May 13, 1998, the U.S. imposed harsh economic sanctions upon the Government of India as a result of its detonation of nuclear devices. The purpose of this memo is to provide the firm's clients and colleagues with information concerning the legal and business-related issues pertaining to the sanctions order.
Contrary to some press reports, and as more specifically addressed below, the sanctions are effective immediately. Most trade sanctions orders are imposed with warning, which allows companies to assess the impact and plan accordingly. Here, there has been no warning and no time to prepare. Although the President had the statutory authority to delay sanctions for a period of 30 days, he chose to impose sanctions immediately to send a clear message to the Indian government.
Based upon the information received to date, the immediate impact concerns the following:
- Pending applications with the ExImBank for export projects to India are suspended, which includes approximately $500 million in pending loans or loan guarantees and approximately $3.5 billion in projects at the pre-application stage. Applications that have been approved and in place will not be affected by the sanctions. Construction companies, power generation equipment suppliers, electric utility plant builders, and other firms with infrastructure projects in India will be affected in some manner.
- Pending applications for insurance with the Overseas Private Investment Corporation (OPIC) are suspended. This includes approximately $10.2 billion in insurance by OPIC.
- Financial institutions are prohibited from lending any money to the Government of India. Currently, this is estimated to be approximately $1.9 billion.
- Suspension of all direct aid to India in the sum of approximately $142.3 million a year, excluding $91 million for humanitarian and food aid. The balance of the $51.3 million is for a variety of development aid which will be suspended.
- Weapon sales to India, including technology that can be used to design and construct weapons, are prohibited. This is anticipated to be small since most of India's weapons come from Russia. However, the prohibition on weapons sales is unclear and may also include computer technology with broad application.
Projects that are seeking World Bank financing may be affected if the U.S. can obtain the support of other member-shareholders. The World Bank is set to vote on two loans this month including $500 million for three energy projects and $275 million for road improvements. The World Bank loan package for 1997 was $1.5 billion and in 1998 is estimated by press reports to be $3 billion. - Prohibits exports of "specific goods and technology" subject to export licensing. It is unclear which particular products will be subject to the sanctions until the Commerce Department takes action under the President's order.
- Imports from India are not directly affected unless the producer is unable to obtain parts as a result of the sanctions.
We are monitoring the situation and suggest that those firms that are potentially affected to take a wait-and-see approach over the next 48 hours given that it is too premature to take any action at this time. Given that the law has never been applied before, there is much uncertainty as to the impact of the sanctions and exposure for U.S. firms.
Presidential Determination 98-22: Sanctions under the Arms Export Control Act
The President imposed sanctions on India pursuant to Section 102 (b) (1) of the Arms Export Control Act [22 USC § 2799aa-1 (b) (1)], also known as the Glenn Amendment of 1994. The Act requires that the President impose sanctions against a "non-nuclear-weapon" state if it "detonates a nuclear explosive device." [22 USC § 2799aa-1 (b) (1) (B) (ii)]. India is considered a "non-nuclear-weapon" state under the international proliferation treaty until it is confirmed that it has a bomb.
As set forth in his Executive Order (Presidential Determination 98-22), the President simply instructs the "relevant agencies and instrumentalities of the United States Government" to impose the sanctions set forth in the Arms Export Control Act. The sanctions are required by the Arms Export Control Act, and specifically 22 USC § 2799aa-1 (b) (2) (A)-(G), and include the following items:
- termination of assistance under the Foreign Assistance Act of 1961, except for humanitarian assistance for food or other agricultural commodities;
- termination of sales of defense articles, defense services, or design and construction services under the Arms Export Control Act, and termination of licenses for the export of any item on the United States munitions list;
- termination of all foreign military financing under the Arms Export Control Act;
- denial of any credit, credit guarantees, or other financial assistance by any department, agency or instrumentality of the United States government;
- the United States opposition to the extension of any loan for financial or technical assistance by any international financial institution such as the International Monetary Fund or the World Bank;
- prohibiting United States banks from making any loan or providing any credit to the government of India, except for purposes of purchasing food or other agricultural commodities; and
- prohibiting export of specific goods and technology subject to export licensing by the Commerce Department, excluding food and other agricultural commodities.
The President also made a determination under the Export-Import Bank Act of 1945 that the ExImBank may not give approval to guarantee, insure, or extend credit, or participate in the extension of credit of United States exports to India.
Effective Date and Application of the Statutory Waiting Period
The effective date of the sanctions is May 13, 1998. There is some confusion in the press reports about whether a 30-day waiting period applies to this situation. It does not. Under the law, the President had the discretion to delay the imposition of sanctions by providing a certification to Congress providing that "an immediate imposition of sanctions . . . would be detrimental to the national security of the United States." [22 USC § 2799aa-1 (b) (4) (A)]. There is also a statutory waiting period of 30-days for lesser offenses under the law such as transfers of design information or components concerning the development of a nuclear explosive device. [22 USC § 2799aa-1 (b) (6) (A)]. The White House, per U.S. National Security Adviser Sandy Berger, made it clear that Clinton purposefully decided not to employ the 30-day waiting period.
Anticipated Duration of Sanctions
The Arms Export Control Act does not impose a minimum or maximum amount of time for sanctions. In order to rescind the order, however, the President is required to notify Congress or Congress is required to issue a joint resolution calling for an end to sanctions. The U.S. made it clear that it wants India to accede to the Comprehensive Test Ban Treaty, which is signed by 149 countries, and to cease the testing of nuclear weapons. India has refused to sign the CTBT arguing that the agreement, approved by the United Nations in 1996, works to the advantage of the world's known nuclear powers. India wants to renegotiate the CTBT treaty.
Notwithstanding the strong international pressure, the Indian government is anticipated to maintain its current position given that it has the popular support of its people on this issue. CNN reported that a poll indicated that 91% of urban Indians support the tests.
As a result, it is uncertain of the duration of the sanctions, as well as the short and long-term impact of the sanctions on U.S. business in India.