potential impacts on federal contractors.

Background

Russia invaded Ukraine in late February 2022, prompting the U.S. and numerous other countries to implement hard-hitting economic sanctions against Russia and numerous prominent Russia figures. Many private companies followed suit by ceasing operations in Russia, though countless others are finding it increasingly difficult to make a definitive break due to aggressive economic countermeasures by the Russian government. 

On March 21, 2022, Representative Carolyn B. Maloney (D-NY) added to the flurry of activity, introducing the proposed Act as the first Russia sanctions effort aimed specifically at federal government contractors. According to Rep. Maloney, the principal aim of the legislation is "to isolate Russia and ensure no American taxpayer dollars will go towards supporting [Russia's] unjustified invasion." Though the proposed Act has not garnered public bipartisan support, it remains to be seen if the bill will gain traction as Russia's highly unpopular war in Ukraine drags on. 

The Federal Contracting for Peace and Security Act

If the proposed Act becomes law, the U.S. will be prohibited from entering into or renewing existing contracts with any company that conducts business operations in Russia until the Secretary of State and Secretary of the Treasury determine jointly that Russia has taken adequate steps "to restore [the] safety, sovereignty, and condition of Ukraine." This prohibition would extend to any "covered contract," defined as "a prime contract or a prime contract that includes a subcontract at any tier to procure any product or service from a company (including any parent, subsidiary, successor entity, or beneficial owner of such company) conducting business operations" in Russia during the war in Ukraine. 

In addition, within 60 days of the proposed Act's enactment, the government would be required to terminate covered contracts held by entities with business operations in Russia. Such terminations would be initiated in writing with just 15 days advanced notice, though a covered contractor would have the ability to request successive 30-day "good faith extensions" upon showing that: (a) it has pursued and continues to pursue "all reasonable steps" to comply with the Act and (b) it has developed a plan to comply with Act and made "satisfactory progress" under the plan. 

The proposed Act contemplates a broad range of prohibited "business operations" in Russia to include "commerce in any form [in Russia], including acquiring, developing, selling, leasing, or operating equipment, facilities, personnel, products, services, or personal property, real property, or any other apparatus of business or commerce." Importantly, prohibited operations would not include any "action taken to support the suspension or termination of business operations [during] the covered period," including actions to: 

  • Secure or divest from facilities, property, or equipment
  • Provide products or services to reduce or eliminate operations in Russia or to comply with sanctions relating to Russia 

The proposed Act also includes exceptions for: 

  • Products or services used for the benefit of Ukraine or humanitarian purposes
  • The "provision of products or services for compliance with legal, reporting, or other requirements of the laws or standards of countries other than the Russian Federation"
  • Journalistic activities 

In addition, executive agencies may request an advanced congressional waiver of the prohibition on national security or public interest grounds.

Given the tight deadline for implementation (i.e., 60 days from enactment), the proposed Act would provide "emergency rulemaking authority" to the Office of Management and Budget (OMB) to "promulgate regulations for agency implementation." This rulemaking would, "to the greatest extent practicable," include: 

  • A list of equipment, facilities, personnel, products, services, or other items or activities that would be considered prohibited "business operations"
  •  A requirement for a contractor or offeror to represent compliance with the Act's prohibition
  • A definition of the characteristics of any "major subcontract" subject to the Act's prohibition
  • A description of the process for reviewing contractor requests for a "good faith extension"

Apart from the foregoing, several other questions are evident:

  • Will the representation mandated by the proposed Act require covered contractors and major subcontractors to vet their supply chains to determine if they directly or indirectly procure products or services from Russia?
  • Will covered companies be required to completely withdraw from Russia or will it be sufficient to temporarily pause business operations during the war in Ukraine?
  • Would existing covered contracts be terminated for default or the government's convenience if a covered contractor or major subcontractor cannot or does not comply?
  • Which government agencies will be tasked with enforcing the proposed Act?

Key Takeaway

Though it is still too early for contractors to take any concrete action, the proposed Act foreshadows a potentially significant business risk for any company that contracts with the U.S. government and conducts business in Russia. This risk could be particularly acute for multinational companies with global operations or supply chains that would be infeasible to disentangle or terminate for an undefined period (i.e., as long as the U.S. determines the war in Ukraine is ongoing). Regardless, if the proposed Act passes, contractors of all sizes would soon face a stark choice between contracting with the U.S. government or maintaining business operations in Russia. This may, in turn, force companies to restructure their international business practices at potentially significant expense and compliance risk.

We will continue to monitor and report on updates to the proposed Act. In the meantime, if you have questions about the potential impact of the bill or Russia-related sanctions in general, please contact one of the Miller & Chevalier attorneys listed below:

Alejandro L. Sarria, asarria@milchev.com, 202-626-5822

Timothy P. O'Toole, totoole@milchev.com, (202) 626-5552

Jason N. Workmaster, jworkmaster@milchev.com, 202-626-5893

Brian J. Fleming, bfleming@milchev.com, (202) 626-5871

Christopher Stagg, cstagg@milchev.com, (202) 626-5931

Richard A. Mojica, rmojica@milchev.com, (202) 626-1571

Alexandra S. Prime, aprime@milchev.com, 202-626-5940



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