The Escalating Sanctions Against Venezuela, Russia and Iran
The last two weeks have witnessed a flurry of economic sanctions developments, as the Trump administration has taken a number of executive actions in quick succession targeting Venezuela, Russia, and Iran — and by extension, China. Included within these developments is a broad embargo against the Venezuelan government, imposition of long-awaited sanctions against Russia related to the March 2018 poisoning of Sergei Skripal and implementation of sanctions against Iran’s metals sector, one of its primary sources of export revenue.
Specifically, the Trump administration has taken the following actions:
Venezuela
On Aug. 5, President Donald Trump issued Executive Order 13884,[1] “blocking” the government of Venezuela. This measure cuts off the Venezuelan government from most dealings with the United States and U.S. persons, a measure tantamount to adding the government of Venezuela to the list of Specially Designated Nationals and Blocked Persons, known as the SDN list, and provides for “secondary sanctions” against non-U.S. persons that deal with the government of Venezuela.
Russia
On Aug. 2, the U.S. Department of State announced[2] the imposition of a second round of sanctions against Russia under the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991, or CBW Act.
The new sanctions provide for U.S. opposition to World Bank and International Monetary Fund financial assistance to Russia; prohibit U.S. banks from dealing in non-ruble-denominated Russian sovereign debt and lending non-ruble-denominated funds to the Russian sovereign, and impose certain export control restrictions related to items controlled for chemical and biological weapons proliferation reasons.
Iran
On Aug. 6, the U.S. Department of the Treasury, Office of Foreign Assets Control implemented sanctions[3] set out in Executive Order 13871,[4] issued in May 2019, which imposes secondary sanctions against Iran’s iron, steel, aluminum and copper sectors. Specifically, OFAC implemented the sanctions through amendments to the Iranian Financial Sanctions Regulations and the Iranian Human Rights Abuses Sanctions Regulations, which were renamed the “Iranian Sector and Human Rights Abuses Sanctions Regulations.”
The View From Washington
These sanctions represent significant actions against regimes considered inimical to U.S. foreign policy and national security interests.
First, the blocking of the Venezuelan government is a major escalation of U.S. sanctions against Venezuela, one that is arguably aimed just as much at benefactors of the Maduro regime, such as China, as at the Maduro regime itself. Perhaps not coincidentally, the Trump administration announced the sanctions the same evening that it designated China as a currency manipulator.[5]
Second, the Russia sanctions are the product of bipartisan consensus, as the administration imposed them after the Democratic chair and Republican ranking member of the House Committee on Foreign Affairs wrote a letter[6] to President Trump calling for the sanctions, which were required to be imposed under the CBW Act as of November 2018.
Third, the administration continues to signal that Iran is a priority, as reflected in the implementation of the metals sanctions and the recent placement of its foreign minister on the SDN List.
The recently announced sanctions measures will be the subject of close attention in Washington and foreign capitals in the weeks and months to come. The Venezuela sanctions may figure into the ongoing U.S.-China trade war, as the Aug. 5 executive order provides grounds for the Trump administration to impose secondary sanctions on sponsors of the Maduro regime.
With respect to Russia, now the action will shift to Congress, where there may be skepticism of the administration’s use of waivers — described below — in imposing the sanctions, which fall short of what is set out in the CBW Act.
Regarding Iran, implementation of the metals sanctions could reflect a ramping up of secondary sanctions enforcement against non-U.S. persons, perhaps as signaled by the July 22 imposition of sanctions[7] against a Chinese purchaser of Iranian oil.
Venezuela Sanctions
Executive Order 13884 blocks the property and interests in property of the government of Venezuela, essentially imposing comprehensive sanctions against it. The government of Venezuela is defined broadly to include all state agencies, the Central Bank of Venezuela, Petroleos de Venezuela S.A. (or PdVSA) all state-owned entities and all persons acting on behalf of the government of Venezuela, including individual Maduro regime members.
Pursuant to this action, U.S. persons — defined as persons in the United States, U.S. citizens, U.S. lawful permanent residents and U.S.-incorporated entities and their non-U.S. branches — are required to freeze the assets of the government of Venezuela that are in their possession or control and are cut off from practically all dealings with the government of Venezuela unless authorized by OFAC.
Additionally, the executive order provides for secondary sanctions against non-U.S. persons that furnish material support to the government of Venezuela. Such persons are subject to designation on OFAC’s SDN List.
Notably, the executive order stops short of imposing a full trade embargo against Venezuela, as trade with private parties remains permissible. Given the extensive reach of the state into the Venezuelan economy, however, now virtually all trade with Venezuela is subject to extensive restrictions.
Reflective of these more comprehensive sanctions, OFAC has issued several general licenses authorizing certain dealings with the government of Venezuela under particular circumstances. Among the more notable general licenses are the following:
- General License Nos. 24[8] and 25,[9] respectively authorizing mail and telecommunications transactions, and the export of software, services, hardware and technology related to the exchange of communications over the Internet.
- General License No. 28,[10] authorizing the winding down of contracts with the government of Venezuela through Sept. 4, 2019.
- General License No. 30,[11] authorizing dealings ordinarily incident to the use of ports and airports in Venezuela — an apparent effort to clear a key hurdle for parties engaged in trade with private enterprises in Venezuela.
- General License No. 31,[12] authorizing dealings with the Venezuelan National Assembly, Interim President — and opposition leader — Juan Guaidó, and all persons appointed by Guaidó to official positions and boards of directors. Notably, this would appear to include persons appointed by Guaidó to the board of Citgo, the major U.S.-based refiner owned by PdVSA.
These general licenses are in addition to those previously in effect with respect to earlier sanctions imposed against Venezuela. These include General License No. 7C,[13] authorizing certain dealings with Citgo and PDV Holding for renewable 18-month periods, and General License No. 8C,[14] authorizing certain dealings by Halliburton, Schlumberger, Chevron, Baker Hughes and Weatherford International until Oct. 25, 2019.
Russia Sanctions
In August 2018 the Trump administration imposed a first round of sanctions against Russia under the CBW Act, in response to the Skripal poisoning in the United Kingdom. Pursuant to the CBW Act, the administration was required to impose a second, more severe round of sanctions in November 2018.[15]
Following pressure from Congress, the administration imposed the second round of sanctions[16] on Aug. 2. The sanctions consist of the following:
- U.S. opposition — through its voting rights — to World Bank and IMF financial assistance for Russia;
- Effective Aug. 27, prohibition of U.S. banks — through issuance of an OFAC directive[17] — from participating in the primary market for nonruble-denominated sovereign Russian debt, and from lending nonruble-denominated funds to the Russian sovereign; and
- Imposition of a “presumption of denial” policy under the Export Administration Regulations[18] for the export to Russian state-owned or state-funded entities of items controlled for chemical and biological weapons proliferation reasons.
The president also had authority under the CBW Act to downgrade diplomatic relations with Russia, suspend U.S. landing rights for Russian state-owned carriers and prohibit imports from Russia, but did not do so.
Notably, with respect to the sanctions identified above, the president is waiving certain sanctions on national security grounds. Specifically, while the CBW Act calls for a prohibition of all U.S. bank loans to the Russian government, the recently announced sanctions are focused on nonruble-denominated lending and dealings in the primary market for nonruble-denominated Russian sovereign debt.
The sanctions thereby do not cover ruble-denominated dealings, participation in the secondary market for Russian sovereign debt or dealings involving Russian state-owned enterprises.
Furthermore, while the CBW Act provides for a near-total ban on exports to Russia, the recent measures restrict only CB-controlled items, with exceptions for civilian end-users —among others. The CWB Act provides for a 15-day congressional review period regarding the waivers, which in this case will run through on or about Aug. 17.
It remains to be seen how the waivers will be received in Congress, which has been considering additional Russia sanctions for some time. Among the targets of proposed legislation are Russian sovereign debt and the Russian energy industry.[19]
Iran Sanctions
On Aug. 6, following the expiration of a 90-day wind down period, OFAC implemented Executive Order 13871, which provides for secondary sanctions against non-U.S. persons that engage in significant transactions with Iran’s iron, steel, aluminum and copper sectors.
Specifically, the executive order provides for the blocking of non-U.S. persons that operate in those sectors, supply significant goods or services used in connection with those sectors, engage in significant purchases of products of those sectors or otherwise provide material support for those sectors.
Additionally, the executive order provides for the suspension of U.S. correspondent and payable-through account privileges for non-U.S. financial institutions that facilitate significant financial transactions in support of the above activity.
OFAC amended the Iranian Financial Sanctions Regulations[20] to implement the correspondent/payable-through account sanctions, and the Iranian Human Rights Abuses Sanctions Regulations,[21] which were renamed the “Iranian Sector and Human Rights Abuses Sanctions Regulations,” or ISHRASR, to implement the blocking sanctions.
Notably, the IFSR and ISHRASR provide detailed definitions of the terms “aluminum/aluminum products,” “aluminum sector of Iran,” “copper/copper products,” “copper sector of Iran,” “iron/iron products/steel/steel products,” “iron sector of Iran” and “steel sector of Iran.”
OFAC’s implementation of the metals sanctions reflects the Trump administration’s continued focus on Iran. Codification of secondary sanctions remains a relatively rare occurrence, and the fact that OFAC took that step here indicates the administration is determined to pursue parties worldwide that meaningfully engage in trade with Iran.
Key Takeaways
The recent sanctions actions demonstrate that the Trump administration’s imposition and enforcement of sanctions are increasingly vigorous, as the use of sanctions continues to be a key driver for the administration in confronting foreign policy challenges.
The following points are particularly notable:
- With respect to Venezuela, it is important to note that Venezuela now is essentially an embargoed country, and the window of permissible trade with that country is growing smaller.
- Regarding both Venezuela and Iran, the administration is signaling that it is willing to resort to secondary sanctions to try to drive change in line with U.S. policy.
- As for Russia, the recent CBW Act sanctions mark a continued deterioration in U.S.-Russia relations, although the issuance of waivers may prompt a more robust response from Congress.
Mario Mancuso, Sanjay José Mullick and Anthony Rapa are partners and Abigail E. Cotterill is of counsel at Kirkland & Ellis LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] https://www.federalregister.gov/documents/2019/08/07/2019-17052/blocking-property-of-the-government-of-venezuela
[2] https://www.state.gov/imposition-of-a-second-round-of-sanctions-on-russia-under-the-chemical-and-biological-weapons-control-and-warfare-elimination-act/
[3] https://www.treasury.gov/resource-center/sanctions/Programs/Documents/fr84_38545.pdf
[4] https://www.federalregister.gov/documents/2019/05/10/2019-09877/imposing-sanctions-with-respect-to-the-iron-steel-aluminum-and-copper-sectors-of-iran
[5] https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20190808_southern_cross.pdf
[6] https://foreignaffairs.house.gov/_cache/files/4/4/4429d7fc-0378-4841-8465-f155d2570fdc/29DDD1C202F4B8A9CC0E29D46C442A0B.ele-mccaul-letter-to-president-trump-on-cbw-act.pdf
[7] https://www.state.gov/the-united-states-to-impose-sanctions-on-chinese-firm-zhuhai-zhenrong-company-limited-for-purchasing-oil-from-iran/
[8] https://www.treasury.gov/resource-center/sanctions/Programs/Documents/venezuela_gl24.pdf
[9] https://www.treasury.gov/resource-center/sanctions/Programs/Documents/venezuela_gl25.pdf
[10] https://www.treasury.gov/resource-center/sanctions/Programs/Documents/venezuela_gl28.pdf
[11] https://www.treasury.gov/resource-center/sanctions/Programs/Documents/venezuela_gl30.pdf
[12] https://www.treasury.gov/resource-center/sanctions/Programs/Documents/venezuela_gl31.pdf
[13] https://www.treasury.gov/resource-center/sanctions/Programs/Documents/venezuela_gl7c.pdf
[14] https://www.treasury.gov/resource-center/sanctions/Programs/Documents/venezuela_gl8c.pdf
[15] https://www.kirkland.com/publications/article/2018/08/cos-must-prepare-for-toughening-russia-sanctions
[16] https://www.state.gov/second-round-of-chemical-and-biological-weapons-control-and-warfare-elimination-act-sanctions-on-russia/
[17] https://www.treasury.gov/resource-center/sanctions/Programs/Documents/20190803_cbw_directive.pdf
[18] 15 C.F.R. Parts 730-774
[19] https://www.kirkland.com/publications/article/2018/08/cos-must-prepare-for-toughening-russia-sanctions
[20] 31 C.F.R. Part 561
[21] 31 C.F.R. Part 562
