On December 18, the President signed legislation passed by Congress that authorizes further sanctions on Russia.  The Ukraine Freedom Support Act of 2014 (UFSA) is aimed to assist “in restoring Ukraine’s sovereignty and territorial integrity” and to deter the Russian Government “from further destabilizing and invading Ukraine and other independent countries in Central and Eastern Europe, the Caucasus and Central Asia.” While the legislation authorizes a range of new sanctions on Russia’s defense and energy sectors as well as foreign financial institutions who engage in sanctionable transactions, it also grants the President significant discretion to waive both the industry-wide sanctions and specific transactions on national security grounds.

New Defense Sector Sanctions

The UFSA requires the President to impose sanctions on Rosoboronexport, a leading Russian defense firm.  It also permits the President to impose sanctions on Russian businesses that manufacture, sell, transfer or broker defense articles into Syria, Ukraine, Georgia and Moldova and potentially other countries designated by the President that may include Poland, Lithuania, Latvia, Estonia, and the Central Asia republics.  The legislation also permits the President to impose sanctions on any business that assists, sponsors, or provides financial, material or technical support for, or goods or services to or in support of Russian companies engaged in the above activity.

New Energy Sector Sanctions

The new legislation permits the President to impose sanctions on foreign persons who knowingly make a significant investment in special Russian crude oil projects which are defined to include projects in Russian’s exclusive economic zone in waters no more than 500 ft deep, in Russian Artic offshore locations, and shale formations located in Russia.  The Department of Commerce’s Bureau of Industry and Security (BIS) and Treasury’s Office of Foreign Assets Control (OFAC) are permitted to impose additional licensing requirements or other restrictions on the export or re-export of items for use in Russia’s energy sector, including equipment used for tertiary oil recovery.  The President can also prohibit equity or debt investment in, and impose additional sanctions on, Russian energy company, Gazprom, if he determines that the company is withholding significant natural gas supplies from NATO countries, Ukraine, Georgia, or Moldova.

Sanctions on Foreign Financial Institutions

Finally, foreign financial institutions can be prohibited from dealing with the U.S. banking system or face restrictions in their ability to conduct financial services in the United States if they facilitate any of the above sanctioned activity in the Russian defense or energy sectors or facilitate any transaction of behalf of any entity that has been designated under U.S. sanctions in connection with the crisis in Ukraine.

Range of New Sanctions

The President may impose a range of additional sanctions under the new legislation.  These include prohibitions on Export-Import Bank assistance, federal government procurement, arms and dual-use exports, and investment in the equity and debt of sanctioned companies.  The President can also block U.S. property and banking transactions, and deny U.S. visas and other U.S. entry documentation.  Finally, the President can impose all these sanctions on the principal executive officers of sanctioned companies.

There are a number of important exceptions.  The ability to block property transactions does not include the authority to impose sanctions on the importation of goods.  Also, the sanctions affecting the Russian defense and energy sectors will not apply to the procurement of defense articles or services under existing contracts including ancillary or incidental contracts for good, services or funding, necessary to give effect to such contracts so long as the President determines that it is in the national interest and (i) the foreign person to  which the sanctions would otherwise apply is the sole supplier of the defense article or services; (ii) such defense articles or services are essential; and, (iii) alternative sources are not easily or reasonably available;  or, that such defense articles and services are essential under defense coproduction agreements.

There are also exceptions for spare and component parts that are essential to U.S. products or productions and to routine servicing and maintenance of U.S. products to that extent that alternative sources are not readily or reasonably available.  There is also an exception for products, technology, and services  provided under agreements that are entered into before the date on which the name of a sanctioned person appears in the Federal Register.

Sanctions are Subject to Presidential Waiver and Termination

The legislation provides the President with significant discretion to waive both the industry-wide sanctions and specific transactions on national security grounds so long as he submits the reasons for his determination in a report to the appropriate congressional committees.  The sanctions under this legislation will ultimately terminate when the President certifies that the Russian Government 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”.

Conclusion

This legislation ratchets up sanctions on Russia by targeting the country’s energy, defense and finance sectors.  It has been reported that some U.S. companies have expressed concern about the potential impact of the legislation on U.S. trade with Russia but welcome the provisions that preserve the President’s flexibility in imposing the new measures.

*Update*

On December 19, 2014, the President signed an executive order that imposes economic restrictions similar to sanctions imposed by the European Union on December 18. The order prohibits U.S. companies and individuals from exporting or importing goods, services or technology to or from Crimea. Likewise, U.S. individuals or companies are prohibited from buying real estate or businesses in Crimea or finance Crimean companies.