New Sanctions on Ukraine/Russia, Crimea, and Venezuela: What Companies Need to Know

Last week was one of the busiest in recent memory for sanctions developments. After first announcing major relaxations in U.S. sanctions on Cuba earlier in the week, President Obama on Thursday signed into law new sanctions which substantially expand his existing authorities against Russia for its role in destabilizing Ukraine. Also on Thursday, the EU enacted new sanctions on Crimea, a move quickly followed by the U.S. on Friday. At the same time, Canada expanded both its Russian and Ukrainian sanctions lists and expanded its sectoral sanctions on Russia. Finally, President Obama signed legislation enacting a new sanctions regime targeting alleged human rights violations in Venezuela and threatened to (re)add North Korea to the list of State Sponsors of Terrorism.

I. New U.S. and Canada Sanctions on Ukraine and Russia

1. New U.S. Legislated Sanctions: The Ukraine Freedom Support Act
2. Canada's Expanded Russia and Ukrainian Sanctions

II. New U.S. and EU Sanctions on Crimea

1. The U.S. Effectively Imposes an Embargo
2. The EU Adopts Stricter Export and Import Restrictions

III. The U.S. Enacts a New Sanctions Program Targeting Venezuela

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I. New U.S. and Canada Sanctions on Ukraine and Russia

Late last week, the United States and Canada both increased sanctions on Russia and the Ukraine.

(a) New U.S. Legislated Sanctions: The Ukraine Freedom Support Act

On Thursday December 18, President Obama signed the Ukraine Freedom Support Act of 2014 (UFSA). The Administration had opposed the strict provisions in the UFSA for several months, but after negotiations led to a removal of the strictest sanctions and an increase in the president's implementing discretion, he agreed to sign it. 

Upon signing, the president made clear that the United States had no intention of utilizing the new authority in the short term. According to the president, the effectiveness of the current sanctions regime has been the result of close collaboration with the EU and other allies. The president insisted that he will continue that coordination.

In brief, the UFSA greatly expands the president's existing authority to sanction U.S. persons transacting in the Russian energy, defense, and financial sectors. It extends similar prohibitions and compliance obligations to non-U.S. persons. A number of non-sanctions measures – including the authorization and funding of lethal aid to Ukraine, an approach the president has to date opposed – are also included. 

The UFSA contains a broad termination authority, permitting the Administration to terminate the sanctions provided the president certifies to Congress that the Russian Federation "has ceased ordering, controlling, or otherwise directing, supporting, or financing, significant acts intended to undermine the peace, security, stability, sovereignty, or territorial integrity of Ukraine, including through an agreement between the appropriate parties." Before the final negotiations, the termination authority had required a certification that pertained to Crimea, Moldova, and Georgia as well.

More specifically, the UFSA provides as follows:

Defense Sector Sanctions:

The president "shall" impose three or more sanctions (described below) on:

• Rosoboronexport - Russia's intermediary agency responsible for the import/export of its defense and dual-use end products; and
• Other Defense Sector Entities (Russian producers, transferors, or brokers of defense articles) owned by the Government of Russia or a Russian person, that takes any of the following actions: (1) knowingly manufacture, (2) transfer, or (3) broker or otherwise assist in the transfer of defense articles into Syria, Ukraine, Georgia, or Moldova without the consent of their governments, or that (4) assist, sponsor, or provide financial, material, or technological support for any person undertaking (1)-(3).

Energy Sector Sanctions:

• Extension of Sanctions to Non-U.S. persons - The president "may" impose sanctions on a non-U.S. person who "knowingly makes a significant investment in a special Russian crude oil project" including extracting crude oil from Russian deep-water (greater than 500 feet), Arctic offshore, or shale formations in Russia. 
• New Licensing Requirements - The legislation further authorizes the Departments of Commerce (BIS) and Treasury (OFAC) to impose additional licensing requirements or other restrictions on the (re)export of items "for use in the energy sector" in Russia, including for "tertiary oil recovery."
• Conditional Sanctions on Gazprom: if the president determines that Gazprom is withholding significant natural gas supplies from member countries of the North Atlantic Treaty Organization, or further withholds significant natural gas supplies from countries such as Ukraine, Georgia, or Moldova, the president "shall", not later than 45 days after making that determination, impose a prohibition on investment in equity or debt (U.S. Directive 1) and at least one additional sanction described below with respect to Gazprom.
  • Currently Gazprom is subject to sectoral sanctions by the U.S. under Directive 4, the prohibition on participation in "special" oil projects.

Financial Sector Sanctions:

• The president "may" impose sanctions on a foreign financial institution (FFI) in two circumstances if the FFI knowingly facilitated a significant transaction: (1) involving the types of defense sector and energy sector activity described above; or (2) on behalf of any Russian person identified by OFAC on the list of Specially Designated Nationals (SDN List) for its role in the Ukraine crisis. The potential sanctions include a prohibition on the opening, and restrictions on the maintenance of, a correspondent or payable-through accounts in the United States.

The potential sanctions for the Defense and Energy sectors are similar to those imposed by the Comprehensive Iran Sanctions and Divestment Act of 2010 (CISADA). Specifically, the president is provided a list of potential prohibitions on:

• Any form of Export-Import Bank Assistance.
• U.S. government procurement by non-U.S. persons.
• (Re)export of items controlled under the International Traffic in Arms Regulations (ITAR).
• (Re)export of dual-use items subject to the Export Administration Regulations (EAR).
• Transactions in property and full blocking sanctions.
• Any financial transaction subject to U.S. jurisdiction.
• Investment in equity or debt of the sanctioned person (similar to Directives 1-3 under current sectoral sanctions).
• Travel to the United States or receipt of a U.S. visa.
• Similar prohibitions (including blocking sanctions, and visa bans) on Principal Executive Officers of any sanctioned person.

The law also includes a number of non-sanctions measures including: (1) increased military assistance for the Government of Ukraine; (2) expanded non-military assistance for Ukraine; (3) Expanded nonmilitary assistance for Ukraine; (4) Expanded broadcasting in countries of the former Soviet Union; (5) Support for Russian democracy and civil society organizations; and an (6) demand that Russia eliminate the military systems that constitute its violation of its obligations under the Intermediate-Range Nuclear Forces (INF).   

(b) Canada's Expanded Russia and Ukraine Sanctions

Following suit, late last Friday, Canada also expanded its existing sanctions on Russia and the Ukraine in several respects. First, it added 11 new individuals to its Russia-related sanctions and nine new individuals to its Ukraine-related sanctions; all 20 individuals had been previously designated by the EU and/or the United States.

Canada also expanded its existing sectoral sanctions on Russia, expanding the prohibitions on new "debt" or "equity" and implementing export controls related to products for "unconventional" oil and gas exploration and production for the first time:

• Expansion of the Definition of New Debt: Canada expanded its existing prohibition on new "debt." Previously, this had covered "bonds, loans, or debentures." Now the definition has been expanded to also cover "extensions of credit, loan guarantees, letters of credit, bank drafts, bankers' acceptances, discount notes, treasury bills, commercial paper and other similar instruments." These changes affect both Canada's existing restrictions on financial sector (30 days) and energy sector (90 days). 
• Expanded Definition of New Equity: Canada expanded its definition of "new equity." Previously this was defined as dealing in "capital funding through the transaction of shares in exchange for an ownership interest…." Now, it has been expanded to a prohibition on "transact[ing] in, provide financing for or otherwise deal in new securities, including shares or any other ownership interest…" 
• Expanded Energy Sector Restrictions:  Previously, Canada did not maintain a prohibition on transactions involving "unconventional" oil exploration and production. Canada has now added such a restriction, bringing its regime in line with those of the U.S. and EU. Specifically, Canada has now prohibited any person in Canada, or Canadian outside of Canada, from exporting, selling, supplying, or shipping certain enumerated goods (Column 1 of Schedule 4) to Russia for use in: (1) offshore oil exploration or production at a depth greater than 500 m; (2) oil exploration or production in the Arctic; (3) shale oil exploration or production.  Services in support of these exports are also prohibited.

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II. New U.S. and EU Sanctions on Crimea

On December 18-19, the U.S. and EU announced coordinated measures substantially expanding their current sanctions on the Crimea and imposing new prohibitions on investment, imports, and exports.

(a) The United States Imposes an Effective Embargo on the Crimea

On December 19, President Obama signed an (as-yet-unnumbered) Executive Order (EO) expanding sanctions on Crimea. The sanctions are intended to parallel those issued by the European Union (discussed below) from the day prior, but in many ways go further and include the following prohibitions:

• Prohibits Investment – Prohibition on new investment in the Crimea region of Ukraine ("Crimea") by a U.S. person.
• Prohibits U.S. Imports – Prohibition on importation into the United States, directly or indirectly, of any goods, services, or technology from Crimea. 
• Prohibits U.S. Exports – Prohibition on exportation, re-exportation, sale, or supply from the United States, or by a U.S. person, of any goods, services, or technology to the Crimea. 
• Prohibits Facilitation / Approval / Financing – Prohibition on any approval, financing, facilitation, or guarantee by a U.S. person or a transaction by a non-U.S. person where that transaction would be prohibited for a U.S. person or in the United States.  
• New Designation Authority – The EO provides OFAC with new designation criteria including for any person determined: (i) to operate in the Crimea; (ii) to be a leader of an entity operating in Crimea; (iii) to be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to this order; or (iv) to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person whose property and interests in property are blocked pursuant to this order. 
• 24 New Designations – Simultaneously, OFAC utilized its pre-existing authority (EO 13660) – NOT its new authority – to designate 24 persons (17 individuals and 7 entities). Of particular importance, the U.S. added "Marshall Capital Partners" a Russian-based investment fund. Three of the other individuals and three of the entities had not been designated earlier by the EU. They are:
  • The Night Wolves biker group and its leader, Aleksandr Zaldostanov, known as the "The Surgeon."
  • Oplot, one of the militias that is attempting to assert control over the Donetsk and Luhansk regions of Ukraine.
  • Petro Savchenko and the Ukrainian accounting firm Profaktor (because of his ownership or control).
  • Dmitry Neklyudov, who was appointed "deputy minister of interior of the so-called Republic of Crimea on May 5, 2014.
• New General License – Finally, OFAC issued a new general license (General License No. 4) which authorizes the exportation or re-exportation of agricultural commodities, medicine, medical supplies, and replacement parts to Crimea.  The General License is subject to the same exclusions (e.g., certain agricultural products, certain medicines, and certain military/law enforcement end users) as are found in similar general licenses for the Iran embargo authorized under the Trade Sanctions Reform Act (TSRA).

(b) New EU Sanctions on Crimea

The previous day (Dec. 18), the European Union similarly increased its sanctions on Crimea by implementing the following:

• Prohibited New Investment – The EU prohibited the acquisition of any ownership in real estate, any shares or ownership or control of entities, creating a joint venture, or providing investment services related to Crimea. The EU exempted obligations arising from contracts concluded before December 20, 2014 (provided the EU is notified in advance).
• Prohibited Financing – The EU prohibited the grant of any loan or credit or other financing to an entity in Crimea.
• Expanded Export Prohibition – In contrast to the United States, the EU did not impose a full export embargo, but did expand its pre-existing list of prohibited exports to Crimea. These prohibitions include certain products useful in the transport, telecommunications, energy, or exploration and production for oil, gas, or mineral resources sectors. The list if provided in Annex II to the EU regulation. The EU exempted obligations under pre-existing contracts until March 21, 2015, provided the competent authority is notified in advance.
• Prohibited Services Related to Infrastructure – The EU prohibited the provision of technical assistance, brokering, construction, or engineering services, relating to infrastructure in Crimea in the transport, telecommunications, energy, or exploration and production for oil, gas, or mineral resources sectors.
• Prohibited Services Relating to Tourism – The EU prohibited the provision of services directly related to tourism activities in Crimea. This includes a prohibition on EU cruise ships stopping at certain Crimean ports. 

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III. The U.S. Enacts a New Sanctions Program Targeting Venezuela

In response to protests earlier this year that left more than 40 people dead, on December 18, 2014 President Obama signed the "Venezuela Defense of Human Rights and Civil Society Act of 2014 (S. 2142) imposing sanctions on the country. Venezuelan President Maduro has strongly opposed the legislation, which he describes as "insolent imperialist sanctions."

In effect, the legislation provides the president with new authority under the International Emergency Economic Powers Act (IEEPA) to establish a list-based targeted blocking sanctions program, which includes exclusion from the U.S. (visa bans).

Specifically, the president "shall" impose sanctions on any non-U.S. person, including current and former officials of the Government of Venezuela, that he determines have:

• Perpetrated, or are responsible for ordering or directing, significant acts of violence or serious human rights abuses in Venezuela against persons associated with the antigovernment protests;
• Ordered, or otherwise directed, the arrest or prosecution of a person in Venezuela, primarily because of the person's "legitimate exercise of freedom of expression or assembly;" or
• Knowingly materially assisted, sponsored, or provided "significant financial, material, or technological support for, or good or services in support of" the commission of (1) or (2).

The president has the authority to waive any aspect of these sanctions if the waiver is "in the national interest of the United States" and he submits a report to Congress. The sanctions will automatically terminate on December 31, 2016, a provision added during the Senate debate.