The United States announced new sanctions against the Venezuelan Government on August 25, 2017 that target the government’s ability to access U.S. debt and equity markets. The measures are intended to pressure Venezuelan President Nicolas Maduro to reverse policies widely viewed as repressing democratic processes and human rights in Venezuela. Under the new sanctions, U.S. persons are now prohibited from dealing in certain debt and/or equity instruments issued by, on behalf of, or for the benefit of the Venezuelan Government and its instrumentalities, including the state-owned Petroleos de Venezuela, S.A. (“PDVSA”).

The measures, which are similar in many respects to measures targeting certain Russian financial, energy, and defense companies under the Sectoral Sanctions Identification List (“SSI List”), represent a significant expansion of sanctions against Venezuela. Previously, sanctions against Venezuela were limited to the addition of certain prominent Venezuela politicians (including President Maduro) to the U.S. List of Specially Designated Nationals (“SDN List”). To mitigate the immediate effects of the measures on U.S. persons, the U.S. Government also announced a number of “general licenses” authorizing U.S. persons to engage in certain transactions that would otherwise be prohibited under the new measures – most notably, authorizing U.S. persons to continue to engage in transactions involving specified existing debt instruments issued by the Venezuelan Government and to wind down activities related to prohibited securities.

Given the complexities of the prohibitions and exceptions under the new sanctions, U.S. persons dealing in Venezuelan debt or equity instruments should closely assess the potential impact of the measures on their existing and anticipated holdings.

Scope of Prohibitions

Executive Order 13808 (the “Order”) restricts U.S. persons from engaging in any transactions related to:

• New debt with a maturity of greater than 90 days of PDVSA issued on or after August 25, 2017;
• New debt with a maturity of greater than 30 days, or new equity, of the Government of Venezuela issued on or after August 25, 2017 (other than new debt of PDVSA, which is subject to the 90 day threshold);
• Bonds issued by the Government of Venezuela prior to August 25, 2017 (though dealings involving many specified existing debt instruments of the Government of Venezuela are authorized under a general license, as described in more detail below); or
• Dividend payments or other distributions of profits to the Government of Venezuela from any entity owned or controlled, directly or indirectly, by the Government of Venezuela.

“U.S. persons” subject to these restrictions are defined to include any U.S. citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States. Such persons are prohibited from directly or indirectly engaging in the prohibited activities, including by facilitating any activities of non-U.S. persons in which the U.S. persons could not themselves engage in directly.

The restrictions on new “debt” and “equity” are similar to prohibitions set forth under the SSI List regarding Russia. As is the case under the SSI List, the terms are interpreted broadly. The scope of “debt” instruments affected by the measures includes bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper. The scope of “equity” instruments includes stocks, share issuances, depositary receipts, or any other evidence of title or ownership.

“Government of Venezuela” is defined to include any agency or instrumentality of the government and any entity owned or controlled by the government, including the Central Bank of Venezuela and PDVSA. Based on existing guidance from the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”), any entity 50% or more owned by PDVSA or the Government of Venezuela is considered to be subject to these restrictions. The term “control” is not defined, but OFAC has stated in other contexts that an entity can be considered to “control” an entity in which it holds less than a majority interest, particularly where the “controlling” entity holds a majority of seats on the board of directors of the entity or otherwise controls the actions, policies, or personnel decisions of the entity. U.S. persons therefore should exercise caution with respect to any entity in which the Venezuelan government holds any significant but minority ownership interest (such a joint venture in which the government owns a minority share but has significant managerial rights).

In Frequently Asked Questions accompanying the new sanctions, OFAC stated that the new prohibitions and related general licenses (discussed in more detail below) “are meant to prevent U.S. persons from contributing to the Government of Venezuela's corrupt and shortsighted financing schemes while mitigating market disruptions and harm to investors.” The United States reportedly was considering imposing measures that would have had even more significant effects on Venezuela, such as prohibitions on exports of light crude oil to Venezuela or imports of Venezuelan crude oil into the United States. Such measures also would severely impact U.S. businesses and investors, which is the likely reason why they have not yet been implemented.

Scope of Generally-Authorized Activities

OFAC has issued four general licenses that authorize U.S. persons to engage in certain activities that otherwise would be prohibited by the Order:

• General License 1, "Authorizing Certain Activities Necessary to Wind Down Existing Contracts," provides U.S. persons with a 30 day wind-down period (until September 24, 2017) to engage in all transactions and activities necessary to terminate contracts and other agreements that were effective prior to August 25, 2017 and are now prohibited under the new measures. Persons that conduct wind-down transactions under the general license must file a detailed report to OFAC within ten days describing the value and date of the transaction as well as the parties involved.
• General License 2, "Authorizing Certain Transactions Involving CITGO Holding Inc.," authorizes U.S. persons to engage in all transactions otherwise prohibited by the new measures provided that the only Government of Venezuela entities involved in the transactions are CITGO Holding, Inc. (“CITGO”, a U.S. entity that is wholly-owned by PDVSA) and any of its subsidiaries.
• General License 3, "Authorizing Transactions Related to, Provision of Financing for, and Other Dealings in Certain Bonds," authorizes all transactions related to specific Venezuelan bonds identified on the List of Authorized Venezuela-Related Bonds (an annex to the general license) or any other bonds issued by CITGO or other U.S. entities owned or controlled by the Venezuelan Government that would otherwise be prohibited by the new restrictions on dealings in any existing bonds of the Venezuelan Government. The list identifies approximately 75 existing debt instruments of the Venezuelan government and its agencies – U.S. persons who hold these bonds can continue to trade them. If an instrument does not appear in the authorized list, however – and we are aware of certain Venezuelan government bonds that do not appear to be covered – U.S. persons must sell off their holdings within the 30 day wind-down period and submit a report to OFAC.
• General License 4, "Authorizing New Debt Transactions Related to the Exportation or Reexportation of Agricultural Commodities, Medicine, Medical Devices, or Replacement Parts and Components,” authorizes U.S. persons to engage in transactions related to the provision of financing for, and other dealings in new debt related to the exportation or reexportation of agricultural commodities, medicine, medical devices, or replacement parts and components for medical devices to Venezuela, or to persons in third countries purchasing specifically for resale to Venezuela (as long as no restrictions apply under other U.S. regulations, such as the Export Administration Regulations).

OFAC typically issues clarifying regulations and/or official guidance after significant expansions of U.S. sanctions. Dechert will continue to monitor developments and issue updates as necessary.