On December 18, 2014, President Obama signed the Ukraine Freedom Support Act of 2014 (UFSA) (H.R. 5859), expanding Ukraine-related sanctions against Russia. This statute may be most significant as a reflection of Congress’s bipartisan decision to mandate visible military and other aid to Ukraine in order to counter Russian intervention in that country. But from an economic sanctions perspective, this new statute is notable for imposing a set of “secondary sanctions” against Russia, such that foreign persons who engage in certain activities in Russia now face the prospect of adverse economic consequences from the United States. As with the Iran sanctions program, these secondary sanctions may result in a considerable ratcheting up of the pressure on the Russian government to change its policies and behavior vis-a-vis Ukraine, while at the same time presenting more legal risks to non-US companies conducting trade and investment with or in Russia.
Specifically, the UFSA requires the President to impose sanctions on foreign persons that he determines to be engaged in certain activities related to Russia’s defense industry, and furtherauthorizes—but does not require—the President to sanction foreign persons that make “significant investments” in certain Russian oil projects. Similar to other “secondary” sanctions regimes, sanctioned persons are subject to denial of certain privileges of doing business with the United States, including restrictions on US financing and trade. Moreover, Gazprom could be subject to restrictions on new debt and equity that would further restrict US person dealings with that company, similar to those issued pursuant to “sectoral” sanctions Directives 1-3 that currently exist for other Russia companies, if the President determines that it is withholding significant natural gas supplies from NATO member countries and others. Finally, foreign financial institutions that facilitate “significant” financial transactions involving restricted defense- and energy-related activity are subject to the imposition of “strict conditions” on US correspondent and payable-through accounts.
For a summary of existing sanctions against Russia, please see our previous advisories on US sanctions against Russia, including the imposition of “sectoral” sanctions, export restrictions, and restrictions related to certain Russian entities. For other examples of “secondary” sanctions that the United States has imposed in other sanctions programs, see our previous advisories regarding Iran-related sanctions legislation and executive orders.
Sanctions Relating to Russia’s Defense Sector
The UFSA requires the President to impose sanctions on Rosoboronexport (Russia’s defense export agency). In addition, sanctions must be imposed against any foreign person that is an entity owned or controlled by the Russian Government or by nationals of the Russian Federation if the President determines that the foreign person: (1) knowingly manufactures or sells, (2) transfers, or (3) brokers or otherwise assists the transfer of, defense articles into Syria or into Ukraine, Georgia, and Moldova, as well as any other presidentially designated country of concern (which may cover Poland, Lithuania, Latvia, Estonia, and the Central Asia republics) without the consent of the “internationally recognized” government of that country. Any foreign person that knowingly assists, sponsors, or provides financial, material, or technological support for, or provides goods or services to or in support of, such activities of an entity designated for the reasons set forth above also must be subject to sanctions. The term “foreign person” means any individual or entity that is not a US citizen, US permanent resident alien, or an entity organized under the laws of the United States or any jurisdiction within the United States.
The President is required to impose at least three of nine types of sanctions authorized under the statute to deny the sanctioned foreign person certain privileges of doing business with the United States, including restrictions related to:
- US Ex-Im Bank assistance to the sanctioned person
- Award of federal procurement contracts to the sanctioned person
- Export of dual use goods to the sanctioned person
- Export of defense articles to the sanctioned person
- Holding, transacting, or dealing in the sanctioned person’s property (blocking)
- Payments between financial institutions involving the sanctioned person
- Investing in debt or equity of the sanctioned person
- Exclusion of the sanctioned person from the United States, or revocation of the person’s US visa
- Imposition of sanctions on the principal officers of a sanctioned entity
This “menu” of sanctions closely resembles the sanctions available to the President in the Iran “secondary” sanctions context, with the exception of the restrictions on debt and equity, which are a relatively new feature of US “sectoral” sanctions against Russia.
The UFSA requires that the President impose sanctions against Rosoboronexport within 30 days of enactment of the statute (January 17, 2015), and further requires the President to begin imposing sanctions against persons determined to be engaging in sanctionable defense trade starting on the date that is 45 days after enactment (February 1, 2015).
Sanctions Relating to Russia’s Energy Sector
The UFSA authorizes—but does not require—the President to impose at least three of the nine sanctions listed above on any foreign person determined by the President that knowingly makes a “significant investment” in a project intended to extract crude oil from: (a) Russia’s exclusive economic zone in waters more than 500 feet deep; (b) Russian Arctic offshore locations; or (c) shale formations located in Russia. The President will have authority to impose such sanctions 45 days after the date of enactment of the UFSA (February 1, 2015).
The statute does not define what constitutes a “significant” investment, thereby leaving interpretation of the term to the President’s discretion. No US dollar threshold is set forth in the law that would trigger a presumption of a significant investment. It is possible that the US Government will issue guidance interpreting this concept at some point. In the Iran “secondary” sanctions context, non-US persons are restricted from making investments of $20 million or greater in certain Iranian petroleum projects; and in the Iran Financial Sanctions Regulations, the US Treasury Department, Office of Foreign Assets Control (OFAC) issued guidance regarding what was considered “significant” for purposes of sanctions that could be imposed on foreign financial institutions providing significant services to certain Iranian-related transactions.
Furthermore, the UFSA authorizes OFAC and the US Commerce Department, Bureau of Industry and Security (BIS) to impose additional licensing requirements for, or other restrictions on, the export or re-export of items for use in Russia’s energy sector, including equipment to be used for tertiary oil recovery.
Finally, the UFSA authorizes the President to impose sanctions on Gazprom if the President determines that Gazprom is withholding “significant” natural gas supplies from NATO member countries or from Ukraine, Georgia, or Moldova. In such instances, the primary sanction to be imposed on Gazprom is prohibiting US persons from transacting in, providing financing for, or otherwise dealing in equity or debt in respect of Gazprom. However, the President may also impose at least one of the other above-referenced sanctions on Gazprom.
Civil and Criminal Penalties
The UFSA authorizes the imposition of penalties set out in the International Emergency Economic Powers Act (IEEPA) against persons that violate, attempt to violate, conspire to violate, or cause a violation of the UFSA. The IEEPA provides for civil penalties of up to $250,000 per violation and criminal penalties of up to $1 million per violation and/or 20 years’ imprisonment.
The UFSA marks the continuation of a trend of Congress providing for IEEPA penalties in the “secondary” sanctions context, as it has done under certain Iran sanctions statutes. It is not clear how such penalties would be imposed in practice, as the United States arguably can only impose penalties to the extent that it can exercise jurisdiction over non-US persons.
The UFSA authorizes—but does not automatically require—exceptions from the above sanctions with respect to:
- Foreign persons that provide certain defense articles and defense services to the United States under existing contracts
- Procurement of “eligible products” under the Trade Agreements Act of 1979
- Goods, technology, or services provided under contracts agreed to before the date of imposition of sanctions against a sanctioned person
- Spare parts, information, and technology “essential” to US products or production
- Food, medicine, medical devices, and agricultural commodities
Furthermore, the President may waive the imposition of sanctions, either with respect to a person or a particular transaction, if a waiver is “in the national security interest” of the United States.
Sanctions Relating to Foreign Financial Institutions
The UFSA further authorizes—but does not require—the President to impose sanctions on:
- Foreign financial institutions (FFIs) determined to knowingly engage in “significant” transactions involving sanctionable defense- and energy-related activity described above, for persons sanctioned under the provisions described above
- FFIs that knowingly facilitate a “significant” financial transaction on behalf of any Russian person designated as a Specially Designated National (SDN) by OFAC pursuant to the UFSA, Executive Orders 13660, 13661, or 13662, or any other executive order addressing the Ukraine crisis
The authority of the President to impose sanctions for facilitating defense- and energy-related transactions appears to become effective 45 days after enactment of the UFSA (February 1, 2015), although the statute is silent on this point. The authority for imposing sanctions for dealing with Russian SDNs, in contrast, becomes effective 180 days after enactment (June 16, 2015). This likely reflects the anticipated complexities associated with FFIs’ unwinding of relationships with SDNs.
Sanctioned FFIs are subject to prohibition of the opening of, and a prohibition or the imposition of “strict conditions” on the maintaining of correspondent or payable-through accounts in the United States. This is similar to the sanctions authorized against foreign financial institutions in the Iran sanctions context.
The UFSA does not define “significant financial transaction,” but OFAC guidance may be instructive. As noted above, the Iranian Financial Sanctions Regulations, 31 C.F.R. Part 560, set out certain factors to consider in assessing whether a financial transaction is “significant,” including:
- the size, number, and frequency of transactions
- the nature of the transaction(s)
- the level of awareness of management and whether the transaction(s) are part of a pattern of conduct
- the nexus between the transaction(s) and a blocked person
- the impact of the transaction(s) on statutory objectives
- whether the transaction(s) involve deceptive practices
The President may waive sanctions if a waiver is in the national security interest of the United States.
Finally, the UFSA authorizes IEEPA penalties against sanctioned FFIs. As noted above, it is not clear how this would be applied in practice.
The UFSA provides for a major expansion of US sanctions against Russia through the imposition of “secondary” sanctions. However, it is important to note that overall, the President has more flexibility under the UFSA than in the Iran “secondary” sanctions context. While the defense-related sanctions are mandatory, imposition of the energy- and finance-related sanctions are discretionary. Furthermore, there are several exceptions to sanctions under the UFSA, and the statute affords the President somewhat flexible waiver authority. Certain provisions of the UFSA could benefit from interpretational guidance issued by OFAC, such as interpretation of the term “significant investment.”