US hits Russian businesses with new sanctions

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Russia/CIS Riskwatch - Issue 14 - May 2018
US hits Russian businesses with new sanctions: first takeaways

The US has finally begun applying the anti-Russia sanctions law in earnest, targeting major Russian businesses with Kremlin ties while, it appears, keeping in mind an implicit side goal of benefitting the White House’s economic agenda. But the sanctions have not spread to non-Russian companies, and the new government of Vladimir Putin appears reluctant to escalate the sanctions war.

The Countering America's Adversaries Through Sanctions Act (CAATSA), which expanded and codified the anti-Russian sanctions framework, was passed on 2 August 2017. However, the US government took eight months to apply the law to major players in the Russian economy.

To that end, the US Office of Foreign Assets Control (OFAC) on 6 April 2018 blacklisted six of 94 entries on its “list of oligarchs”, or wealthiest Russians, released in January 2018. One more businessman sanctioned that day, Igor Rotenberg, was not on the list, but his father and uncle were, and they have been already sanctioned by the US.

CAATSA’s businessmen targets include billionaires Oleg Deripaska and Viktor Vekselberg; Putin’s alleged former son-in-law Kirill Shamalov; and entrepreneurs-cum-lawmakers Suleiman Kerimov and Andrei Skoch. A number of their companies were also blacklisted, including Deripaska’s major aluminium producer Rusal.

Prior to the April sanctions, the only major Russian private company hit by OFAC was Alexei Mordashov’s Power Machines, sanctioned in January 2018 for involvement in supplies of power turbines to Crimea, a Russia-annexed territory of Ukraine.

Informal factors

The lack of implementation has made CAATSA an “uncertainty law”, full of vague wording that allowed applying it in a wide variety of ways – or not at all, as the case was. OFAC’s “list of oligarchs” also highlighted the wealthiest Russians in bulk as potential sanctions targets, without regard to their political connections or other sanctions triggers.

Sanctions against Deripaska, Vekselberg and the others finally shed some light on the criteria that the US government uses to select entities for blacklisting from a wide range of possible targets.

One major takeaway is that political scandals are an important risk factor. This applies particularly to Deripaska, who was formally blacklisted for acting “on behalf” of a Russian government official.

Deripaska never held formal government positions in Russia. However, in February 2018, a whistleblowing report revealed that he had entertained a Russian government official on his yacht – this being Sergei Prikhodko, an important, if non-public, figure in Russian foreign policy. Deripaska has a historical connection to Trump’s affiliate Paul Manafort, currently investigated in the US as a possible go-between for Russia in dealings with Trump, which has made the case relevant for the US.

The situation was made worse by Deripaska’s past informal affiliations with the Russian government: he has held a Russian diplomatic passport, and Russian Foreign Minister Sergei Lavrov has personally lobbied for a US visa for Deripaska, who has struggled with US entry for years.

The importance of media exposure as a sanctions risk factor is also confirmed by Power Machines – the supply of turbines to Crimea made plenty of headlines when it came to light in 2017, and has eventually triggered a reaction from OFAC.

Another informal risk factor for Russian entities under CAATSA appears to be US economic policy. Deripaska’s Rusal is a leading producer of aluminium, which it sells to the United States. However, metals is an industry that Trump wants to protect domestically, and Rusal’s troubles here advance this policy (Vekselberg’s Renova also has a share in Rusal). Economic considerations were not cited by OFAC or any other US authorities, but the April sanctions certainly benefit the White House’s economic agenda.

OFAC has also cited Deripaska’s and Vekselberg’s investment in energy projects as reasons for sanctions. Due to the shale oil boom, the US has become a global energy exporter, which makes Russia its natural competitor. Last week, the Wall Street Journal reported that Trump was pushing Germany to quit the project to build a second gas pipeline from Russia in exchange for US shale gas. 

Finally, and more traditionally, corruption allegations and Kremlin ties also increase sanctions exposure. The former applies in particular to Skoch and Kerimov: Skoch has for decade’s battled allegations of launching his business career through participation in a mafia group, though no such allegations have ever been proven in court; Kerimov is under investigation in France for money laundering.

Reservations and pushback

However, the things OFAC has not done matter no less. This applies, in particular to the secondary sanctions, i.e. sanctions against partners of sanctioned entities. In essence, OFAC is allowed to punish any foreign companies working with the blacklisted Russian firms and individuals – but has not done it so far.

This is particularly noteworthy due to the case of Power Machines: the Russian company produced and supplied the turbines to Crimea in a joint venture with Siemens, but the German company has not yet faced any penalties in the US.

OFAC has also softened its stance on Rusal since the imposition of sanctions, extending the grace period for wrapping up dealings with the company and indicating that it may remove Rusal from its blacklist altogether if Deripaska decreases his share to below 50%, which he has said he will do.

Many analysts have attributed this to the position of the EU: sanctions against Rusal stand to harm European companies. This is why the leaders of France and Germany visited Washington in April, lobbying for a softer stance on the Russian company, according to the Financial Times

This reluctance to impact non-Russian companies is good news for foreign businesses working in Russia. But the risk remains, and not just in the US: earlier this month, Dutch media reported that several companies in the country are being investigated for possible business involvement in Crimea.

US sanctions also have the potential to grow: the latest national defence bill in Congress, filed in April, proposes to blacklist suppliers to the Russian defence sector. Defence is a sprawling industry in Russia, and so this may affect a wide range of companies, both Russian and foreign.

Russian reaction

Russia has responded to the April sanctions with a sweeping bill that would have allowed the Russian government to ban imports of US agricultural products and medical drugs, cooperation in the rocket engine and aviation industries, and even employment of US nationals in Russia.

However, the bill was postponed for review amid an outcry from the Russian business community and the general public, and was eventually passed but in a more restricted form. In any case, it only enables Russian counter-sanctions, which are to be implemented at the government’s discretion.

In general, Moscow appears undecided on its policy on the US sanctions, an uncertainty exacerbated by the ongoing government reshuffle following Putin’s re-election in March.

Putin has indicated that he will focus on domestic, not foreign policy, in his new term, which would imply less confrontation with the US. Media reports from Russia even claimed he may appoint influential ex-finance minister and his long-time ally Alexei Kudrin, widely seen as a leader of the liberal grouping in the Russian elite, as a negotiator with the West working to normalise relations. This plan may get a boost after the Putin-Trump meeting, tentatively set for the summer of 2018.

However, the conservative, anti-West faction remains strongly represented in the Russian government and Putin’s inner circle. This means that while reconciliation remains possible, in the short term, the sanctions regime will, at best, remain unchanged, with the possibility of secondary sanctions still hanging over the head of foreign companies working in Russia. 




  • Alexey Eremenko, Consultant

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