President to Sign Ukraine Freedom Support Act (with Turza Comment)

White House press secretary Josh Earnest confirmed that President Obama will sign the Ukraine Freedom Support Act of 2014. Congress passed the Act unanimously on December 13, 2014.

The bill gives the President the authority to expand U.S. sanctions significantly against the Russian Federation regarding its continued intervention in Ukraine. By allowing the President to impose sanctions directly against foreign entities, the bill marks a departure from the Administration's approach under various Ukraine-related Executive Orders whereby U.S. persons are prohibited from taking certain actions involving designated persons and entities. The bill permits the President to choose sanctions from a list that includes blocking property interests, prohibiting certain financial transactions and imposing visa bans, depending on the activities in which the sanctioned entity or person is engaged.

Sanctions Details

Defense Sector Sanctions

The bill requires the President to:

• Impose sanctions against the Russian defense firm Rosoboronexport within 30 days of the enactment of the bill.
• Impose sanctions within 45 days of the enactment of the legislation against Russian defense sector entities that knowingly (i) manufacture or sell defense articles transferred into Syria or into any other "specified" country without the consent of the "internationally recognized" government of that country; (ii) transfer defense articles into Syria or into any other "specified" country without the consent of the "internationally recognized" government of that country; or (iii) broker or otherwise assist in the transfer of defense articles into Syria or any other "specified" country without the consent of the "internationally recognized" government of that country.
• Impose sanctions against entities that knowingly assist, sponsor, or provide financial, material or technological support for, or goods or services in support of, Russian defense sector entities engaged in the actions described above.

The bill defines "specified country" to include Ukraine, Georgia and Moldova, and gives the President discretion to extend that designation to other countries of "significant concern," such as Poland, the Baltic states and the Central Asian republics.

Energy Sector Sanctions

Within 45 days of its enactment, the bill will give the President discretion to impose sanctions against a foreign person who, in the President's determination, knowingly makes a significant investment in a special Russian crude oil project. The bill defines a "special Russian crude oil project" as a "project intended to extract crude oil from" (i) the exclusive economic zone of the Russian Federation in waters more than 500 feet deep; (ii) Russian Arctic offshore locations; or (iii) shale formations located in the Russian Federation. However, the bill does not define "significant," which gives the President some flexibility in making determinations under the legislation.

The bill also directs the President to impose sanctions on Russian gas giant Gazprom within 45 days of determining that Gazprom (i) is "withholding significant natural gas supplies" from NATO member countries; or (ii) "further withholds significant natural gas supplies from countries such as Ukraine, Georgia, or Moldova. . . ." The imposed sanctions must include prohibiting any U.S. person from "transacting in, providing financing for, or otherwise dealing in" (i) Gazprom debt of longer than 90 days' maturity issued on or after the date on which the sanctions are imposed; or (ii) Gazprom equity issued on or after the date on which the sanctions are imposed. Again, the bill gives the President flexibility in applying sanctions, since it does not define "significant natural gas supplies."

Financial Sector Sanctions

The bill also permits the President to impose sanctions on foreign financial institutions that he determines have engaged knowingly in "significant transactions" involving entities engaged in the sanctioned activities described above, such as (i) destabilizing arms manufacturing, sales, or transfers to various designated countries; (ii) assisting such activities; or (iii) making significant investments in a special Russian crude oil project. Notably, financial sanctions would extend to transactions involving Gazprom, but not Rosoboronexport. The President may also impose sanctions against a foreign financial institution if the President determines that the foreign financial institution – on or 180 days after the enactment of the Act – knowingly facilitated a "significant" financial transaction on behalf of any Russian person included on the Specially Designated Nationals and Blocked Persons list maintained by OFAC pursuant to the Act or any Ukraine Executive Order.

Sanctions against foreign financial institutions engaging in such transactions include prohibiting the opening of correspondent or payable-through accounts in the United States or, if such accounts are already open, discontinuing or severely restricting the operation thereof.

Turza Comment: The Obama Administration has been under intense pressure from both Democrats and Republicans to sign this bill into law. The White House's somewhat reluctant announcement that the President will do so likely is in recognition of the bill's overwhelming bipartisan support. The decision may have been influenced by Russia's continuing economic troubles. The country is teetering on the brink of a currency crisis stemming from not only the falling price of oil, but also the U.S.-led international sanctions regime. While the bill authorizes the President to expand sanctions significantly – especially by applying them to foreign entities – it also affords him substantial flexibility in making various sanctions determinations. As such, the bill's ultimate impact likely will depend on how the Obama Administration and future Administrations make use of its provisions.

See also: Sanctions Specialty Page (available to Cabinet subscribers only).