Both the United States and the European Union have increased pressure on Russia in recent months in response to the crisis in Ukraine. The U.S. Congress recently passed legislation, which the President is expected to sign this week, giving authority to the President to expand sanctions, and the EU has taken several actions targeting Russia as well, summarized below.
Late last week, Congress passed legislation to expand sanctions against Russia, and the White House has indicated that the President will sign the law by the end of this week. The Ukraine Freedom Support Act primarily targets Russian energy and defense sectors as well as non-U.S. financial institutions that facilitate such transactions or engage in significant transactions with Russian persons/entities designated as Specially Designated Nationals (SDNs), even when the activity has no U.S. nexus. The bill has specific provisions relating to Rosoboronexport and Gazprom. Significantly, the bill also adds considerable extraterritorial reach to existing sanctions as it allows the U.S. government to sanction foreign persons who make significant investments in certain Russian oil projects or who facilitate certain defense and energy-related transactions. In addition, the bill authorizes $350 million in military aid to address alleged Russian involvement in eastern Ukraine and authorizes non-military aid to Ukraine. The legislation signals a possible further escalation of sanctions already imposed by the U.S. targeting certain Russian government officials, economic sectors, and individuals or businesses targeted for their connection to the regime. For background information on past sanctions involving Ukraine and Russia, see here.
Key Sanctions Provisions:
- Defense sector: Within 30 days of the legislation’s enactment, the President is required to impose at least three sanctions measures (described below) on Rosoboronexport, the Russian state agency responsible for the import and export of defense and dual-use products, technology, and services. Upon or after 45 days of the legislation’s enactment, the President is alsorequired to impose at least three sanctions measures on foreign entities the President determines are owned or controlled by the Russian government or Russian nationals that knowingly manufacture, sell, transfer, or assist in the transfer of defense articles transferred into Syria, Ukraine, Georgia and Moldova (or certain other countries if the President makes a required determination related to such additional countries) without the consent of the internationally recognized government of that country. The sanctions measures must also be applied to those entities that knowingly provide financial, material, or technological support to an entity described above.
- Energy sector: Upon or after 45 days of the legislation’s enactment, the President may impose at least three sanctions measures (described below) on foreign persons that the President determines have knowingly made a significant investment in a special Russian crude oil project. The bill also authorizes the President, via the Commerce Department’s Bureau of Industry and Security and the Treasury Department’s Office of Foreign Assets Control (“OFAC”), to impose additional licensing requirements or other restrictions on the export of items for use in the Russian energy sector. Finally, the bill also authorizes the President to prohibit investment in equity or debt, and impose an additional sanctions measure (described below) with respect to Gazprom, if the President determines that Gazprom is withholding significant natural gas supplies from NATO members and countries such as Ukraine, Georgia, and Moldova. The sanctions must be imposed within 45 days of such determination.
- Types of sanctions measures specified in the bill:
- Denial of credit by the Export-Import Bank
- Prohibition on procurement contracts with the U.S. Government
- Arms export ban
- Dual-use export ban
- Prohibition on dealings in property of sanctioned person (i.e., asset freeze/blocking measure)
- Prohibition on U.S. banking transactions that involve interest of sanctioned person (effectively cutting of the sanctioned person from accessing the U.S. financial system including for payment processing in U.S. currency)
- Prohibition on investment in new equity or new debt of sanctioned person issued after the date when the sanctions are impose (this measure targets debt longer than 30 days maturity for defense sector and longer than 90 days maturity for energy sector)
- Exclusion from U.S. and visa revocation
- Additional sanctions on executives of sanctioned entities (i.e., any of the above sanctions measures that could apply to individuals, including the visa ban, asset freezing and other measure
- The legislation includes exceptions to the sanctions: for example, it specifies that the President does not have the authority to impose sanctions on the import of goods, procurement that is essential to national security, or certain pre-existing contracts as well as certain spare parts/components that are essential to U.S. products or production and routine servicing and maintenance of U.S. products to the extent alternative sources are not readily available (these parts/components and servicing are not limited to pre-existing contracts). Food, medicine and medical devices are also covered by the exception (not limited to pre-existing contracts). The bill also provides for certain national security waivers.
- Sanctions on Foreign Financial Institutions: The President mayimpose sanctions on foreign (non-U.S.) financial institutions that facilitate certain defense- and energy- related transactions or that facilitate “significant” financial transactions on behalf of any Russian SDN designated by OFAC pursuant to the Executive Orders issued in connection with the crisis in Ukraine. The bill does not define the term “significant financial transaction” but OFAC likely would apply the definition from the Iranian Financial Sanctions Regulations, 31 CFR Part 561, because it references those regulations for purposes of the definition of the term “foreign financial institution”. With respect to transactions on behalf of Russian SDNs, the provision may be triggered on or after 180 days of the legislation’s enactment. The sanction measure that would be imposed against a foreign financial institution is a prohibition on the opening, and a prohibition or strict condition on maintenance, of a correspondent or payable-through account in the U.S. by the foreign financial institution (essentially, cutting off such foreign financial institution from the ability to process USD transactions). This provision also includes a national security waiver.
Provisions Authorizing U.S. Assistance to Ukraine:
- Military aid: The legislation also authorizes the President to provide a total of $350 million in defense articles, services and training to assist the government of Ukraine in reestablishing sovereignty over the next three years. The weapons listed include anti-tank and anti-armor weapons, crew weapons and ammunition, counter-artillery radars, fire control, range finder, and optical and guidance and control equipment, tactical troop-operated surveillance drones, and secure command and communications equipment. The bill requires the President to submit a report to certain congressional committees detailing the plan to provide the above within 60 days of the legislation’s enactment.
- Nonmilitary aid: In addition to military aid, the bill instructs the President to provide nonmilitary aid to Ukraine within specified timeframes, including assistance to protect internally displaced people, to bolster the defense sector, to address the energy crisis, and to strengthen civil society. The bill also requires the U.S. Chairman of the Broadcasting Board of Governors to submit a plan to expand broadcasting in former Soviet countries, prioritizing Ukraine, Georgia, and Moldova. The State Department was also authorized to spend a total of $60 million over three years to foster civil society and democracy organizations in Russia. Finally, the legislation requires the President to submit a report to Congress relating to Russia’s violation of the Intermediate-Range Nuclear Forces Treaty within 90 days of the legislation’s enactment and every 90 days thereafter.
Response to the Legislation:
White House press secretary Josh Earnest told reporters that he expected President Obama to sign the legislation by the end of this week, saying the law preserved the President’s flexibility to carry out the strategy. Earlier this week, Earnest had declined to comment on whether the President would ultimately sign it, stating that the administration wanted to ensure that the U.S. and Europe were coordinating their efforts, and that any sanctions would be effective and minimize harm to U.S. and European companies. The administration had expressed concerns about earlier versions of the bill, saying it might undermine cooperation between the U.S. and its allies toward Russia.
Reaction by Russia was negative. Russia’s Foreign Ministry condemned the bill as “overtly confrontational” and said, “undoubtedly, we will not be able to leave this without a response.” In response to past sanctions, Russia has imposed import bans on certain U.S. and EU products, and lowered the percentage of ownership that foreign persons can hold in Russian media companies.
Additional designated persons and entities subjected to asset freeze on 29 November 2014:
On 29 November 2014, the EU published the names of 13 people and 5 entities newly included on the lists of those subject to asset freeze and travel bans. These individuals and entities are said to have been involved in the recent and disputed elections in eastern Ukraine. The number of persons subject to EU asset freeze is now 155. This includes 23 individuals included for human rights violations and 132 individuals included for violations of Ukraine's territorial integrity. The number of listed entities is 28.
Changes made to the EU trade and financial sanctions on 6 December 2014:
On 6 December 2014, Council Regulation 1290/2014 introduced several clarifications and amendments to the EU Russia sanctions principally related to trade restrictions and the financial restrictions.
Dual-use goods and services
Ancillary contracts necessary for the execution of grandfathered contracts concluded before 12 September 2014 are carve out. Assistance necessary for the maintenance and safety of existing capabilities within the EU is also excluded from the prohibitions.
Oilfield equipment and services
- It is clarified that restrictions apply to Russia's Exclusive Economic Zone and its Continental Shelf.
- Definitions are provided for:
- "Deep sea" = deeper than 150 meters;
- "Arctic" = north of the Arctic Circle;
- "Shale" = projects that have the potential to produce oil from shale formations through hydraulic fracturing, but not oil exploration or extraction of oil from non-shale reservoirs through shale formations.
- The following additional carve-outs are provided:
- Ancillary contracts necessary for the execution of grandfathered contracts concluded before 12 September 2014.
- Export of Annex II equipment and related services is permitted when it is necessary to prevent or mitigate an event likely to have a serious and significant impact on human health and safety or the environment. In such a case, there is an obligation to inform the authorities and provide a justification within 5 days of making such an export.
- The definitions of certain Annex II equipment have been amended.
- The prohibition to provide loans with a maturity of more than 30 days to entities listed in Annexes III, V and VI is extended, and now also applies to loans for non-restricted imports or exports between the EU and Russia. These loans are still permitted for non-restricted trade between the EU and a third state.
- The exception for contracts concluded prior to 12 September 2014 is clarified with the following conditions:
- All terms to the contract were agreed and were not modified on or after 12 September 2014.
- A contractual maturity date for repayment in full was fixed prior to 12 September 2014.
EU is to introduce new sanctions against Crimea on 18 December 2014:
On 15 December 2014, Federica Mogherini, the EU foreign policy chief, announced that the EU has agreed to impose new sanctions against Crimea. These are likely to be announced on December 18. Ms Mogherini also confirmed that the EU will never recognize Crimea's accession to the Russian Federation. This is a timely move as the majority of the current EU measures in place introducing sanctions against Crimea are due to be reviewed before December 31.