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U.S. Imposes Economic Sanctions against Venezuela

joseph.jay@cwt.com's picture
Commentary by A. Joseph Jay

On August 24, 2017, The White House imposed a new round of economic sanctions against Venezuela.

In an Executive Order titled "Imposing Additional Sanctions with Respect to the Situation in Venezuela," the government levied restrictions intended 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" (see U.S. Treasury Department Office of Foreign Assets Control ("OFAC") FAQs on Sanctions and Corresponding General Licenses).

Specifically, the Executive Order bans transactions related to the following:

  • new debt with a maturity of longer than 90 days of Petroleos de Venezuela, S.A. ("PdVSA") (Venezuela's state-owned oil and natural gas company);
  • new debt with a maturity of longer than 30 days, or new equity, of the Government of Venezuela;
  • bonds issued by the Government of Venezuela before the effective date of the Executive Order;
  • 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; and
  • purchasing securities, directly or indirectly, from the Government of Venezuela, other than new debt with a maturity of less than or equal to 90 days (for PdVSA) or 30 days (for other Government of Venezuela debt).

OFAC also issued four General Licenses to allow for (i) a wind-down period for contracts and other agreements that were effective prior to the Executive Order's effective date; (ii) transactions involving CITGO Holding, Inc. (which is owned by PdVSA); (iii) dealings in certain specified Government of Venezuela bonds that would otherwise be prohibited; and (iv) all transactions that relate 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."

Commentary

joseph.jay@cwt.com's picture
A. Joseph Jay

Given that the focus of these new sanctions is on the buying and trading of Venezuelan debt and equity, the onus of compliance – and the risk of non-compliance – will fall largely on financial institutions. As a result, banks, funds and others in the financial services industry should review their current holdings and immediately put in place controls to ensure that there are no dealings in prohibited bonds, equity and other instruments.

In FAQs issued alongside the August 24 Executive Order, OFAC explains that the new sanctions apply to the Venezuelan government and its "property and interests in property," including entities owned 50% or more, directly or indirectly, by one or more Venezuelan government agencies. This means that restrictions applicable to the Venezuelan government also apply to companies that it owns 50% or more – even if the government's interest in those companies is not explicit or apparent. In addition, while U.S. firms can continue to disburse funds to Venezuelan government entities under revolving credit facilities – as long as the terms were contractually agreed prior to the sanctions effective date – it is now prohibited to roll over old debt with repayment terms that exceed the applicable tenure (i.e., 30 or 90 days).

As already noted, the Venezuelan government's primary U.S. asset, CITGO Holding, Inc., is exempted from the ban on dealings in equity and debt, and the sanctions do not directly prohibit the continued importation of Venezuelan crude oil into the United States. The Trump administration is well aware that extending sanctions to cover CITGO or Venezuelan oil imports would represent a significant escalation – and would have a major impact in the United States, as well as in Venezuela. For the time being, such a move does not appear imminent.

This comment was co-authored by James Treanor.

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