President Obama's Executive Order Mainly Targets the Activities of U.S. Persons

HIGHLIGHTS:

  • President Obama issued a new Executive Order on Dec. 19, 2014, that imposes sanctions essentially barring U.S. entities from engaging in most transactions with entities in the Crimea Region.
  • The recently enacted Ukraine Freedom Support Act (UFSA or the Act) imposes mandatory sanctions on certain Russian defense sector entities that provide arms to Ukrainian separatists or to Syrian groups.
  • UFSA also gives the president the authority to impose secondary sanctions against non-U.S. companies and foreign financial institutions for breaches of U.S. sanctions, but the Obama administration has signaled it will not implement these “permissive” measures at this time.

Executive Order Relating to the Crimea Region

On Dec. 19, 2014, in a step coordinated with similar sanctions imposed by the European Union (EU), President Obama issued a new Executive Order targeting the Crimea Region. The major elements of this Executive Order apply to U.S. persons (i.e., U.S. citizens, residents, companies organized under the laws of the U.S., and any person or entity physically in the U.S.). The sanctions mean that U.S. persons:

  • cannot enter into new investments in the Crimean Region, including the maritime area over which Crimea claims sovereignty
  • cannot provide any goods, services, or technology to the Crimean Region, and cannot facilitate, finance or guarantee a transaction by a third-country entity that the U.S. person could not enter into directly
  • are required to block the property of persons or entities designated as specially designated nationals (SDNs) by the U.S. Treasury Department Office of Foreign Assets Control (OFAC) as having operated in the Crimea Region; this includes leaders of such entities, owned or controlled affiliates, and persons who materially assist such designated entities

In conjunction with the new sanctions, OFAC issued a general license allowing U.S. persons to continue to provide agricultural commodities, medicine, medical supplies and certain uncontrolled replacement parts to entities in the Crimea Region not designated as SDNs.

Ukraine Freedom Support Act of 2014 (UFSA)

On Dec. 18, 2014, the president signed UFSA into law. In signing the Act, the president issued a statement that UFSA “does not signal a change in the Administration’s sanctions” policy; and further that “[a]t this time, the Administration does not intend to impose sanctions under the law.” The president likely did not want the legislation as it signals a unilateral versus multilateral approach to sanctions. The administration has emphasized that it intends to continue to coordinate sanctions with U.S. allies and partners. Further, government officials have delineated informally between “mandatory” primary sanctions and “permissive” secondary sanctions.

Mandatory Sanctions

These sanctions are mandated by the Act and will be primary in nature (in that they affect U.S. persons).

  • The Act requires the president to impose at least three sanctions from a statutory list on Rosoboronexport (the sole Russian state-owned intermediary for arms exports) within 30 days, subject to limited waiver provisions. The statutory list ranges from barring assistance from the Export-Import Bank of the United States, to barring the entity from using the U.S. banking system, and prohibiting the transfer of U.S. property owned by the designated person. These statutory lists are similar to statutory sanctions under Iran sanctions legislation.
  • Subject to a 45-day grace period, UFSA requires the president to impose at least three statutory sanctions on any Russian producers, transferors, or brokers that knowingly manufacture, sell, or transfer defense articles to Syria, Ukraine, Georgia and Moldova without the consent of the recognized government of that country.
  • If the president determines that Gazprom, a Russian global energy company, is withholding natural gas supplies from NATO countries, Ukraine, Georgia, or Moldova, he must within 45 days impose two sanctions on Gazprom (one of which is a ban on new investment in Gazprom).

Permissive Sanctions

Congress, apparently after discussions with administration officials, used permissive language that authorized, but did not require, the president to impose the following sanctions. (As discussed above, and as reiterated by U.S. government officials, the U.S. does not intend to implement these sanctions, which would have broad secondary/extraterritorial implications.)

  • Subject to 45-day grace period, the president may impose three or more of the statutory sanctions on a foreign entity that knowingly makes a significant investment in a special Russian crude oil project.
  • The president may impose three or more statutory sanctions on a foreign person who participates in the sale of defense articles prohibited under the mandatory sanctions.
  • The president may bar Russian or other foreign financial institutions (defined in the same manner as under Iran sanctions) from maintaining correspondent accounts with U.S. banks, if such banks facilitate significant financial transactions related to the types of energy and defense transactions sanctioned above; or (subject to a 180-day grace period) with any entity placed on the SDN list in connection with Russia/Ukraine sanctions. These sanctions against foreign financial institutions are similar in nature, but narrower in scope, than those imposed against foreign financial institutions under U.S. sanctions on Iran.

Practical Implications of These Latest Sanctions

Under the Executive Order, virtually all trade between U.S. persons and the Crimea Region must cease – there is no transition or grace period. However, it is likely that OFAC would favorably consider a license application to wind-down activities by U.S. businesses currently doing business in Crimea. While currently the administration does not intend to implement UFSA’s secondary sanctions, a Republican Congress may pass more stringent measures. Further, U.S. sanctions against foreign financial institutions largely isolated Iranian banks from the world financial markets. Therefore, even the unimplemented “threat” of such sanctions against Russia will likely further isolate those Russian entities designated as SDNs or involved in sectors targeted for sanctions.