On December 18, President Barack Obama signed the Ukraine Freedom Support Act of 2014 (UFSA) into law. Passed by the Congress in response to Russia’s support of the pro-Russian insurgency in eastern Ukraine, it authorizes expanded sanctions on Russia and the provision of certain types of weapons to the government in Kiev. This new wave of potential sanctions places even more pressure on Russian President Vladimir Putin amid dropping global oil prices and the fall in the value of the Russian ruble. On December 15, Russia’s central bank raised its key interest rate from 10.5 to 17 percent, the largest single increase since 1998 and the sixth increase this year.

The UFSA contains provisions aimed at the Russian defense and energy sectors, as well as at foreign financial institutions engaged in certain transactions involving Russia. The enhanced measures target the flow of weapons to pro-Russian separatists and impose sanctions against the sale or transfer of military equipment to Ukraine, Georgia, Moldova, and Syria, without the consent of the applicable country’s government.

Energy and Defense Sector Sanctions

The USFA provides for:

• Mandatory sanctions to be imposed, within 30 days, on Rosoboronexport, a major Russian defense exporter, unless waived or excepted;
• Unless waived or excepted, mandatory sanctions to be imposed, within 45 days, on entities that the President determines are either:
  • Russian-owned or -controlled entities that knowingly manufacture, sell, transfer, or broker the transfer of defense articles to Ukraine, Georgia, Moldova, Syria, or other designated countries without authorization from the internationally-recognized governments of those countries; or
  • An entity that knowingly assists, sponsors, or provides financial, material, or technological support for, or goods or services to, or in support of, such entities engaged in those activities;
• Discretionary sanctions to be imposed within 45 days against foreign persons determined to make “significant investments” in energy projects for the extraction of oil from Russian deepwater, Arctic offshore locations, or shale formations.
• Contingent sanctions to be imposed on Gazprom within 45 days of the President determining that Gazprom is withholding significant natural gas supplies from NATO member countries or from countries such as Ukraine, Georgia, or Moldova.
• Authorization to the Department of Commerce and the Office of Foreign Assets Control to extend licensing requirements or restrictions on the export or reexport of items for use in the Russian energy sector, including equipment used for tertiary oil recovery.

The UFSA provides various sanctions options that may be imposed, as described above, including limiting assistance from the US Export-Import Bank; prohibiting the heads of any executive agency from contracting to procure any goods or services from a sanctioned party; prohibiting the export of defense articles and dual-use items; blocking property interests through, for instance, designation as a “Specially Designated National”; banning transfers of credit and payments through the US banking system; banning investments or dealings in a sanctioned party’s debt or equity; and banning visas for sanctioned individuals or executives of sanctioned entities.

The legislation also includes exceptions to the sanctions and certain national security waivers. The President does not have the authority to impose sanctions on the importation of goods, procurement essential to national security, or certain preexisting contracts. Contracts—not only preexisting contracts—for certain spare parts and components and for food, medicine, and medical devices are also excepted from the imposition of sanctions.

Penalties for violations of the energy and defense sector sanctions can be severe—up to 20 years in jail and/or a $1 million fine for criminal violations, and up to the greater of $250,000, or twice the value of the transaction for civil violations.

Foreign Financial Institution Sanctions

The UFSA also provides for discretionary sanctions against foreign financial institutions that knowingly:

• Engage in significant transactions involving entities designated under any of the above listed energy and defense sanctions (excluding Rosoboronexport), or
• Facilitate, on or after 180 days from enactment, significant financial transactions involving Russian Specially Designated Nationals designated under the Russia/Ukraine-related-sanctions regime.

The sanctions for such foreign financial institutions involve limitation or complete prohibition on opening or maintaining correspondent or payable-through accounts in the United States, effectively excluding such institutions from the US banking system.

Impact of the New Legislation

The Obama Administration had expressed concerns about earlier versions of the bill that it viewed as possibly compromising US relations with its allies. The legislation “includes some sanctions language that does not reflect the consultations that are ongoing,” White House spokesman Josh Earnest stated at a daily news briefing. “That said, because it does preserve the President’s flexibility to carry out the strategy, he does intend to sign the bill.” Now that the bill is enacted, though, most of the measures will not go into effect immediately because the President or executive agencies must determine that certain entities fit within the criteria for sanction. In his statement, President Obama emphasized that “the Administration does not intend to impose sanctions under this law, but the Act gives the Administration additional authorities that could be utilized, if circumstances warranted.”

Not surprisingly, reaction in Russia has been largely negative, with Russian Foreign Minister Sergei Lavrov branding the new sanctions as hostile and overly confrontational. According to the foreign ministry, Russia’s response will depend on the “practical application” of the sanctions and whether they go into force. In response to previously implemented measures, Russia imposed bans on imports of certain US and EU products and lowered the percentage of ownership foreign persons may hold in Russian media companies.

To view the text of the Ukraine Freedom Support Act of 2014 – H.R. 5859, click here.

President Obama Imposes Trade/Investment Embargo on Crimea

On December 19, the President issued an Executive Order imposing a trade/investment embargo on Crimea. These actions were taken under existing authority and are not related to the newly-passed legislation. The Order prohibits the following activities:

• New investment in the Crimea region of Ukraine by a United States person, wherever located;
• The importation into the United States, directly or indirectly, of any goods, services, or technology from the Crimea region of Ukraine;
• The exportation, reexportation, sale, or supply, directly or indirectly, from the United States or by a United States person, wherever located, of any goods, services, or technology to the Crimea region of Ukraine; and
• Any approval, financing, facilitation, or guarantee by a United States person, wherever located, of a transaction by a foreign person where the transaction by that foreign person would be prohibited if performed by a United States person or within the United States.

On that day, the Office of Foreign Assets Control (OFAC) also added 24 new individuals and entities to the list of Specially Designated Nationals in connection with their activities related to the situation in Ukraine. Finally, OFAC issued Ukraine General License 4, which authorizes, in certain cases, the (re)exportation of agricultural commodities, medicine, medical supplies, and replacement parts for medical supplies to the Crimea region.