On December 18, US President Barack Obama signed into law the
Ukraine Freedom Support Act (UFSA),1 which either
imposes, or gives the President the authority to impose, a range of
additional sanctions targeting the energy and defense sectors of
the Russian Federation. Together with the European Union (EU), the
United States also imposed new economic restrictions against the
disputed Crimea region.
Although it is the first congressionally mandated Russia sanctions
to be enacted by the United States during the Ukraine crisis (US
sanctions so far had been implemented through action by the
Executive Branch2), UFSA does not significantly alter
the scope of restricted activity for US persons under current
Russia sanctions law. However, it does provide the US President
with a "menu" of sanctions that may be imposed at the
President's discretion, extending beyond the current sanctions
regime.
The new legislation also extends the potential extraterritorial scope of US sanctions against Russia by authorizing sanctions against "foreign persons" engaged in complex Russian oil projects and "foreign financial institutions" engaged in significant transactions with designated Russian entities. In this respect, the legislation resembles recent Iran sanctions legislation, although UFSA is far less comprehensive than the US Iran Sanctions Act, as amended. At this point, the White House has indicated that it will not immediately impose additional sanctions under the law, although it will continue to have the ability to do so in the future.
Separate from UFSA, President Obama has utilized existing authority by imposing a near embargo against the Crimean region, effective December 19, 2014. The EU, for its part, also adopted additional sanctions against Crimea on December 18, 2014 which, by their own terms, have already taken effect. The EU's Crimea sanctions are less comprehensive than the US sanctions in covering a narrower set of trade activities and offering exemptions for certain contracts concluded before December 20, 2014. At the same time, EU-Crimean (and EU-Russian) trade is overall more significant than US-Crimean trade.
Ukraine Freedom Support Act: A Menu-Based Sanctions Regime
Implementation of UFSA will be left to the Executive Branch, and reports indicate that the President may utilize certain waiver authorities for the few mandatory provisions. However, even with the exercise of such waivers, the President may issue further sanctions pursuant to UFSA in the future. In particular, UFSA lays out a menu of nine different sanctions that may be imposed against entities involved in the Russian defense and energy sectors:
- Directing the Export-Import Bank to not approve the issuance of any guarantee, insurance, extension of credit, or participation in the extension of credit related to the sanctioned person.
- Directing the head of any US agency to not enter into any procurement contract with the sanctioned person.
- Prohibiting the export of defense articles or services to the sanctioned person.
- Prohibiting the export of any dual use goods or technology to the sanctioned person.
- Blocking the property in the United States of the sanctioned person.
- Prohibiting the transfer of credit or payments under US jurisdiction to the sanctioned person.
- Prohibiting investments in debt and/or equity issued by the sanctioned person.
- Banning travel to the United States by the sanctioned person.
- In the case of sanctioned entities, any of the above may be imposed against officers of the sanctioned entity.
Russian Defense and Energy Firms Further Targeted
Similar to recent sanctions against Russia issued by the US Department of the Treasury's Office of Foreign Assets Control (OFAC), UFSA specifically targets Russian defense and energy firms. However, the only automatic sanctions required by the law are against Russian arms exporter Rosoboronexport, against which a minimum of three types of sanctions from the menu must be applied.
UFSA also requires the President to impose a minimum of three types of sanctions against other Russian arms dealers engaged in transfers to Syria or other specified countries (e.g., Ukraine, Georgia, and Moldova) without the consent of their internationally recognized governments. However, the President has discretion as to which specific entities to target.
The President is also required to restrict US persons from dealing in new debt or equity issued by Gazprom (plus one additional sanction from the menu), but only if the President determines that it is "withholding significant natural gas supplies" from NATO member-states or countries such as Ukraine, Georgia, or Moldova. This "contingent" sanction broadly corresponds to the capital market restrictions imposed against energy firms, pursuant to Directive 2 under Executive Order 13662, but may also include restrictions on dealings in "equity," which are excluded from the scope of Directive 2.3
Finally, UFSA authorizes (but does not require) the President to impose three or more types of sanctions on non-US persons (e.g., foreign registered subsidiaries of US firms) that make significant investments in certain types of "special Russian crude oil projects" involving extraction from deepwater, Arctic offshore, and shale locations in Russia. The President is also authorized to apply additional licensing requirements or other restrictions on the export of items used in Russia's energy sector.
Foreign Financial Institutions Involved with Sanctioned
Russian Entities
The law also authorizes (but does not require) the President to
prohibit or restrict foreign financial institutions'
(FFIs)4 dealings with the US banking system, including
prohibiting the opening of correspondent or payable-through
accounts in the United States, if he determines that they have
engaged in certain sanctionable conduct, such as engaging in
"significant transactions"5 involving arms
transfers to Syria or other countries; deepwater, Arctic offshore,
and shale oil projects in Russia; activities relating to Gazprom;
or on behalf of Russian specially designated nationals
(SDNs).
US and EU Territorial Sanctions Against
Crimea
The US and EU have also together imposed wide-ranging sanctions
against the territory of Crimea. Under a new regulation, the EU has
prohibited new investment in Crimea; the export of specifically
listed goods and technology to Crimea for use in the energy,
telecommunications, transport, and mineral resources sectors; and
provision of services to Crimea relating to certain infrastructure
and tourism.6
In the US, President Obama has also issued a new Executive Order
imposing a broader embargo against Crimea, entailing more
comprehensive trade restrictions and narrower exemptions than the
EU measures. It prohibits new investment by US persons in Crimea;
exports of goods, technology or services to Crimea; imports of the
same from Crimea; and the facilitation of any of the
foregoing.7 No exemptions or wind-down provisions have
been included for contracts concluded before the Order's entry
into force, and US persons will be required to promptly discontinue
prohibited business. OFAC has also issued Ukraine General License
4, allowing the provision of certain humanitarian supplies, such as
agricultural goods and medicine, to Crimea and has designated 24
additional Russian and Ukrainian separatist persons as
SDNs.
1 H.R. 5859.
2 See, e.g., US and EU Escalate Russia
Sanctions (September 15, 2014), available at http://www.wilmerhale.com/pages/publicationsandnewsdetail.aspx?NewsPubId=17179874791;
US Targets Major Russian Financial and Energy Firms in
Sector-Specific Sanctions (July 18, 2014), available athttp://www.wilmerhale.com/pages/publicationsandnewsdetail.aspx?NewsPubId=17179873718.
3 See OFAC Directive 2, as amended, issued
pursuant to Executive Order 13662 (September 12, 2014).
4 The legislation uses the same definition of FFIs
included in Iran sanctions regulations. It covers any foreign
entity that is engaged in the business of "accepting deposits,
making, granting, transferring, holding, or brokering loans or
credits, or purchasing or selling foreign exchange, securities,
commodity futures or options, or procuring purchasers and sellers
thereof, as principal or agent." It includes but is not
limited to "depository institutions, banks, savings banks,
money service businesses, trust companies, securities brokers and
dealers, commodity futures and options brokers and dealers, forward
contract and foreign exchange merchants, securities and commodities
exchanges, clearing corporations, investment companies, employee
benefit plans, dealers in precious metals, stones, or jewels, and
holding companies, affiliates, or subsidiaries of any of the
foregoing." 31 C.F.R. §561.308.
5 Although "significant investment" is not
defined in the legislation, OFAC generally considers such factors
as (1) the size, number, frequency, and nature of the
transaction(s); (2) the level of awareness of management of the
transaction(s) and whether or not the transaction(s) are a part of
a pattern of conduct; (3) the nexus between the foreign financial
institution involved in the transaction(s) and a sanctioned entity;
(4) the impact of the transaction(s) on the goals of the
legislation; (5) whether the transaction(s) involved any deceptive
practices; and others. See OFAC Frequently Asked Question
#154.
6 See Council Regulation (EU) No 1351/2014
(December 18, 2014). Contracts concluded before December 20, 2014
are generally exempted from the EU prohibitions, but certain types
of contracts must be wound down by March 21, 2015.
7 See Executive Order Blocking the Property of
Certain Persons and Prohibiting Certain Transactions with Respect
to the Crimea Region of Ukraine (December 19, 2014). The Order also
authorizes future blocking actions against political leadership in
Crimea.
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