State + Local Government Update: New Restrictions On Doing Business In Russia - Government Contracts, Procurement & PPP

When Russia invaded Ukraine earlier this year, the international outcry was immediate. Governments around the world took steps to isolate Russia economically and diplomatically. In the United States, most of the attention has been focused on actions directed against Russia at the federal level. But numerous state and local governments have also adopted regulations and laws aimed at further isolating Russia. New York State, in particular, took swift action to prevent any support being provided to the Russian government by curtailing the ability of companies that do business with New York State from also doing business in Russia.

While New York's initiative was implemented months ago, its impact is now being felt as state contracts come up for renewal and bids are solicited for new contracts. This alert summarizes New York's new regulatory scheme, which is instructive for companies that conduct business in Russia and contract with New York State or any other state or local government that has imposed similar measures.

New York Executive Orders

New York Governor Kathy Hochul acted quickly after Russia invaded Ukraine by signing two Executive Orders aimed at ensuring that New York State was not supporting the Russian government or its war effort. On February 27, 2022, the governor issued Executive Order 14 ("EO 14"), which directs "State Entities"¹ to divest from and terminate contracts with businesses that are headquartered or have their principal place of business in Russia and to refrain from new investments or contracts with such entities. The following month, Governor Hochul issued Executive Order 16 ("EO 16"), which creates legal and commercial implications not only for entities based or headquartered in Russia, but also for entities conducting business in Russia.

More specifically, EO 16:

Directs State Entities to "refrain from entering into any new contract or renewing any existing contract with an entity conducting business operations in Russia."
Defines an "entity conducting business operations in Russia" as "an institution or company, wherever located, conducting any commercial activity in Russia or transacting business with the Russian Government or with commercial entities headquartered in Russia or with their principal place of business in Russia in the form of contracting, sales, purchasing, investment, or any business partnership."
Permits the head of a State Entity to renew or enter into a new contract with an entity conducting business operations in Russia based on a written determination that the contract is necessary for the State Entity to perform its function and no suitable contractual alternative exists.

These two Executive Orders were far reaching, going beyond the scope of the Russia-related sanctions implemented by the United States Department of the Treasury's Office of Foreign Assets Control (OFAC). Given that foreign policy—including Russia sanctions—is an area where Congress has generally intended federal law to "occupy the field," the Executive Orders may be vulnerable to a preemption challenge.² Importantly, the federal sanctions regime under OFAC imposes prohibitions against engaging in certain broad categories of conduct and with certain parties, but there is a meaningful subset of Russia-related activities that remains legal under federal law. For example, the provision of certain humanitarian and telecommunications and internet communication related goods and services is authorized by OFAC. These license authorizations represent a decision by the federal government that such transactions are consistent with U.S. foreign policy and national security objectives. As described below, while the New York Executive Orders do not have similar carve outs, New York State will consider mitigating factors in making determinations under its Executive Orders.

New York State Guidelines for the Executive Orders

The New York State Office of General Services (OGS) established guidelines (the "Guidelines") to assist in making determinations under EO 16. On their face, the Guidelines, like EO 16 itself, put in place prohibitions on commercial ties to Russia that exceed the federal sanctions regime implemented by OFAC. Save for relatively narrow exceptions, the Guidelines effectively bar a vendor that seeks to contract with New York State from engaging in any ongoing business engagement with Russia, regardless of whether such engagement is prohibited by U.S. sanctions or consistent with U.S. policy objectives, including OFAC. Accordingly, for entities that do or seek to do business with New York State and also engage in business with Russia, the Guidelines raise difficult economic and legal questions.

More specifically, the Guidelines for certification provide as follows:

State Entities must obtain a certification ("Certification") from vendors in connection with new contract bids, contract renewals, or the assignment of existing contracts.
The Certification requires a vendor to disclose if it is an "entity conducting business operations in Russia" and provides four possible responses to be certified under penalty of perjury.

The possible responses are:
- Response 1: No.
- Response 2.a: Yes, but the vendor has taken steps to wind down (or is in the process of winding down) business operations in Russia.
- Response 2.b: Yes, but the vendor's business operations in Russia are being conducted only to the extent necessary to provide vital health and safety services within Russia or to comply with federal laws and regulations.
- Response 3: Yes.

Negative responses (Response 1) allow the procurement to proceed in the usual manner, while an unqualified affirmative response (Response 3) serves to disqualify the vendor unless, as described below, there are grounds to exempt the vendor from disqualification.
Qualified affirmative responses (Response 2.a or 2.b) trigger a review by the State Entity.
- If the State Entity determines the vendor has made good-faith efforts to limit its business operations in Russia and its remaining operations are not contributing in any significant way to Russian war effort, the contract award can proceed in the usual manner.
- If the State Entity determines the vendor's remaining operations are contributing to the Russian war effort, the vendor will be disqualified from the contract award absent a basis to exempt it from the disqualification.

In either case, the State Entity's determination must be made in writing.

The Guidelines also provide that the head of a State Entity may contract with an entity conducting business operations in Russia if the contract is necessary for the State Entity to perform its functions and no suitable "contractual alternative exists." Any such exemption must be granted in writing and include: (1) a detailed explanation why the particular vendor is necessary for the State Entity to perform its "critical functions" and (2) an explanation of why no suitable alternatives exist, including what alternatives were considered and why they were not suitable.

Application of the Guidelines to the Executive Orders

The scope of EO 16's impact is extensive. It applies to every entity that currently does business or is seeking to do business with any New York State agency and broadly construes "doing business in Russia" to include not only sales in Russia, but also contracting, purchasing, investments, and forming partnerships in that country. Additionally, while New York State has published the Guidelines, the application of the Guidelines to evaluate each vendor's certification is not conducted by a single state authority, but rather by the leadership of the individual State Entity issuing (or renewing) the contract. Further, there is no provision for automatic reciprocity between State Entities. As such, while it seems likely that the determination made by one State Entity under EO 16 would be followed by other State Entities with which the entity is seeking to contract, there is no formal mechanism for this coordination.

For many companies, the nature of their business in Russia remains in flux. Long-term partnerships or other arrangements can make divesting or otherwise winding up business relationships in Russia difficult. Further, in some instances, particularly for services being provided to the Russian citizenry (as opposed to the Russian military or state apparatus) or that are otherwise consistent with U.S. policy objectives, companies are permitted under federal law to continue their Russian business operations. As such, in preparing a Certification under EO 16 where a company continues to have business operations in Russia, the company should be prepared to provide the relevant State Entity with additional facts about the nature of its ongoing business in Russia and to explain how the company has reacted to the Ukrainian-Russian conflict more generally, including with respect to compliance with U.S. sanctions.

As the Russia-Ukraine conflict endures, it is unclear if OGS will amend or augment the Guidelines. In the absence of more extensive guidance from OGS, offering a more complete picture of the nature and scope of a company's ongoing business operations in Russia will provide the State Entity with helpful context as it evaluates a company's Certification submission and will assist the State Entity to more fairly and fully consider the Certification.

Footnotes

1. Under EO 14, the term "State Entities" includes New York State agencies and departments and certain public benefit corporations, authorities, boards, and commissions. The Port Authority of New York and New Jersey is not subject to EO 14 or EO 16 (as defined below).

2. See Crosby v. National Foreign Trade Council, 530 U.S. 363 (2000).

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.