In response to Russian actions in Ukraine, the United States has imposed progressively stronger sanctions against Russia over the past several months, both by legislative and by executive action. The latest step was taken on December 13, 2014, when Congress unanimously passed the Ukraine Freedom Support Act of 2014 (the Act).1 The Act targets elements of Russia’s defense, energy, and financial sectors. The Act also targets foreign financial institutions engaged in certain transactions either with Specially Designated Nationals (SDNs) or with certain Russian defense or energy interests, as well as significant foreign investors in Russian crude oil projects. President Obama, while expressing some misgivings, signed the Act into law on December 18. While early indications from the White House are that the President does not immediately intend to make use of the authority the law grants him, he has left open the possibility of taking swift action should circumstances warrant.
With respect to Russia’s defense and energy sectors, the Act specifies a “menu” of nine possible sanctions that may be imposed on the individuals or entities specified, and requires that the President choose from these possible sanctions when implementing the law.
The individuals or entities subject to sanctions include:
- Rosoboronexport. The President is required to impose three of the possible sanctions against Rosoboronexport, a Russian state-owned exporter of weapons and other military items, within 30 days of the enactment of the Act.
- Any entity—owned or controlled by the Russian government or by Russian nationals—that knowingly manufactures, sells, transfers, brokers, or assists with the transfer of defense articles into Ukraine, Georgia, Moldova, Syria, or any other country designated by the President. The President is required to impose three of the possible sanctions against these entities, and against anyone that knowingly assists or provides support for these activities.
- Foreign persons that knowingly make significant investments in Russian crude oil projects in Russian shale formations, Russian Arctic offshore locations, or certain offshore areas in Russia’s exclusive economic zone. The Act grants the President the authority to impose three or more of the specified sanctions against these persons, but does not require that the President do so. This language was a change from previous versions of the legislation, which required that the sanctions be imposed.
- Gazprom. The Act seeks to prevent Gazprom from cutting energy supplies to much of Europe. If the President determines that Gazprom is withholding natural gas from NATO members or Ukraine, Georgia, or Moldova, the Act requires that the President prohibit United States persons from dealing in the company’s new equity or new debt with maturity over a specified period. The Act also requires that the President impose at least one additional sanction from those specified.
- The Act also grants the President the authority to impose additional requirements for the licensing of equipment used in Russia’s energy sector.
The possible sanctions from which the President must choose are the following:
- Denial of Export-Import Bank assistance for exports to sanctioned persons;
- Denial of procurement contracts with US executive agencies;
- Prohibitions on the export of defense articles or services to those sanctioned;
- Denial of export licenses;
- Prohibitions on property transactions in the United States;
- A prohibition on access to the US banking system;
- Prohibitions on dealings in debt or equity of those sanctioned;
- Denials and revocations of United States visas and exclusion from United States territory for sanctioned individuals; and
- For the principal executive officers of sanctioned entities, any of the foregoing sanctions that can be imposed on individuals.
There are a number of instances in which the President may waive the required sanctions against entities in the defense and energy sectors. These waivers may be invoked in instances in which the entity being sanctioned is the provider of important defense articles or services to the United States. Additionally, if the President determines that a waiver of the sanctions is in the country’s national security interests, he may grant a waiver—but must notify Congress of his reasons for doing so. Given the political implications of granting a waiver, and the attempts of some in Congress to eliminate the President’s waiver authority in other sanctions regimes,2 it remains to be seen whether the waiver authority granted in the Act will be invoked.
The Act also authorizes the President to prohibit the opening of or otherwise to restrict US correspondent or payable-through accounts of foreign financial institutions that engage in significant defense or energy transactions with sanctioned persons or that facilitate significant financial transactions for Russian SDNs. Any foreign financial institution that knowingly engages in significant transactions with the Russian entities that deal in the transfer of defense articles into Ukraine, Georgia, Moldova, or Syria is subject to this sanction, as is any foreign financial institution that engages in significant transactions involving the Russian crude oil projects or Gazprom’s withholding of natural gas to European countries. Finally, foreign financial institutions that knowingly facilitate financial transactions of Russian SDNs also face potential restrictions on their US correspondent and payable-through accounts.
The Act is the latest salvo in United States sanctions against Russia. While these latest sanctions are targeted against specific sectors of the Russian economy, they have the potential to be far-reaching. Companies and financial institutions that deal in the sectors targeted should assess the law’s possible effects on their businesses and should pay close attention to the executive branch’s application of its new authority. The Act will certainly not be the last word in the US government’s response to the Russian actions in Ukraine, especially considering the Republican control of both Houses of Congress beginning in January 2015.