Trump Administration Imposes Debt and Equity Sanctions on Venezuela
President Trump has issued an additional executive order with respect to the situation in Venezuela. The executive order prohibits U.S. persons from engaging in certain debt and equity transactions with the Government of Venezuela, including its national oil company, Petroleos de Venezuela, S.A. (PdVSA).
The new sanctions intensify sanctions previously imposed under Executive Order 13692 (EO 13692), issued by President Obama in March 2015 pursuant to the Venezuela Defense of Human Rights and Civil Society Act. EO 13692 provided for blocking of property (i.e., asset freezing) and denial of entry into the United States of persons designated pursuant to the order. Under the Trump administration, numerous additional persons have been designated under EO 13692, including members of Venezuela's Supreme Court of Justice, current and former senior officials of the Government of Venezuela, and President Maduro himself. However, while U.S. persons have been prohibited from engaging in any transactions with such persons, until last week the United States had not imposed broad sanctions against the Government of Venezuela.
Last week's executive order (the new EO) does stop short of a comprehensive embargo on trade and transactions with Venezuela. The new sanctions are similar to the debt and equity sanctions previously imposed on designated persons in the Russian financial services, energy, and defense sectors, and target only the Government of Venezuela. The term "Government of Venezuela" is defined to include "any political subdivision, agency or instrumentality" of the Government, and is expressly stated to include the Central Bank of Venezuela, PdVSA, and any person owned or controlled by, or acting for or on behalf of, the Government. Office of Foreign Assets Control (OFAC) guidance issued on August 25, 2017 (the OFAC Guidance) emphasizes that this definition extends to entities owned 50 percent or more by the Government of Venezuela.
Unlike in the case of the Russian debt and equity sanctions, which were imposed via directives issued pursuant to an executive order, the new Venezuelan debt and equity sanctions are imposed directly in the new EO.
Subject to certain general licenses issued by OFAC, Section 1(a) of the new EO prohibits all transactions related to, provision of financing for, and other dealings by U.S. persons or within the United States in the following:
- New debt of PdVSA with a maturity of greater than 90 days;
- New debt of the Government of Venezuela with a maturity of greater than 30 days (other than debt of PdVSA);
- New equity of the Government of Venezuela (including PdVSA);
- Bonds issued by the Government of Venezuela prior to August 25, 2017; and
- Dividend payment or other distributions of profits to the Government of Venezuela from any entity owned or controlled, directly or indirectly, by the Government of Venezuela.
In addition, Section 1(b) prohibits the purchase, directly or indirectly, by a U.S. person or in the United States, of securities from the Government of Venezuela, other than securities qualifying as new debt with a maturity of less than or equal to 90 days (in the case of PdVSA) or 30 days (in the case of any other part of the Government of Venezuela). The Section 1(b) prohibition against security purchases applies to securities held by, as well as securities issued by, the Government of Venezuela, subject to the general licenses discussed below.
The OFAC Guidance clarifies that the prohibitions extend to rollover of existing debt if the rollover results in the creation of prohibited new debt, and provides guidance on the circumstances under which drawdowns and disbursements under existing loan agreements may be authorized, as well as the circumstances under which certain direct or indirect dealings with the Government of Venezuela may be permitted in connection with debt or credit transactions in which the Government of Venezuela is not the borrower.
Transactions designed to evade or avoid the sanctions or conspiracies or attempts to violate the sanctions also are prohibited.
The new sanctions took effect immediately, but OFAC simultaneously issued a general license that provided a "wind down" period until September 24, 2017. General License 1 covers transactions that are "ordinarily incident and necessary" to wind down contracts or agreements that were in effect prior to August 25, 2017.
On August 25, 2017 OFAC also issued General License 2, which authorizes all transactions with CITGO Holdings, Inc. and its subsidiaries on an indefinite basis. The OFAC Guidance cautions that this general license applies only if no other Government of Venezuela entities are involved in the transaction.
General License 3 authorizes all transactions related to, the provision of financing for, and all dealings in:
- Certain bonds specified in the Annex to the general license previously issued by the Government of Venezuela, PdVSA, and certain other related entities; and
- Bonds issued prior to August 25, 2017 by U.S. person entities owned or controlled, directly or indirectly, by the Government of Venezuela.
However, the OFAC Guidance states that "U.S. persons are not authorized to purchase, directly or indirectly, bonds listed on the Annex."
Finally, General License 4 authorizes financing and other debt transactions related to exports and reexports of U.S. agricultural commodities, medicine, medical devices, or replacement parts and components for medical devices, provided that the export or reexportation is licensed or otherwise authorized by the Department of Commerce pursuant to the Export Administration Regulations.
The OFAC Guidance emphasizes that the new sanctions do not require blocking of property, but do require U.S. persons to reject transactions or dealings prohibited by the new EO. The OFAC Guidance also states that "U.S. financial institutions may continue to maintain correspondent accounts and process U.S. dollar-clearing transactions for the Government of Venezuela, so long as those activities do not involve engaging in transactions related to, providing financing for, or otherwise dealing in" transactions prohibited by the new EO.
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