The U.S. government recently has taken a number of actions to intensify its response to the Russian Federation. Today, the House passed by a vote of 378-34 the Support for the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014 (Ukraine Act, H.R. 4152), as amended and passed by the Senate on March 27. The legislation provides financial support to Ukraine and authorizes the imposition of further sanctions against the Russian Federation. U.S. President Barack Obama has announced that he will sign this bill into law.
On March 20, the U.S. Treasury imposed sanctions against additional Russian politicians and business leaders and one Russian bank under Executive Order 13661, and President Obama signed a third, broader Executive Order (E.O. 13662) authorizing the imposition of additional sanctions against broad categories of individuals and economic sectors in Russia. While the third E.O. creates the legal framework for additional sector-based sanctions, the Obama administration has not yet sanctioned any individuals or entities pursuant to its authority.
On March 27, the Department of Commerce Bureau of Industry and Security (BIS) and the Department of State Directorate of Defense Trade Controls (DDTC) disclosed that they had stopped processing applications for U.S. business licenses to export items to Russia on March 1, reflecting administration effort to put additional pressure on Moscow.
ANALYSIS OF RECENT CONGRESSIONAL ACTION
The Ukraine Act provides financial support to Ukraine, authorizes sanctions against categories of Ukrainian and Russian persons already targeted by the three Executive Orders as well as persons responsible for corruption in Russia, and authorizes the appropriation of funds for security and civil society programs in Eastern and Central Europe. It does not contain controversial provisions to ratify reforms to the International Monetary Fund.
Specifically, the new legislation authorizes sanctions against the following persons:
- Any person who ordered, controlled, directed, or perpetrated significant acts of violence or gross human rights abuses against anti-government protesters in Ukraine;
- Any person who ordered, controlled, directed, or perpetrated significant acts (including economic extortion) to undermine the peace, security, sovereignty, or territorial integrity of Ukraine;
- Any Russian government official, close associate, or family member who is responsible for, complicit in, ordered, controlled, or directed acts of significant corruption in Ukraine;
- Any individual who materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of the above acts; and
- Any person who orders, controls, directs, or perpetrates significant acts of corruption in Russia.
As passed, the new legislation does not mandate an expansion of U.S. sanctions targeting Russia, but it provides additional authority for the Obama administration to designate more Russian persons in the future, even if the Executive Orders are lifted.
While the first four categories of sanctioned persons largely mirror those announced by the Obama administration in the first three Executive Orders, the fifth category expands U.S. sanctions to include persons responsible for corruption in Russia. This largely reflects Congress’ current willingness to give deference to the President on the issue of Russia sanctions, but this political perspective is likely to change if there is a further escalation of the crisis.
Sanctions bills have been increasingly popular in Congress, and passing the Ukraine Act allows lawmakers to show strong action in response to the situation in Ukraine, which is an important political consideration in advance of the mid-term elections in November 2014. Like the three Executive Orders issued by President Obama, the legislation authorizes the following sanctions against the above categories of persons:
- Asset blocking: Any person or entity meeting the above criteria may be listed as a Specially Designated National (SDN) by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC).
- Visa bans or revocations: The U.S. will deny visas to travel to the U.S. for persons who meet the above criteria, as well as revoke the visas of such persons already in the United States.
The bill also contains a number of non-sanctions provisions, including: authorizing $50 million to improve democracy and governance in Eastern and Central Europe; authorizing $100 million for increased security cooperation in the region; and providing for U.S. assistance in recovering Ukrainian state assets allegedly stolen by former Ukrainian President Viktor Yanukovych and his former officials.
In conjunction with H.R. 4152, both chambers of Congress also passed an act authorizing United States International Programming to Ukraine and Neighboring Regions (S. 2183), which authorizes the appropriation of $10 million to fund Ukrainian, Russian, and Tatar language broadcasts on U.S. public diplomacy channels to counter perceived Russian propaganda. This is a priority issue for House Foreign Affairs Committee Chairman Ed Royce (R-California).
ANALYSIS OF RECENT EXECUTIVE BRANCH ACTION
Executive Order 13662
On March 20, President Obama signed a third Executive Order (E.O. 13662), which authorizes the imposition of sanctions against additional categories of persons who operate in sectors of the Russian Federation economy, such as the financial services, energy, metals and mining, engineering, and defense and related materiel industries. To date, no individuals or entities have been sanctioned pursuant to E.O. 13662, although this measure is designed to serve notice to broad sectors of the Russian economy that they may be targeted in the future.
In particular, E.O. 13662 authorizes the imposition of sanctions against the following three categories of persons:
- Persons who operate in sectors of the Russian Federation economy that have been the subject of a joint U.S. Treasury and Department of State “determination,” (such as financial services, energy, metals and mining, engineering, and defense and related materiel industries);
- Persons who materially assist, sponsor, or provide financial, material, or technological support for, or goods or services to or in support of a senior official in the Government of the Russian Federation or a person designated pursuant to the new E.O; or
- Persons directly or indirectly owned or controlled by, or acting for or on behalf of, a senior official in the Government of the Russian Federation or a person designated pursuant to the new E.O.
The E.O. authorizes the same sanctions – asset freezes and visa bans – as the Congressional legislation. Notably, it authorizes the imposition of sanctions against persons who operate in “such sectors of the Russian Federation economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, such as financial services, energy, metals and mining, engineering, and defense and related materiel.” (emphasis added).
This indicates that the U.S. government views the list of industry sectors as an illustrative non-exhaustive list, and the U.S. Treasury and State Departments have authority to determine that additional sectors of the Russian economy should be targeted in the future. E.O. 13662 is silent, however, as to the criteria that should be applied in making these determinations.
It is significant that the new E.O. authorizes sanctions against persons who operate in these sectors of the Russian economy, but does not immediately impose sanctions on them for doing so. In addition to determining the economic sectors to be targeted, the E.O. requires the U.S. Treasury, in consultation with the U.S. Department of State, to then determine that the person operates in one of these sectors of the Russian Federation economy. Presumably, a person will be sanctioned only after both determinations have been made. The U.S. government has wide discretion in making these determinations.
In our view, the Obama administration issued this E.O. in part to get out ahead of Congress as a means of discouraging Congress from adopting further legislation in the near term, especially legislation that could go beyond the level of sanctions that the President considers appropriate under the circumstances or that would otherwise interfere with the Obama administration's diplomatic negotiations to advance the national interest. Moreover, by issuing the E.O. prospectively, the Obama administration signaled clearly that it is prepared to impose sanctions on sectors that could have a significant impact on the Russian economy.
Additional Designations Under E.O. 13661
On March 20, the Treasury Department’s Office of Foreign Assets Control (OFAC) designated sixteen senior Russian government officials, four Russian business leaders described by the U.S. Treasury as members of Russian President Vladimir Putin’s “inner circle,” and one Russian bank pursuant to E.O. 13661. E.O. 13661 authorizes the imposition of sanctions against senior Russian government officials, as well as those determined to be “acting for or on behalf of or materially assisting, sponsoring, or providing financial, material, or technological support for, or goods or services to or in support of, a senior Russian government official.” The U.S. government determined that the four Russian business leaders and one Russian bank are each controlled by, acting for or on behalf of, or providing material or other support to, a senior Russian government official.
These designations are in addition to sanctions imposed against seven Russian persons and four Ukrainian persons pursuant to E.O. 13660 on March 6. (For more information on E.O. 13660. The complete Specially Designated Nationals and Blocked Persons List is available here.
Administrative Licensing Freeze
The Bureau of Industry and Security (U.S. Department of Commerce) disclosed that beginning March 1 it placed a hold on all applications for licenses to export items from the United States. to Russia until further notice. In 2013, the Bureau approved over 1,800 applications to export “dual use” items to Russia – worth $1.5 billion. The Directorate of Defense Trade Controls (U.S. Department of State) also announced that it has stopped processing applications for licenses to export “defense articles and defense services” to Russia until further notice. U.S. industry has expressed concern that these policies will only hurt U.S. businesses because they need export licenses to ship their products to Russia. Russian companies are still able to procure these items from manufacturers in other countries.
POTENTIAL FURTHER DEVELOPMENTS
Both the White House and Congress have indicated that they may impose further sanctions against the Russian Federation depending on how the situation in Ukraine continues to develop. During his trip to Europe last week, President Obama suggested that the United States and its allies will hold off on implementing additional economic sanctions, but indicated that this may change if the situation in Ukraine deteriorates. His statement does not preclude sanctioning more individuals and entities under existing sanctions authorities.
In the near term, we do not expect Congress to pass additional sanctions legislation, as long as the President remains out front on the issue and developments in the region do not change materially. That said, the risk remains high that, for political and other reasons, members of Congress will continue to push for additional sanctions. Thus, the risk remains high that the White House will be forced to impose additional sanctions to head off legislation or will be forced by events to negotiate with Congress over an acceptable range of additional measures to be imposed by statute.
Moreover, the G-7 countries, the White House, and Congress also agree that further sanctions would be warranted if Russia takes additional actions, such as invading eastern or southern Ukraine or the Transnistria region of Moldova, or interfering in the May 25 Ukrainian presidential election. In the March 31 White House Press Briefing, Press Secretary Carney stated the White House’s position that: “there will be potentially more, and more serious consequences imposed by the United States and our partners, should Russia engage in further acts that violate Ukraine’s territorial integrity and sovereignty.”
By all indications, this is still a very fluid situation. Companies should examine the nature and extent of any business operations in Russia and/or Ukraine to understand their potential exposure under these sanctions measures. For advice on specific transactions related to Russia and/or Ukraine, please contact Joseph L. Brand (email@example.com), Stephen J. McHale (firstname.lastname@example.org), or Daniel E. Waltz (email@example.com).