On March 6, 2014, President Barack Obama signed Executive Order 13660 (the “Ukraine EO”)1 in response to “[the] unusual and extraordinary threat to the national security and foreign policy of the United States”2 posed by the situation in Ukraine. As discussed further below, the Ukraine EO establishes the legal framework for the implementation of economic sanctions. It does not, however, specifically designate any persons or entities that meet the criteria for sanctions set forth by its terms. The timing and sequencing of any such future designations will be highly choreographed in order to maximize their contribution to US policy objectives, while mitigating collateral risk to US security and other interests. Indeed, it is a measure of the importance of such choreography—and the caution underlying the President’s response to the crisis—that the Ukraine EO never mentions the words “Russia,” “Russian Federation,” or “Putin.”
The Crisis in Ukraine—Policy Context
The crisis in Ukraine is generally seen by US security analysts as a deliberate effort by Russia to undermine the security architecture that has provided stability in Europe since 1989 - and, thus, a geopolitical challenge of the first order. For the United States and the European Union, it is vital that Europe’s eastern frontier remains stable.
To that end, the US administration has described, in recent days, the four principal elements of its evolving strategy with respect to Ukraine:
- To provide economic support for the interim government of Ukraine;
- To deter the additional infringement on Ukraine’s sovereign rights by military incursion or otherwise;
- To assure US allies in Central and Eastern Europe that the US is committed to their territorial integrity and security; and
- To “de-escalate” tensions between Moscow and the interim government in Kiev.3
Increasingly, US security analysts inside and outside the government are advocating that the President take a strong stance to protect the territorial integrity and independence of Ukraine (and thus reassert the post-1989 order in Europe). This is seen as necessary to compensate for relative US and European inaction to Russia’s 2008 incursion into Georgia, to bolster the confidence in NATO security guarentees of NATO allies in Eastern Europe, and, separately, to send a strong message to dynamic states in Asia that may seek to revise existing international arrangements. This important policy point has practical implications for our clients, because it suggests that absent a timely political settlement to the crisis in Ukraine, there are important constituencies in the US prepared to advocate that the administration impose stronger sanctions and other measures on Russia—even if such measures come at a political and economic cost to the US.
US Sanctions—The Executive Branch Framework
As described in a White House press release relating to the Ukraine EO, the United States is “pursuing and reviewing a wide range of options in response to Russia’s ongoing violation of Ukraine’s sovereignty and territorial integrity.” The Ukraine EO is a first step in what appears to be an incremental sanctions policy targeting persons within Russia that are contributing to the invasion and occupation of Crimea or, more generally, threatening the peace, security, territorial integrity, and stability of Ukraine.
In the first instance, the Ukraine EO sets broad parameters for mandatory asset freezes of persons subject to sanctions under its terms. Specifically, the Ukraine EO targets and subjects to an asset freeze a wide range of individuals and entities including persons:
- responsible for or complicit in, or who have engaged in, actions or policies that undermine democratic processes or institutions in Ukraine; actions or policies that threaten the peace, security, stability, sovereignty, or territorial integrity of Ukraine; or the misappropriation of state assets of Ukraine or of an economically significant entity in Ukraine;
- who have asserted governmental authority over any part or region of Ukraine without the authorization of the Government of Ukraine;
- leaders of any entity, or whose members are, described in (i) or (ii);
- who have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any activity described in (i) or (ii); or
- who are owned or controlled by, or acting on behalf of, any person targeted by the Ukraine EO.
As noted previously, the Ukraine EO does not identify individuals or entities meeting the criteria above, but delegates the authority to identify such individuals and entities to the Secretary of the Treasury (in consultation with the Secretary of State).
In addition to authorizing an asset freeze, the Ukraine EO also suspends entry into the United States, as immigrants or nonimmigrants, of individuals subject to sanctions under its terms. In this connection, at President Obama’s direction, the State Department has put in place restrictions on the travel of certain individuals and officials responsible for the situation in Crimea.4
The Crisis in Ukraine—Congress Begins to Stir
On the same day that the President signed the Ukraine EO, the US House Foreign Affairs Committee adopted H. Res. 499, which, among other things, “calls on the Administration to work with [the administration’s] European allies and other countries to impose visa, financial, trade, and other sanctions on senior Russian Federation officials, Russian and Ukrainian oligarchs and others complicit in Russia’s intervention and interference in Ukraine, majority state-owned banks and commercial organizations, and other state agencies, as appropriate…”5 The Senate Foreign Relations Committee is currently considering a similar resolution.6 There are additional punitive bills under consideration in the House and Senate, including HR 4154 which would deny visas and entry to the United States to officials and employees of the Government of the Russian Federation.
Congress is also considering various bills to provide economic relief to the government of Ukraine and to undermine the ability of the Russian government to use energy as an instrument of economic coercion against the interim Ukrainian government. For example, H.R. 4155 and S. 2083 would increase US natural gas exports to the Ukraine in an effort to both insulate Kiev from any possible Russian-directed energy disruptions, and to impose a financial cost on Moscow .7 Neither of these bills has been scheduled for debate at this time, although language concerning increased natural gas exports to the Ukraine was added to H. Res. 499 during the Committee markup.8 On March 6th, the House passed H.R. 4152 which allows the interim government of Ukraine to be eligible for certain loan guarantees. The bill makes the money available, but further amendments, or other legislation, will have to clarify the amount of relief to be provided.
The View From the European Union
The EU has thus far been reluctant to impose far-reaching restrictive measures against the Russian Federation. This reluctance is widely seen as stemming from the close commercial ties EU countries maintain with Russia, and the need to adopt sanctions unanimously within a currently divided 29 EU Member State block.
On March 5, 2014, the EU imposed sanctions against former President Yanukovych and 17 other natural persons subject to criminal proceedings in Ukraine in connection with the embezzlement of Ukrainian state funds and their illegal transfer outside Ukraine.9 However, unlike the Ukraine EO, the EU sanctions are not a response to Russia’s military incursion into the Crimea, but instead target selected individuals for misappropriating Ukrainian state funds or committing human rights violations in Ukraine.10
With respect to Russia, the EU is currently developing a plan that will lead to economic sanctions only in the event diplomatic talks fail.
To that end, on March 6, 2014, the EU mapped out a three-step approach11, should the situation in Ukraine remain incapable of being resolved diplomatically between the governments of Ukraine and the Russian Federation, including through potential multilateral mechanisms. Such negotiations are to “start within the next few days and produce results within a limited timeframe”.12 First, the EU has already decided to suspend bilateral talks with the Russian Federation on visa matters, as well as on a new trade agreement between the EU and Russia. It also supports the decision of certain EU member states to suspend their participation in G8 summit preparations until further notice. Second, absent any satisfactory resolution of the crisis, the EU will “decide on additional measures, such as travel bans, asset freezes and the cancellation of the EU/Russia summit.”13 Third, any “further steps by the Russian Federation to destabilise the situation in Ukraine” would lead to “additional and far reaching consequences” for relations “in a broad range of economic areas” between the EU and its member states, on the one hand, and the Russian Federation, on the other hand.14
Conclusion and Recommended Next Steps
At the moment, there are no specifically designated persons or entities under the Ukraine EO, though18 natural persons from Ukraine have been targeted by EU sanctions. However, with the basic legal framework now firmly in place for the follow-on imposition of US sanctions, the administration is ready to respond to events in Ukraine as circumstances warrant or recommend. It is widely believed that any such designations could be used to capture elements of Russia’s financial and banking system, which would raise serious compliance risks for those doing business with or in Russia.
For now, we recommend that investment funds, financial institutions, and operating companies carefully assess whether their business has a direct or indirect Russia nexus (e.g., as an investor, portfolio company, joint venture partner, creditor, borrower, supplier, or distributer, etc.) which makes their business vulnerable to any new sanctions regime. This basic, high-level analysis will make it easier to assess what impact any sanctions would have, if and when they are implemented.