Sanctions

Recent Russia Sanctions Designations: A Rundown

By Ed Stein
Thursday, April 12, 2018, 9:00 AM

On Friday, April 6, the Treasury Department announced sanctions on a variety of Russian entities, including “seven Russian oligarchs and 12 companies they own or control, 17 senior Russian government officials, and a state-owned Russian weapons trading company and its subsidiary, a Russian bank.” Although it will likely take some time before the full impact of the designations can be assessed, they already appear to be having an effect.

Signaling to Congress

Treasury’s announcement makes clear that these designations are intended to satisfy congressional calls for action against Russia, specifically the Countering America’s Adversaries Through Sanctions Act (“CAATSA”), discussed here. Although the designations do not appear to be based on any new authorities established by the CAATSA, Treasury notes that its authority to issue the sanctions was “codified by [the statute].” And in case there was any confusion, the department also adds that these actions grew out of the recently-issued “Oligarch’s Report” (discussed here) which Section 241 of CAATSA required the administration to assemble:

These actions follow the Department of the Treasury’s issuance of the CAATSA Section 241 report in late January 2018. In the Section 241 report, Treasury identified senior Russian government officials and oligarchs. Today’s action targets a number of the individuals listed in the Section 241 report, including those who benefit from the Putin regime and play a key role in advancing Russia’s malign activities.

We have already seen these designations have a significant impact on at least one company owned by an oligarch in addition to the Russian stock market more broadly, which saw a sharp decline on Monday. (However, as former Treasury sanctions official Elizabeth Rosenberg points out, the fact that a number of the designees were also identified in the Section 241 Report may cut both ways: designees had “ample time to adjust their legal holdings, or shrink their exposure to U.S. jurisdiction in order to limit some of the more material effects.”

Although it is too early to tell definitively how Congress as a whole will react, early signs suggest that members believe the sanctions to be a step in the right direction. Rep. Adam Schiff, ranking member of the House intelligence committee, welcomed the designations, calling them “the most significant action the Trump administration has taken to date to see Russia punished for its interference in our election, its murder of dissidents at home and abroad, and its subversion of democracy and peace from Syria to Ukraine and beyond.” More reactions may be forthcoming as Congress addresses Russia’s recent actions: For example, just this past week Reps. Joaquin Castro (D.-Texas) and Mike Turner (R.-Ohio) introduced a bill which would impose additional sanctions on Russia in response to last month’s attack on Sergei and Skripal in the United Kingdom.

CAATSA Delisting Review Implications

CAATSA’s review procedure could create a bit of a wrinkle should the administration seek to unwind any of these designations—for example, if Russia offered concessions. As discussed here and here, CAATSA includes a robust review procedure intended to limit the president’s ability to unilaterally lift sanctions imposed on Russia. Specifically, Section 216 of the bill (codified at 22 U.S.C. § 9511) requires congressional review before any of the following designations can be lifted:

(B) Sanctions described. The sanctions described in this subparagraph are—

(i) sanctions provided for under—

(I) this chapter or any provision of law amended by this title, including the Executive orders codified under section 9522 of this title;

(II) the Support for the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014 (22 U.S.C. 8901 et seq.); or

(III) the Ukraine Freedom Support Act of 2014 (22 U.S.C. 8921 et seq.); and

(ii) the prohibition on access to the properties of the Government of the Russian Federation located in Maryland and New York that the President ordered vacated on December 29, 2016.

22 U.S.C. § 9511(a)(2)(B)(i)(I) is an indicator of the strength and longevity that we can expect from these designations and of designations made under similar authorities. Since 22 U.S.C. § 9522 explicitly covers executive orders 13661 and 13662—two Ukraine-related authorities—Section 216 turns designations under these authorities into a one-way ratchet: It appears that it will require more work by Congress to undo any of Friday’s designations than it took to impose them. (As discussed in an earlier post, some argue that the review provision runs afoul of Immigration and Naturalization Service v. Chadha, 462 U.S. 919 (1983).) Without this provision, the president could lift these designations unilaterally with the stroke of a pen. But under CAATSA, members of Congress get a chance to weigh in first.

Serious Sanctions

These appear to be serious, weighty designations. The targets include individuals close to Vladimir Putin, some who have also been accused of a range of illicit activities.

Although the designations include a number of Russian government officials, oligarchs receive the lion’s share of the attention. Take just one of the oligarchs listed, Oleg Deripaska, who is designated pursuant to executive orders 13661 and 13662, the Ukraine-related executive orders mentioned above:

Oleg Deripaska is being designated pursuant to E.O. 13661 for having acted or purported to act for or on behalf of, directly or indirectly, a senior official of the Government of the Russian Federation, as well as pursuant to E.O. 13662 for operating in the energy sector of the Russian Federation economy. Deripaska has said that he does not separate himself from the Russian state. He has also acknowledged possessing a Russian diplomatic passport, and claims to have represented the Russian government in other countries. Deripaska has been investigated for money laundering, and has been accused of threatening the lives of business rivals, illegally wiretapping a government official, and taking part in extortion and racketeering. There are also allegations that Deripaska bribed a government official, ordered the murder of a businessman, and had links to a Russian organized crime group.

Deripaska’s designation extends to the companies he owns or controls, including En+, a London stock exchange-listed producer of aluminum. As The Times of London points out, the secondary restrictions which flow from the designation of Deripaska and his companies will have an impact in the U.K.:

Overseas businesses could face sanctions for "knowingly facilitating significant transactions" on behalf of those on the blacklist. ... The crackdown is expected to force City banks to sever ties with Deripaska and the other sanctioned tycoons. ... EN+ raised $1bn in a London stock market float in November last year. Citi and Credit Suisse advised on the fundraising and stayed on as brokers to EN+. The accountancy firm KPMG is the group's auditor.

(Reuters has outlined some other international dealings which Deripaska’s designation could impact, and the Financial Times reports that the designation had already had noticeable impact on aluminum prices.)

Shares of En+ dropped nearly 20 percent after the designations were announced. Late in 2017, after it was included on the Section 241 Oligarch’ Report, En+ reportedly encountered hesitation from large U.S. financial institutions based on reputational risk alone—even before a designation was made. And about two weeks before the Section 241 report was released, Deripaska reportedly filed suit in New York state court alleging that Paul Manafort and Rick Gates had defrauded him. Reporting as of late last year suggests that Deripaska and Manafort had extensive financial dealings and that Congress apparently denied Deripaska’s offer to testify in exchange for immunity.

Deripaska is hardly alone. The Treasury Department has designated numerous other Russian oligarchs, including Putin’s former son-in-law Kirill Shamalov and one of Shamalov’s businesses. According to Treasury, Shamalov’s “fortunes drastically improved following the marriage” to Putin’s daughter. But those fortunes reportedly took a recent hit after his marriage hit the rocks. And, according to the Financial Times, Shamalov is at the center of a meeting in the Seychelles which is “being examined by special counsel Robert Mueller.”

Another designee is Viktor Vekselberg, the ninth richest person in Russia according to Forbes—who, the Washington Post reported, attended the 2018 inauguration. The Wall Street Journal has outlined several of Vekselberg’s U.S. business connections.

The designations also include entities sanctioned under executive order 13582, which targets conduct supporting the Syrian government. According to Treasury:

Rosoboroneksport is a state-owned Russian weapons trading company with longstanding and ongoing ties to the Government of Syria, with billions of dollars’ worth of weapons sales over more than a decade. Rosoboroneksport is being designated under E.O. 13582 for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of, the Government of Syria. The Russian Financial Corporation Bank (RFC Bank) is being designated for being owned by Rosoboroneksport.

The Treasury Department’s Office of Foreign Assets Control (OFAC) notes that it has issued licenses designed to allow persons doing business with designated entities like EN+ a limited amount of time to wind down their operations or divest assets. Presumably the sanctions are in full effect thereafter. And, as OFAC flagged, the sanctions would also apply to U.S. person board members or employees at sanctioned entities. Directors are resigning their posts, stock prices are plummeting, and shares are being bought back.

So far, these designations have received widespread acclaim. Elizabeth Rosenberg noted that the designations are “meaningful because they’re aiming at sensitive industries in Russia that generate a lot of revenue.” Brian O’Toole, a former OFAC official, called them “a broad-based pushback on, basically, Putin's expansionist agenda.” (Disclosure: I worked with both Rosenberg and O’Toole at the Treasury Department.) Bill Browder, the force behind the Magnitsky Act, reportedly called the sanctions a “monumental development in the fight against Putin's impunity,” observing that “[t]his is what Obama should have done in 2014 after the Russian invasion of Ukraine.” And Peter Harrell, former deputy assistant secretary of state for counter threat finance and sanctions, called them “the Trump administration’s most forceful action to date against Russia.”

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