The cornerstone of the US’s sanctions against Russia, the Countering America’s Adversaries Through Sanctions Act (CAATSA), had its first anniversary on 2 August. Sanctions are a long game by default, so CAATSA is still settling in, and its main custodian, the US Office of Foreign Assets Control (OFAC), is far from establishing the full practice – and limits – of its implementation. Nevertheless, first takeaways have become clear, and so far they indicate that, unlike in the case of Iran, doing business in Russia or with Russian firms remains possible for companies worldwide, albeit with numerous caveats and a set of compliance measures.
CAATSA offers a complex web of instructions and prohibitions, many of which are open to interpretation. Nevertheless, several key blacklisted areas are clear: the law bans companies from working with the Russian defence/intelligence sector; in ‘special oil’ projects – deepwater exploration, Arctic oil, shale oil; on Russian export oil pipelines (initiated after 1 August 2017); and from any business involvement in Crimea, which Russia in 2014 annexed from Ukraine. Broadly speaking, foreign companies are strongly advised to stay away from these areas of activity.
As usual, the devil is in the details. The most glaring example is the defence/intelligence sector: CAATSA only bans ‘significant transactions’ with it, but neither the law nor OFAC have offered a clear explanation of what constitutes ‘significant’. US Secretary of Defence Jim Mattis in April said that the law has hurt national militaries purchasing Russian arms (as well as US arms exports). But CAATSA also remains applicable to private companies doing business with the Russian army, security services and military-industrial complex, all of which are veritable business conglomerates in their own right with a huge demand for civilian services. Is supplying cranes to a company building housing for army personnel a ‘significant transaction’? OFAC is yet to say.
Another murky area is the possibility of the so-called daisy chain implementation, in which the principle of ‘six degrees of separation’ applies: a company working with a sanctioned entity can itself be sanctioned, exposing its own partners to the risk of sanctions in turn. The principle, also known as ’secondary sanctions’, has not been applied yet, though CAATSA is still finding its feet.
CAATSA and the related regulatory framework also contain provisions for blacklisting on grounds such as involvement in corruption in Russia or representing the interests of a Russian government official, including informally. A significant portion of the Russian political and business elite has at some point being accused of corruption and government ties, though little was ever proven in court. A rigorous implementation of CAATSA could therefore see hundreds, if not thousands, of prominent Russian figures, including businesspeople, on US blacklists.
Lastly, CAATSA allows the US Treasury to sanction companies working in several key Russian industries, including metals, mining and energy, at the Treasury’s discretion – no further preconditions.
Implementation
Clarity for businesses is beginning to emerge as US authorities have started implementing CAATSA, months after the bill’s signing. Some of the blacklisting targets are clearly political: the list includes the Federal Security Service of Russia (KGB’s successor) and small organisations accused of running online influence campaigns on the Kremlin’s behalf during the 2016 US presidential vote.
However, big businesses have been targeted as well, most notably on 6 April, when OFAC sanctioned Russian billionaires Oleg Deripaska and Viktor Vekselberg and their business ventures, including, respectively, leading aluminium producer Rusal and the holding Renova Group. Deripaska, who had ties to Paul Manafort, US President Donald Trump’s embattled campaign manager, was sanctioned for representing the Russian government; Vekselberg for operating in the energy industry.
Sanctioned the same day were Russian billionaire legislators Suleiman Kerimov and Andrei Skoch; the former was the subject of a money laundering case in France at the time of the sanctions (the charges have since been dropped), while the latter was accused of mafia ties during the 1990s, including in British media. And separately, OFAC in January 2018 blacklisted the major Russian company Power Machines for holding a minority stake in a joint venture with Siemens that supplied power-generating equipment to Crimea.
These cases offer some indication of the informal factors OFAC considers when selecting entities for blacklisting from a wide range of liable targets for CAATSA.
This includes negative publicity: Deripaska and Vekselberg have been implicated by US media in controversies surrounding Trump, while Kerimov and Skoch were blacklisted by OFAC on accusations – in both cases extensively covered in media – of involvement in major crimes.
Finally, a case can be made for OFAC considering the White House’s overall economic policy in its sanctions-related decisions. Trump made a point of protecting the domestic metals industry, and the sanctioned Rusal exports heavily to America. Vekselberg’s Renova is a shareholder in Rusal, and also has assets in the oil industry – in which, since the shale oil boom, the US is a direct competitor for Russia.
Impact on non-Russian companies
There are striking omissions in OFAC’s actions. Key among these is the avoidance of secondary sanctions against non-Russian companies, whether Rusal partners or suppliers of the Russian defence/intelligence sector. No ‘daisy chain’ has been triggered so far. Even Siemens, also involved in the supply of turbines to Crimea together with Power Machines, was spared punishment by OFAC (Siemens says it was unaware the machines were to be supplied to the annexed region).
US foreign relations, in fact, appear to matter quite a lot for the sanctions policy. The sanctions against Rusal were softened after the leaders of several EU countries, including France and Germany, which do a lot of business with the Russian company, visited Trump, apparently lobbying for a softer stance. Trump was later reported to have demanded in return that a gas pipeline from Russia to Germany be dropped, with the supply hole to be plugged by US liquefied natural gas.
Nevertheless, this soft approach to non-Russian companies affected by the sanctions cannot be expected to last. OFAC granted general licences, or temporary sanctions waivers, to companies doing business with most entities sanctioned on 6 April, including Rusal, but one of general licences has already expired, and the other (for Rusal) runs out on 5 August. OFAC may renew it again, but will not keep doing so indefinitely. The agency can be expected to eventually put its foot down, and it already has a solid track record of punishing transgressors in the case of Iran and other longer-running sanctions programmes. For example, OFAC in 2014 fined BNP Paribas USD 963m over violations of several sanctions regimes, including on Iran, Cuba and Sudan.
It remains to be seen how far OFAC will go to bridge the current glaring gaps between CAATSA’s formal provisions and OFAC practice. However, the above provides a set of red lines and grey areas that businesses can learn to avoid or be aware of to operate in Russia.
Know Your Sanctions
A crucial part of doing business in Russia in 2018 is knowing what is actually prohibited. Many industries and companies are mentioned in the sanctions context. However, unlike in Iran, there is no blanket ban. Compliance and legal advice sometimes tends to be on the safe side, but while staying on the right side of the law is paramount, it is unwise to waste business opportunities because of misunderstood official guidelines.
One key area is differentiating between the Specially Designated Nationals (SDN) and Sectoral Sanctions Identifications (SSI) lists. No business can be done by US-compliant companies with the SDNs; non-US companies also run the risk of coming under secondary sanctions if they have at least a branch office in the US. However, in the case of the Russian SSI entries, the only prohibition is on lending them money for more than 14 days. The SSI list includes top Russian state-owned companies such as Gazprom, Rosneft and Rostec, all of which continue to do business with companies from outside Russia.
(The SDN/SSI dichotomy is not without caveats. In 2017, ExxonMobil was fined USD 2m by OFAC for a deal it signed with Rosneft in 2014 because it was signed by Rosneft CEO Igor Sechin, who was put on an SDN list as an individual. ExxonMobil is still battling the ruling in court, and the lesson is to watch your countersigning party.)
Another list to be aware of is the so-called Kremlin list, released by OFAC in January, naming the 94 richest Russian businessmen as potential targets for sanctions. Six of them were sanctioned on 6 April, including Deripaska and Vekselberg, which has understandably made businesses jittery about working with the remaining 88. However, the only criteria for inclusion on the list were Russian origin and net worth starting from USD 1bn. Otherwise, the list comprises a wide variety of business figures, from Kremlin-connected oligarchs to IT entrepreneurs and other self-made people in politically neutral industries who have done nothing to land them in OFAC’s crosshairs, especially if the aforementioned informal factors are considered.
Staying Compliant
Following the sanctions regime when working in Russia takes a due diligence and business intelligence effort, but is not insurmountable. An obvious step is sanctions checks – verifying whether your counteragents are on SDN/SSI lists. This is nominally a straightforward task for in-house or outsourced compliance. However, it is not without complications, as in the case of companies with a lot of partners due to long supply chains, for example. Still, bulk checks can be done.
A related good practice, implemented by a number of companies working in Russia, is sanctions-checking the end users of your products. This is also good practice for producers of equipment used in both civilian and military sectors, such as engine parts.
Ownership verification is also a requirement: compliant businesses need to know whether their partners are ultimately controlled by sanctioned entities. This can be more complicated than it should be when the ownership chains contain entities from low-transparency jurisdictions (the British Virgin Islands are especially popular in Russia). A dedicated compliance team can nevertheless establish ultimate beneficiaries in most cases through in-depth media review – business press in Russia remains robust and inquisitive enough – and/or through source enquiries.
A less obvious, but necessary, step is checking for sanctions risks exposure – in other words, whether your counterparties can come under CAATSA-related sanctions in the future. This is a special form of due diligence in which a company is checked for CAATSA liabilities such as military contracts (many of these are unclassified), involvement in special oil projects – which can mean providing infrastructure or transportation services – or for subsidiaries based in Crimea.
Even more importantly, such due diligence on sanctions risks exposure can also identify the informal factors capable of influencing OFAC’s stance on a company or individual. This includes examination of the subject’s reputation, political connections in Russia and corruption allegations against them. However, unlike regular due diligence, this is to be done with a focus on OFAC: the question to be kept in mind is “would it be relevant to the US authorities?” Would OFAC see this blacklisting as advancing the sanctions’ goals, and the White House’s goals in general?
A check of informal factors at play in sanctions risks exposure should also include analysis of the subject’s area of operations and its relevance for US economic policy. Though the US has its fingers in many economic pies, some, such as metals and other blue-collar industries, are clearly hotter than others today. This means a bigger risk for companies working in Russia, which have to do their homework to avoid the nasty shock of finding out their seemingly safe partners have become overnight sanctions liabilities. Risk mitigation always retains an element of uncertainty and unpredictability, especially in politically charged situations such as in US-Russia relations. But a compliant business operation in Russia remains possible as long as – per OFAC’s own guidelines – a company shows its ‘best effort’ in navigating the prohibitions and sticking to ‘clean’ deals and sectors in a market with a still formidable and underexplored potential for smart investors.
Author
- Alexey Eremenko, Consultant