On August 24, 2017, President Trump issued an Executive Order imposing significant financing-related sanctions against the government of Venezuela. The new sanctions, which are already effective, prohibit U.S. persons from engaging in a range of capital markets and finance transactions with or related to the Government of Venezuela, including state-owned entities such as Petroleos de Venezuela, S.A. (PdVSA). Similar in structure to the Russian sectoral sanctions, these prohibitions include dealing in certain new debt and new equity of the Government of Venezuela and PdVSA, Venezuelan government bonds and securities, and dividend payments to the Government of Venezuela. This round of sanctions follows designations of several Venezuelan government officials, and is intended to starve Venezuela of foreign currency and prevent U.S. persons from contributing to the Venezuelan regime's self-enrichment at the expense of its people. Companies and asset managers that deal with Venezuela, Venezuelan government securities, PdVSA, or other state-owned entities should familiarize themselves with these new rules.
Terms of Executive Order
The new sanctions prohibit U.S. persons from engaging in all transactions related to or provision of financing for:
- New debt with a maturity of greater than 90 days of PdVSA;
- New debt with a maturity of greater than 30 days, or new equity, of the Government of Venezuela, other than debt of PdVSA;
- Bonds issued by the Government of Venezuela prior to August 25, 2017; and
- Dividend payments or other distributions of profits to the Government of Venezuela from any entity owned or controlled, directly or indirectly, by the Government of Venezuela.
U.S. persons are also prohibited from purchasing, directly or indirectly, any securities from the Government of Venezuela, except for purchases that are permitted under the new debt restrictions described above (i.e., purchases of new PdVSA debt of less than 90 days, or new debt of less than 30 days of the rest of the government). The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) made clear in the accompanying FAQs that these sanctions do not require U.S. persons to block Venezuelan entities or freeze the funds of Venezuelan entities, and there were no new Venezuelan additions to the list of Specially Designated Nationals at this time. It is still permitted to engage in sales and other transactions with the Government of Venezuela, as long as they do not involve the specific financing arrangements specified in the Executive Order. The new sanctions, like all OFAC sanctions, require vigilance to ensure compliance with OFAC’s 50 percent rule – an entity owned 50% or greater by the Government of Venezuela (including by PdVSA) is also considered subject to the same sanctions as the parent.
These sanctions are very similar to the sectoral sanctions imposed on certain sectors of the Russian economy (except that the Venezuelan sanctions apply to the entire government). In fact, the FAQs for the Venezeuela sanctions refer to the Russia sanctions FAQs for clarifications. Like the Russia sanctions, it is important to understand that “new debt” is defined expansively – it not only includes traditional forms of debt, such as bonds and loans, but also to extended payment terms, the rollover of existing debt, and drawdowns and disbursements under revolving credit facilities or long-term loan arrangements that exceed the limits on tenor specified in the Executive Order. Both “new” debt and equity are those issued on or after August 25, 2017. While the term “securities” is not defined, the FAQs refer to both debt and equity securities.
U.S. financial institutions may continue to maintain correspondent banking accounts and process dollar clearing transactions for Venezuelan individuals and entities, including the Government of Venezuela. However, any transactions performed by U.S. financial institutions must not relate to the types of transactions prohibited by the new sanctions.
Additionally, on August 25, 2017, OFAC issued four General Licenses relating to the new Venezuela sanctions. These General Licenses, which are intended to mitigate the adverse business effect on U.S. companies, authorize the following conduct:
- General License 1: Activities necessary to wind down contracts or other agreements that were in effect prior to August 25, 2017. This authorization lasts until September 24, 2017 and requires a report to OFAC of the transactions undertaken pursuant to this license.
- General License 2: Activities where the only Government of Venezuela entities involved are CITGO Holding, Inc. and its subsidiaries.
- General License 3: Transactions related to, and the provision of financing for, certain bonds issued by the Government of Venezuela prior to August 25, 2017. The list of bonds includes both those issued directly by the Government of Venezuela and those issued by U.S. person entities owned or controlled by the Government of Venezuela.
- General License 4: Transactions related to, and the provision of financing for, new debt related to the exportation or reexportation of agricultural commodities, medicine, medical devices, or replacement parts and components for medical devices to Venezuela.
The 30-day wind-down safe harbor afforded by General License 1 is likely to be the only safe harbor extended by OFAC. This type of safe harbor is offered to minimize market disruption and harm to U.S. companies. In the past, whenever a wind-down safe harbor general license is published alongside new sanctions, the period is not extended. Accordingly, U.S. companies that do business with the Government of Venezuela or PdVSA should take immediate action to determine whether winding down contracts or agreements under General License 1 is appropriate for their business.
These actions indicate that the Trump administration’s warnings to Venezuela about additional sanctions were not mere threats. These sanctions are aimed at restricting the Government of Venezuela from the U.S. financial system in order to cut off its avenues to raise funds, particularly the sale of government securities at below-market prices. They also imply that OFAC and the executive branch view the Russian sectoral sanctions as an effective tool to isolate and pressure the sanctioned entities, as the bans on dealing in new debt of PdVSA and the Government of Venezuela are very similar to the sanctions imposed on certain sectors of the Russian economy.
As the situation in Venezuela remains unstable, additional U.S. sanctions are possible, including potential additional designations, further restrictions on the tenor of new debt, or restrictions on Venezuelan oil exports to the United States.