This alert follows our previous alerts on the Russia/Ukraine sanctions.
U.S. Passes New Sanctions Authorizing Statute - Sends Russia Frigid End of Year Message
President Obama: U.S. will “review and calibrate” sanctions in response to Russia’s actions On December 18, 2014, President Obama signed into law the Ukraine Freedom and Support Act of 2014 (“the Act”), the latest move in a series of sanctions imposed on Russia by the United States and the EU over the past year (full coverage of the Russia sanctions can be found here). While the Act gives the president authority to implement new sanctions against Russia, President Obama has declined to enforce the new provisions at this time. The strategy behind this move is unclear, though it appears to be a “wait and see” approach with the hope that even just the threat of new U.S. sanctions will curb Russia’s destabilizing efforts in Ukraine and the wider Eastern Europe and Central Asia regions. It is also believed that the U.S. administration wants to continue to remain in lock-step with the EU and its imposition of sanctions against Russia.
The provisions of the Act are wide-reaching, and if he chooses to enforce them, would authorize the president to provide defense articles, services, and training to Ukraine; address humanitarian relief efforts for displaced persons; and encourage increased investment in Ukraine’s energy sector with decreased Ukrainian dependence on Russian energy sources. The Act also puts forth several key export controls and sanctions provisions that could be implemented against Russia.
Key Sanctions and Export Control Provisions
- Mandated Sanctions. The Act requires the president to impose three or more enumerated sanctions against Rosoboronexport, Russia’s state-owned exporter of defense articles. The Act also requires the president to impose three or more enumerated sanctions against any Russian entity that transfers or brokers the transfer to, or knowingly manufactures or sells defense articles transferred to, Syria, or into the territory of a “specified country” without its government’s consent. Those that provide financial, material or technological support to such entities are also subject to the sanctions. The Act defines “specified countries” as including Ukraine, Georgia, Moldova, or any other country of significant concern under the Act, such as Poland, Lithuania, Latvia, Estonia, and the Central Asia republics. Lastly, the Act directs the president to impose specified sanctions on Gazprom (Russian-controlled natural gas extractor) if the president finds that it is withholding significant natural gas supplies from North Atlantic Treaty Organization (NATO) member countries, or further withholds significant natural gas supplies from countries such as Ukraine, Georgia, or Moldova.
- Authorized Sanctions. The Act authorizes, but does not require, the president to impose certain sanctions targeting Russia’s energy sector. Under the Act, the president is authorized to impose sanctions on investors in Russian crude oil. The investor must have made a significant investment in a special Russian crude oil project to trigger the sanctions. The president is also authorized to impose additional licensing requirements on the export of items for Russia’s energy sector, including equipment used for tertiary oil recovery, as enforced by the Bureau of Industry and Security of the Department of Commerce (“BIS”), or the Office of Foreign Assets Control of the Department of the Treasury (“OFAC”).
- Restrictions on Foreign Financial Institutions. Under the Act, the president is authorized to impose a prohibition on opening, and a prohibition or the imposition of strict conditions on maintaining, in the United States, a correspondent account or a payable-through account by a foreign financial institution that knowingly engages in significant transactions involving sanctioned persons; or with respect to the Ukrainian crisis, facilitated a significant financial transaction on behalf of any Russian person included on the list of specially designated nationals and blocked persons maintained by the OFAC.
Looking Ahead: Russian Response to Authorizing Statute and New Sanctions Targeting the Crimea Region The Russian response after President Obama’s announcement was nothing short of defiant. Russian President Vladimir Putin decried the sanctions, and a Russian ministry statement released December 20 spoke of retaliatory measures. Given Russia’s reaction, it seems that enforcement of these sanctions and others may be imminent. Indeed, only one day after signing this bill into law, the President issued an Executive Order “Blocking Property of Certain Persons and Prohibiting Certain Transactions with Respect to the Crimea Region of Ukraine” (the “Crimea-related Executive Order”). In a letter issued by the White House Office of the Press Secretary, President Obama described the Crimea-related Executive Order as prohibiting:
- New investments by U.S. persons in the Crimea region of Ukraine
- Importation of goods, services, or technology into the United States from the Crimea region of Ukraine
- Exportation, reexportation, sale, or supply of goods, services, or technology from the United States or by a U.S. person to the Crimea region of Ukraine
- The facilitation of any such transactions.
The Crimea-related Executive Order expands on three previously issued Ukraine-related orders: Executive Order 13660 of March 6, 2014, Executive Order 13661 of March 16, 2014, and Executive Order 13662 of March 20, 2014. In line with previous Ukraine-related sanctions and sanctions-related executive orders of the modern era, the Crimea-related Executive Order contains an asset-blocking feature. Pursuant to this order, property and interests in property of any person may be blocked if determined by the Secretary of the Treasury, in consultation with the Secretary of State, that the person is:
- Operating in the Crimea region of Ukraine
- A leader of an entity operating in the Crimea region of Ukraine
- Owned or controlled by, or has acted or purported to have acted for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to the order, or
- Materially assisting, sponsoring, or providing 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 the order
The Crimea-related Executive Order also blocks such a designated person’s entry into the United States. Relatedly, on December 19, 2014, OFAC issued General License No. 4 “Authorizing the Exportation or Reexportation of Agricultural Commodities, Medicine, Medical Supplies, and Replacement Parts” to Crimea. The general license authorizes such exports from the United States or by a U.S. person, wherever located, to Crimea, or to persons in third countries purchasing specifically for resale to Crimea. Related transactions (e.g., making shipping and cargo inspections, obtaining insurance, receipt of payment, etc.) are also authorized. General License No. 4 is limited to EAR99 items, or items that would otherwise be designated as EAR99 if subject to the Department of Commerce’s Commerce Control List.
EU extends sanctions against Crimea and Sevastopol
On December 18, 2014, the EU extended the restrictive measures in place arising out of the annexation of Crimea and Sevastopol. Council Regulation (EU) No 1351/2014 of December 18, 2014 (the “Regulation”) further amends Council Regulation (EU) No 692/2014 (as first amended by Council Regulation (EU) No 825/2014).
These new restrictive measures came into effect December 20, 2014.
Executive Summary The scope of Article 2 of Regulation 692/2014 is significantly expanded by the Regulation. The Article had originally prohibited the import into the European Union of goods originating in Crimea or Sevastopol, and providing financing or financial assistance, as well as insurance and reinsurance related to the import of such goods.
In July, Regulation 825/2014 had extended the above to also prohibit investments in key sectors in Crimea and Sevastopol, including transport, telecommunications, energy and the exploitation of natural resources, and an export ban on key equipment and technology related to those sectors.
The EU has rounded off 2014 by extending the restrictive measures to provide a ban on all foreign investment in Crimea or Sevastopol; a prohibition on services directly related to the investment ban, as well as services related to tourism activities; and restrictions on goods in the sectors of transport, telecommunications, energy, and exploration of oil, gas and minerals.
Restrictions on foreign investment Article 2a introduces prohibitions on:
- Acquiring or extending any existing participation in the ownership of real estate located in Crimea or Sevastopol
- Acquiring or extending any existing participation in the ownership of any entity in Crimea or Sevastopol, including the acquisition in full of such entity or the acquisition of shares and other securities of a participating nature of such entity
- Granting or being part of an arrangement to grant any loan or credit, or otherwise provide financing – including equity capital – to any entity in Crimea or Sevastopol, or for the documented purpose of financing such entity
- Creating any joint venture in Crimea or Sevastopol or with an entity in Crimea or Sevastopol
- Providing investment services directly related to the activities referred to above
The Regulation provides an exemption for the execution of obligations arising from contracts concluded before December 20, 2014, or ancillary contracts necessary for the execution of such contracts, provided that the competent authority is informed at least five working days in advance.
Member State authorities may grant an authorisation for otherwise prohibited activities in very limited circumstances related to consular missions, organisations with international immunity, projects in support of health institutions, or appliances and equipment for medical use.
Restrictions on goods for use in the transport, telecommunications and energy sectors, and in the prospection, exploration and production of oil, gas and mineral resources Article 2b prohibits the sale, supply, transfer or export of goods listed in Annex II of the Regulation to any natural or legal person, entity, or body in Crimea or Sevastopol, or where such goods are for use in Crimea or Sevastopol. The preamble to the Regulation gives guidance on how to determine the “place of use.”
The prohibition extends to the provision of technical assistance, brokering services, financing and financial assistance for the listed goods and technology.
Note that these restrictions do not apply where there are no reasonable grounds to determine that the goods and technology or services in question are to be used in Crimea or Sevastopol. This highlights the importance of fully investigating proposed transactions, and obtaining sufficient end-user information.
An exemption is provided for the execution until March 21, 2015 of an obligation arising from a contract concluded before December 20, 2014, or by ancillary contracts necessary for the execution of such contracts, provided that the competent authority has been informed at least five working days in advance.
Again, Member States may grant an authorisation of otherwise prohibited goods or technologies in the same limited circumstances cited above.
Restrictions on involvement in infrastructure Article 2c prohibits the provision of technical assistance, or brokering, construction or engineering services directly relating to infrastructure in Crimea or Sevastopol, in the transport, telecommunications and energy sectors, and in the prospection, exploration and production of oil, gas and mineral resources. This prohibition is independent of the origin of the goods or technology.
An exception applies in the execution until March 21, 2015 of an obligation arising from a contract concluded before December 20, 2014, or by ancillary contracts necessary for the execution of such a contract.
Restrictions on the provision of services related to tourism activities Article 2d prohibits the provision of services directly related to tourism activities in Crimea or Sevastopol. In particular, any ship providing cruise services is prohibited to enter into or call at any port situated in the Crimean Peninsula and listed in Annex III to the Regulation. The listed ports include Kerch and Sevastopol, the commercial port authorities of which are already designated by the EU as subject to an asset freeze.
The prohibition applies to any ship flying the flag of a Member State, any ship owned and under the operational control of an EU owner, or any ship over which an EU operator has assumed overall responsibility for its operation.
The prohibition does not apply where a ship enters or calls at any listed port for reasons of maritime safety in cases of emergency. The competent authority must, however, be informed of the entry within five working days.
Notwithstanding the above, it is be permissible to execute an obligation arising from a contract or ancillary contract concluded before December 20, 2014, or ancillary contracts necessary for the execution of such contracts, provided that the competent authority has been informed at least five working days in advance.
Comments These latest amendments significantly extend the EU’s sanctions regime in Crimea and Sevastopol. However, the EU has sought to limit their applicability in line with its overarching aim that sanctions should, as far as possible, be targeted.
The preamble states, for example, that the sanctions should not be taken as prohibiting or restricting transit through Crimea or Sevastopol by EU parties, nor are they aimed at restricting the conduct of legitimate business with entities outside Crimea or Sevastopol, but which operate in those areas, where there are no grounds to determine that any goods or services in question are for use in Crimea or Sevastopol, or where any investments are not destined to enterprises or subsidiaries or affiliates under their control in Crimea or Sevastopol.
Nevertheless, the extension of the regime means that now more than ever, it is essential to carry out thorough due diligence in commercial dealings with parties in Crimea or Sevastopol, or that relate to projects or transactions taking place in those areas.
Client Alert 2014-344