On December 18, 2014, President Obama signed into law the Ukraine Freedom Support Act. This measure is the first significant Congressional move in this area, and adds to existing sanctions imposed by the Executive Branch in response to Russia’s continued efforts to destabilize eastern Ukraine. The Act is far reaching and targets the key Russian defense and energy sectors, along with non-U.S. banks that engage in certain Russia-related transactions. As such, this law expands the extraterritorial scope of U.S. sanction against Russia.

We have summarized below the main economic sanctions provisions of the Act, as well as key takeaways for U.S. and non-U.S. companies that do business in or with Russia.

Energy Sector

The Act includes several provisions targeting Russia’s energy sector, some of which are mandatory and others of which are within the President’s discretion:

  • The President may impose at least three out of a list of sanctions options against non-U.S. persons that make significant investments in “special Russian crude oil projects” (i.e., the frontier oil projects targeted in existing sanctions).
  • The President may impose additional export restrictions or license requirements on items for use in the Russian energy sector, including equipment used for tertiary oil recovery.
  • If the President determines that Gazprom is withholding significant natural gas supplies from member countries of NATO, or further withholds such supplies from countries such as Ukraine, Georgia or Moldova, the President must impose sanctions against Gazprom, including a restriction on dealing in debt with greater than 90 days’ maturity or equity of Gazprom.

Defense Sector

The President must impose at least three out of a list of sanctions options against the following:

  • Rosoboronexport.
  • Russian-owned or -controlled entities that knowingly transfer or facilitate the transfer of defense articles to Syria or specified countries (e.g., Ukraine, Georgia, Moldova) without authorization from the internationally recognized governments of those specified countries.
  • Non-U.S. persons knowingly assisting, sponsoring or providing financial, material or technological support for defense activities in the specified countries.

Non-U.S. Financial Institutions

The Act provides secondary sanctions against non-U.S. financial institutions that facilitate certain sanctionable activity with respect to Russia’s energy and defense sectors or Specially Designated Nationals (“SDNs”). Specifically, the President may restrict these banks from opening or maintaining correspondent accounts or payable-through accounts in the United States if they knowingly engage in the following activity:

  • “Significant transactions” involving sanctioned entities engaged in activities described  above under the defense and energy sector sanctions; and
  • Facilitating  “significant financial transactions”  on behalf  of  Russian SDNs  designated under OFAC’s Russia/Ukraine sanctions program.

While the term “significant financial transactions” is left undefined in the Act, OFAC may apply the definition of that term in the Iran Financial Sanctions Regulations.

Sanctions Options

The menu of sanctions options referenced above includes the following measures:

  • prohibition on U.S. Export-Import Bank credit
  • prohibition on obtaining U.S. government procurement contracts
  • arms export ban
  • dual-use export ban
  • asset-blocking measures
  • restrictions on U.S. banking transactions
  • prohibitions on investment in equity or debt of the sanctioned person
  • visa bans
  • sanctions on executive officers of sanctioned entities

Key Takeaways

This sanctions legislation is one of the few things that Republicans and Democrats were able to agree upon in the closing days of the legislative session. The President immediately indicated that he would sign the bill, despite certain reservations. Specifically, the President was concerned by the unilateral nature of the measures, whereas past U.S. sanctions against Russia had been closely coordinated with the European Union. However, since the Act preserved a great deal of the President’s discretion in implementing additional sanctions, he agreed to sign the bill into law.

While these measures continue the trend of targeting key Russian sectors – finance, defense and energy – they are also quite broad and reach into areas previously untouched by OFAC sanctions. The Act also expands the extraterritorial reach of U.S. sanctions, and the financial sanctions will place great pressure on Russian energy and defense firms. These are the same type of secondary sanctions that were very effective in cutting Iran off from the global economy.

It remains to be seen how the President will implement the measures within his discretion. In fact, the President stated that this law does not change his Administration’s policy on Russia sanctions, and that future moves will be coordinated with Europe. On the other hand, this may also be only the first in a series of Congressional measures, if the experience with Iran is any guide. Either way, watch this space for further action in the coming year.