Congress passes Ukraine Freedom Support Act

On  December 13, 2014, the U.S. Congress passed the Ukraine Freedom Support Act of 2014, a bill to impose certain new sanctions against Russia and in support of Ukraine. It is currently expected that this bill will be signed into law by the President within the next few days. The proposed sanctions include extraterritorial “Iran-style” sanctions against foreign parties engaging in certain activities in the defense, energy and financial sectors.

The Senate first passed S. 2828, entitled the Ukraine Freedom Support Act (UFSA), on 11 December 2014, which was a slightly watered-down version of an earlier bill. On the same day, the House of Representatives followed suit by passing the identically-worded H.R. 5859 to increase the chance of passage during the congressional lame-duck session. The Senate approved H.R. 5859 late on 13 December 2014, and the bill now awaits the President’s signature.

Much of the media coverage surrounding the UFSA has focused on the authorization to increase U.S. military assistance for the Government of Ukraine. More importantly for businesses, however, this bill also contains a number of provisions that would either require or authorize the U.S. President to impose additional sanctions targeting Russia’s defense and energy sectors, as well as foreign financial institutions engaging in certain transactions involving Russia. Even once the bill is enacted, the ultimate effect of these sanctions measures will depend upon the President and/or executive branch agencies taking additional implementation decisions, in some cases within specified time periods.

Proposed Sanctions Measures in the UFSA

Energy/Defense Sanctions

The UFSA provides for the following sanctions on Russia’s energy and defense sectors:

• Mandatory sanctions on Rosoboronexport, a significant Russian defense exporter;
• Mandatory sanctions on entities that the President determines are either: (1) Russian-owned or -controlled entities that knowingly manufacture, sell, transfer or broker the transfer of defense articles to Syria, Ukraine, Georgia, Moldova, or other designated countries without authorization from the internationally-recognized governments of those countries; or (2) other parties knowingly assisting, sponsoring or providing financial, material or technological support for, goods or services to or in support of, such entities in those activities;
• Optional sanctions against foreign persons determined to make “significant investments” in Russian deepwater, Arctic offshore, and shale energy projects for the extraction of oil; and
• Contingent sanctions on Gazprom to be imposed only if the President determines that Gazprom is withholding “significant” natural gas supplies from Ukraine, Georgia, Moldova, or NATO member countries.

Similar to the Iran Sanctions Act and similar subsequent statutes, the UFSA would provide a “menu” of sanctions that may be imposed on the parties described above. These potential sanctions would include: blocking of property interests (e.g., designation as a “Specially Designated National” (SDN)); ban on transfers of credit and payments through the U.S. banking system; ban on investment or dealings in a sanctioned party’s debt or equity; limitations on assistance from the U.S. Import-Export Bank; prohibitions on exports of defense article and dual-use items; and visa bans for sanctioned individuals or executives of sanctioned companies.

The UFSA also authorizes the President to impose additional licensing requirements or other restrictions on the export or reexport of items (i.e., goods, software, technology) for use in the Russian energy sector, including equipment used for tertiary oil recovery.

Foreign Financial Institution Sanctions

The UFSA provides for optional sanctions against foreign financial institutions that knowingly:

• engage in “significant” transactions involving entities designated under any of the above energy/defense sanctions except Rosoboronexport (but including Gazprom), or
• facilitate “significant financial transactions” involving Russian SDNs designated under the various Ukraine/Russia-related measures.

The sanction for such foreign financial institutions involve limitations, or even an outright prohibition, on opening or maintaining correspondent or payable-through accounts in the United States—effectively cutting them off from access to the US banking system.

Potential Impact of the UFSA

Until signed by the President, the UFSA has no legal effect. Even once the bill is enacted, however, most of the UFSA’s sanctions measures would not go into effect immediately because they require determinations to be made within certain time periods by the President and/or executive branch agencies (including the US Treasury Department’s Office of Foreign Assets Control) that specific entities fit the criteria for being sanctioned.

For additional information, please contact Alison J. Stafford Powell of our Palo Alto office, Joseph A. Schrool of our Washington, D.C. office, or any member of our Outbound Practice that you work with on trade sanctions.