On August 25, the U.S. Government announced the publication of a new Executive Order, signed by President Trump on August 24 and effective at 12:01am on August 25, prohibiting U.S. persons from engaging in any transactions or dealings involving “new” debt of certain maturity durations of the Government of Venezuela (GoV) and Petroleos de Venezuela, S.A. (PdVSA), as well as some existing debt of the GoV and any “new” equity of entities owned by the GoV, including PdVSA, along with paying dividends or other profits back to the GoV from GoV-owned entities. “New” debt and equity are those instruments issued on or after 12:01am on August 25, 2017. This adds to existing sanctions targeting certain officials of the GoV, including President Maduro, and is similar to the sectoral sanctions that the U.S. has imposed on certain listed financial, energy and defense sector entities in Russia.
The Executive Order stopped short of imposing broader sanctions, such as “blocking” the property and interests in property of the GoV, prohibiting imports from, exports to, or new investment in Venezuela, or restricting U.S. financial institutions from maintaining correspondent accounts or processing U.S. dollar-clearing transactions for the GoV. While these sanctions are by far the most significant trade restrictions that the U.S. has ever imposed on Venezuela, they are not designed to cut off all commerce. However, given the widely-reported foreign currency shortage in Venezuela, these financing restrictions will have a significant impact on the GoV’s financial stability and will impact any sales to the GoV that rely on longer or more flexible payment terms. The risk and complexity of complying with these new sanctions may also deter lawful trade with Venezuela.
While the Executive Order sets out broad prohibitions on financing the GoV, the Treasury Department’s Office of Foreign Assets Control (OFAC) has issued important general licenses authorizing, among other things, dealings in certain existing debt securities and winding down ongoing activity. However, it appears that this Executive Order prohibits any activity related to distributing profits from CITGO back to the GoV, which could cut off a primary source of revenue for the GoV and further jeopardize its financial stability over the medium term, while seeking not to have a major immediate impact on CITGO itself.
The Executive Order does not cover directly any activity by non-U.S. persons, although it will restrict any use of the U.S. financial system or other involvement by U.S. persons in the covered activity.
Specifically, the Executive Order prohibits U.S. persons from conducting any transactions or dealings related to the following (subject to the general licenses described further below):
- New equity of any entity owned by the GoV, including PdVSA;
- New debt of PdVSA with a maturity of greater than 90 days;
- New debt of the GoV (other than PdVSA) with a maturity of greater than 30 days;
- Bonds issued by the GoV prior to August 25, 2017 (i.e., bonds that are not “new”), of any maturity; and
- Dividend payments or other distributions of profits to the GoV from any entity owned or controlled, directly or indirectly, by the GoV.
The Executive Order also prohibits U.S. persons from purchasing securities, directly or indirectly, from the GoV (other than new debt of PdVSA or the GoV with a maturity 90 or 30 days, respectively, or less). OFAC clarified that this includes purchasing any securities – including equity securities issued by a non-sanctioned party – from the GoV.
For the purpose of these prohibitions, the GoV includes any entity owned 50% or more, individually or in the aggregate, by the GoV or its agencies, instrumentalities or subsidiary entities.
The financial markets, already anticipating a potentially more sweeping action of this nature following reports earlier in the week, have reacted with some relief, in light of the broad set of activities that will be authorized under OFAC’s general licenses, including the following:
- Through September 24, 2017, all transactions ordinarily incident and necessary to wind down contracts or other agreements that were in effect prior to August 25, 2017 that would otherwise be prohibited by the Executive Order – except transactions relating to distributions of profits to the GoV from its subsidiary entities, for which no wind-down period is available. Any authorized wind-down activity must be reported to OFAC.
- Transactions involving new equity and new debt of CITGO Holding, Inc. and its subsidiaries (CITGO), and other securities purchased from CITGO. (The applicable general license states as a condition that the only GoV entities that can be “involved” in these transactions are CITGO and its subsidiaries. This would benefit from clarification from OFAC as to whether any involvement by other GoV entities outside of transactions that are prohibited by the Executive Order (e.g., dealings in the GoV’s new debt or new equity) would preclude the applicability of the general license. OFAC did clarify that the Executive Order does not prohibit U.S. persons from dealing with the GoV “as counterparty to all transactions involving debt issued on or after the sanctions effective date by a non-sanctioned party.” That indicates that “involvement” by the GoV in the covered CITGO transactions may not preclude the applicability of the general license, as long as the transaction does not implicate the prohibitions specified in the Executive Order. But, again, this is something that OFAC may want to clarify explicitly given the ambiguity in the language of the general license.).
- Transactions involving bonds that were issued prior to August 25, 2017 by U.S. person entities owned or controlled, directly or indirectly, by the GoV, including CITGO.
- Transactions involving a specific list of bonds issued by the GoV prior to August 25, 2017, identified by CUSIP number, date and other features. But U.S. persons are not authorized to purchase bonds on this list, directly or indirectly, from the GoV. In other words, this only authorizes the continuation of secondary trading activity.
- Transactions involving new debt related to the exportation or reexportation of agricultural commodities, medicine, medical devices, or replacement parts and components for medical devices, to Venezuela, or to persons in third countries purchasing specifically for resale to Venezuela, provided that the exportation or reexportation is licensed or otherwise authorized by the U.S. Department of Commerce under the Export Administration Regulations (EAR).
OFAC has published Frequently Asked Questions about this Executive Order and the associated general licenses. The last FAQ underscores the U.S. policy objective of seeking to empower the Venezuelan National Assembly, by stating that the U.S. Government “would consider using licensing authority” to authorize dealings in a future debt issuance if that particular issuance were approved by the National Assembly.