On December 18th, President Obama signed into law the “Ukraine Freedom Support Act of 2014,” authorizing stricter sanctions against Russia, and also increasing military and non-military assistance for Ukraine. Although the new law grants the President broad authority to take action against entities in the energy, banking and defense sectors, President Obama has already signaled that he does not intend to implement any of the new sanctions at this time. Low oil prices, combined with U.S. and European Union sanctions that are already in place, have led to a steep decline in the Russian ruble, which may obviate the need for harsher sanctions against Russia at the present time.
Nevertheless, the new law will have an immediate impact because of certainobligatory provisions, including helping the government of Ukraine develop (i) a short-term emergency energy assistance plan to address heating fuel and electricity shortages in the country, and (ii) medium- and long-term plans to increase energy production and efficiency to reduce Ukraine’s dependence on natural gas imported from Russia.
The key aspects of the new Ukraine-related sanctions and enhanced U.S. military and non-military assistance to Ukraine are set forth below.
Key Elements of the Ukraine Freedom Support Act
New Ukraine-Related Sanctions
The new law requires the President to impose three or more of the sanctions listed below on Rosoboronexport (Russia’s state-run arms exporter), and grants authority to, but does not require, the President to impose the same sanctions on the following types of entities in the energy, banking and defense sectors (collectively, including Rosoboronexport, the “Sanctioned Entities”):
- Russian entities that knowingly manufacture or sell, transfer or broker the transfer of defense articles into Syria, Ukraine, Georgia or Moldova without the consent of the government of the respective country,
- Any entity that knowingly assists, sponsors or provides financial, material or technological support for, or goods or services to, Rosoboronexport or any entity described in clause 1, and
- Non-U.S. persons determined to have made a significant investment in a “special Russian crude oil project” (defined as one intended to extract crude oil from the Russian Arctic, deep water and shale formations).
The President may designate additional countries as being of “significant concern” for purposes of clause 1, including countries such as Poland, Lithuania, Latvia, Estonia and the Central Asia Republics. Importantly, the President may also waive his right to implement or maintain any of these sanctions if he determines that the sanctions would be adverse to U.S. national security interests, or in certain other limited circumstances.
Should the President choose to utilize this new authority in the future, he may impose three or more of the sanctions listed below:
- Direct the U.S. Export-Import 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 a Sanctioned Entity,
- Prohibit any federal agency from entering into a procurement contract with a Sanctioned Entity,
- Prohibit the export, sale, lease, loan, grant or other means of any defense article or defense service, and the issuance of any license or other approval to a Sanctioned Entity under Section 38 of the Arms Export Control Act,
- Prohibit the issuance of or suspend any license for the transfer of any items to a Sanctioned Entity, the export of which is governed by the Export Administration Act and related regulations,
- Prohibit any person from (i) acquiring, withholding, transferring, transporting and exporting any property subject to U.S. jurisdiction, in which the Sanctioned Entity has any interest, (ii) dealing in or exercising any right with respect to such property, and (iii) conducting any transaction involving such property,
- Prohibit any transfers of credit or payments between, by, through or to any financial institutions, to the extent the transfers or payments are subject to U.S. jurisdiction and involve any interest of a Sanctioned Entity, and
- Prohibit U.S. persons from transacting in, providing financing for, or otherwise dealing in certain debt or equity of a Sanctioned Entity.
In addition to the sanctions listed above, the new law also grants the President broad authority to impose licensing requirements for, or other restrictions on, the export or re-export of any items for use in the Russian energy sector, including equipment used for tertiary oil recovery. Sanctioned Entities that are individuals, and principal executive officers of Sanctioned Entities that are companies, may also be denied a visa and excluded from the United States.
Gazprom, Russia’s top gas producer, was singled out in the new law. The President is authorized to prohibit U.S. persons from investing in or purchasing significant amounts of Gazprom equity or debt, and to impose an additional sanction on Gazprom from the list of approved sanctions if the President determines that the company is withholding significant amounts of natural gas from North Atlantic Treaty Organization (NATO) countries or countries such as Ukraine, Moldova or Georgia.
The new law also authorizes the President to restrict the ability of foreign financial institutions to conduct business with the U.S. banking system if they have engaged in (i) significant transactions with Sanctioned Entities that are subject to U.S. sanctions related to Russia’s energy or defense sectors, or (ii) knowingly facilitated a significant financial transaction on behalf of a Russian person included on the Office of Foreign Assets Control (OFAC) list of specially designated nationals and blocked persons.
Non-Military Assistance for Ukraine
In addition to efforts to aid internally displaced persons in Ukraine, the Ukraine Freedom Support Act requires the Secretary of State and certain other U.S. government entities to work with the Ukrainian government to develop a short-term emergency energy assistance plan to help Ukraine address potentially severe heating fuel and electricity shortages through the end of 2015. Such a plan will address the acquisition of short-term, emergency fuel supplies, infrastructure repair or replacement, and prioritizing the transportation of fuel to needy areas.
Under the short-term plan, the U.S. government entities are also authorized to support and invest in solutions for enabling Ukraine to secure energy safety during 2014 and 2015, including procuring and transporting emergency fuel supplies (including reverse pipeline flows from Europe), providing technical crisis planning assistance, repairing infrastructure, and repairing power equipment or facilities.
The new law also calls for the Secretary of State and U.S. government entities to help the Ukrainian government develop medium- and long-term plans to increase energy production and efficiency and reduce Ukraine’s dependence on Russian natural gas. These long-terms plans are supposed to include increased production from natural gas fields and other sources (including renewable energy) and modernizing oil and gas upstream infrastructure, among other solutions. The new law also includes a requirement that the Chairman of the Broadcasting Board of Governors create a plan to counter Russian propaganda.
Military Assistance for Ukraine
The President is now authorized to provide more than $350 million in military assistance to Ukraine over the next three years, including defense equipment, services and military training, for the purpose of “countering offensive weapons and reestablishing the sovereignty and territorial integrity of Ukraine.”
Potential Impact on the U.S. Business and Financial Community
As noted above, President Obama is unlikely to utilize his new authority under the Ukraine Freedom Support Act in the immediate future. Russia’s economy is in decline, and the European Union has not signaled its intent to promulgate its own set of parallel sanctions. Until the political and economic winds change, the required non-military assistance to Ukraine under the new law will likely be most relevant to U.S. firms. New opportunities may arise for companies in the renewable energy, traditional energy and infrastructure sectors, as the U.S. government works with partners in Ukraine to combat a short-term energy crisis and to shift Ukraine away from energy dependence on Russia.