On December 18, 2014 and December 19, 2014, both the United States (US) and the European Union (EU) imposed additional sanctions on Russia and Crimea and set the stage for additional future sanctions. On December 18, President Barack Obama signed into law The Ukraine Freedom Support Act of 2014, a law authorizing the President to levy additional sanctions against Russia; and on December 19, he signed yet another Executive Order prohibiting the export/import of goods, technology, or services to/from Crimea, as well as new investments in Crimea. On December 18, the EU also approved substantial further sanctions on investment, services, and trade with Crimea and Sevastopol. These new sanctions are described in more detail below.
What Does This Mean for You?
- Plan for Possible Future Sanctions under the Ukraine Freedom Support Act of 2014: The sanctions that may be imposed under the Ukraine Freedom Support Act of 2014 will require additional actions by the US Administration, the first of which may not take place until the first part of January. Thus, companies should begin planning if they have ongoing transactions with companies that may be sanctioned (see details below).
- Add Crimea to List of Completely Sanctioned Countries: By contrast, the new Executive Order in the US, (effective December 19, 2014), and the new EU sanctions (effective December 20, 2014), both of which restrict trade and investment with Crimea, require immediate actions by company’s export compliance departments. In addition to the alerts and warnings companies have added to transactions involving Crimea, Ukraine, and Russia, it would be prudent to add Crimea to the list of absolute import-export embargoes, such as (for the US) Cuba, Iran, North Korea, Syria, and Sudan (North).
US Sanctions: The Ukraine Freedom Support Act of 2014 (the Act)
In a White House Press Statement, the President makes clear that, “[a]t this time, the Administration does not intend to impose sanctions under this law, but the Act gives the Administration additional authorities that could be utilized, if circumstances warranted.”
Although President Obama stated that the Administration does not intend to impose sanctions “at this time,” the Act, in fact, sets the stage for some mandatory sanctions in the near future — while authorizing other sanctions contingent on specified facts and circumstances.
- With regard to the defense sector, it directs that the President “shall,” no later than 30 days of enactment of the Act (January 17, 2015), impose three or more sanctions on Rosoboronexport from a prescribed menu. The President also “shall,” on or after 45 days (February 1, 2015), impose three or more sanctions on Russian producers, transferors, brokers, or others that he determines have supplied defense articles into Syria or into the territories of Ukraine, Georgia, or Moldova or any other country designated by the President such as Poland, Lithuania, Latvia, Estonia, or the Central Asian Republics.
While the latter group of potential sanctions require a determination by the President prior to imposition, and hence provide some degree of flexibility, the 30-day sanctions on Rosoboronexport do not. The President does have national security and other waiver powers embedded in the Act, although he may be reluctant to use them. The President does have another option if he does not wish to temper the sanctions on Rosoboronexport — that of imposing the three sanctions least likely to bite. For example, the President could select the sanctions prohibiting licenses on the exports of dual use and defense articles (these sanctions are already effectively in existence) and EXIM bank assistance.
- Next, the Act targets the energy sector by stating that, on or after 45 days (February 1, 2015), the President “may impose” three or more of the menu of sanctions on foreign persons who knowingly make significant investments in special Russian crude oil projects, which are defined to mean projects to extract crude oil from the Russian EEZ in waters more than 500 feet deep, from Russian Arctic offshore locations, or from shale formations located in Russia.
- Additionally, the Act provides that the President, through BIS and OFAC, “may impose” additional licensing requirements for other restrictions on the export or reexports of items for use in the Russian energy sector, including equipment used for tertiary oil recovery.
- Last, the Act includes contingent sanctions relating to Gazprom. Specifically, it provides that, if the President determines that Gazprom is withholding significant natural gas supplies from NATO members or withholds significant supplies from the Ukraine, Georgia, or Moldova, the President “shall” not later than 45 days after his determination impose sanctions consisting of: 1) a prohibition on the investment of debt (with longer than 30 days maturity) or equity of Gazprom; and 2) one other sanction from the Act’s sanction menu.
The sanctions menu that the President may select from is reminiscent of the Iran Sanctions Act, but also includes elements of the recent OFAC Russian Sanctions Directives. It consists of nine possible sanctions including:
- EXIM bank assistance: direct the Ex-Im Bank not to approve the issuance of any guarantee, insurance, extension of credit, or participation in the extension of credit in connection with the export of any goods or services to the foreign person;
- Procurement sanction: prohibit an executive agency head from entering into any contract for the procurement of any goods or services from the foreign person;
- Arms Export Prohibition: prohibit the exportation or provision by sale, lease, or loan, grant, or other means, directly or indirectly, of any defense article or defense service to the foreign person and the issuance of any license or other approval to the foreign person under the Arms Export Control Act;
- Dual use export prohibition: prohibit the issuance of any license and suspend any license for the transfer to the foreign person of any item the export of which is controlled by the Export Administration Act (EAR);
- Prohibiting any person from transacting in property in which a sanctioned person has an interest (essentially blocking but specifically carving out US import transactions);
- Banking transactions: prohibit the transfers of credit or payments between financial institutions or by, through, or to any financial institutions, to the extent that such transfers or payments are subject to the jurisdiction of the United Sates and involve any interest of the foreign person;
- Prohibition on new debt (greater than 30 day maturity) or new equity transactions;
- US visa sanctions for individuals; and
- US visa sanctions for officers of the sanctioned person.
Another provision of the Act authorizes the President (“may impose”) to prohibit foreign financial institutions from maintaining correspondent or “payable through” accounts in the United States banking system if they have knowingly facilitated a significant financial transaction related to Russia’s defense and energy sectors or substantial transactions on behalf of any Russian individual or entity sanctioned in connection with the crisis in Ukraine (i.e., Specially Designated Nationals or OFAC’s blocked persons).
Persons violating the sanctions can be punished by penalties under subsections b) and c) of Section 206 of the International Emergency Powers Act (IEEPA), which provide for civil penalties of up to the greater of $250,000 or twice the amount of the transaction per violation, and criminal penalties of up to $1 million per violation or up to 20 years in prison for natural persons.
Additionally, the law authorizes the President to provide a total $350 million over the next three years in military assistance to Ukraine, including defense equipment, services, and training aimed at helping the country re-establish its sovereignty and territorial integrity.
US Sanctions: The Latest Executive Order on Crimea
On December 19, 2014, President Obama signed an Executive Order taking further steps with respect to the situation in Ukraine.
The EO was published on the White House page website only today, December 22, 2014, but was effective at 3:30pm Eastern Standard Time on December 19, 2014. The EO does the following:
- Prohibits the export of goods, technology, or services to Crimea;
- Prohibits the import of goods, technology, or services from Crimea;
- Prohibits new investments in Crimea;
- Prohibits US persons from approving, financing, facilitating, or guaranteeing a transaction by a foreign person where the transaction by that foreign person would be prohibited by this section if performed by a United States person or within the United States; and
- Authorizes the Secretary of the Treasury (OFAC) to impose sanctions on individuals and entities operating in Crimea.
According to President Obama, the Executive Order “is intended to provide clarity to U.S. corporations doing business in the region and reaffirm that the United States will not accept Russia’s occupation and attempted annexation of Crimea.” The EO also appears designed to align US sanctions with EU sanctions on Crimea, which have been broader than US sanctions — and were also further extended on December 18, 2014.
EU Expands Sanctions on Crimea
In a EU press release, the Council explains that, starting December 20, 2014, the following are sanctioned and prohibited:
- Investments in Crimea and Sevastopol are outlawed.
- Europeans and EU-based companies may not buy real estate or entities in Crimea, finance Crimean companies, or supply related services.
- EU operators will no longer be permitted to offer tourism services in Crimea or Sevastopol.
- Other than emergency cases, European cruise ships may no longer call at ports in the Crimean Peninsula.
- This includes all ships owned or controlled by a European or flying a flag of a member state.
- Existing cruise contracts are honored until March 20, 2014.
- Exports of the following types of goods and technology to Crimean companies or for use in Crimea are prohibited. These goods relate to:
- Transport, telecommunications, and energy sectors.
- Prospection, exploration, and production of oil, gas, and mineral resources.
- Technical assistance, brokering, construction, or engineering services related to infrastructure in the same sectors (included again below) are prohibited:
- Transport, telecommunications, and energy sectors,
- Prospection, exploration, and production of oil, gas, and mineral resources.