Memo to Congress: treasury’s plan to lift sanctions on Russian oligarch’s companies is a good one

US lawmakers must not allow understandable concerns about US President Donald J. Trump’s views of Russia to overshadow the technical merits of the administration’s divestiture plan to remove sanctions on aluminum giant Rusal and two other companies—EN+ and EuroSibEnergo, or ESE—sanctioned for their ties to Russian oligarch Oleg Deripaska. After months of negotiations, Treasury officials have arrived at a delisting arrangement worthy of careful consideration and approval.

US Treasury Secretary Steven Mnuchin’s January 10 congressional briefing on the details of the administration’s divestiture plan,  and the ongoing attention to this issue, sharpens the debate on whether the Rusal delisting is the appropriate action and whether Congress ought to exercise its authority under the Countering America’s Adversaries Through Sanctions Act (CAATSA) to prohibit the delisting.

As we have written before, this delisting deal with Deripaska is a positive outcome for the policy that sanctions are intended to advance. It is among the most robust and verifiable delisting processes that Treasury has achieved. Congress absolutely should discharge its oversight role of this deal and require the Trump administration to provide regular status updates to ensure Congress is kept abreast of any attempts by Deripaska or his Kremlin cronies to undermine this arrangement. Ultimately, legislators would be better served focusing their broader punitive ire toward the Kremlin in other areas rather than seeking to overturn a technocratic and sound proposal on Deripaska’s companies.

As context, the Trump administration and Congress arrived at this place after an odd public rollout of the so-called Kremlin Report required under CAATSA that was little more than a cut-and-paste job of Forbes’ Russian billionaires list. Under significant pressure during congressional testimony in the days following that release, Mnuchin promised that additional sanctions based on the classified Kremlin Report would be forthcoming. That promise materialized in a rather significant shock to markets on April 6, 2018, when Treasury’s Office of Foreign Assets Control (OFAC) designated, among others, Deripaska and the key companies he owned. The headliner, Rusal, is the world’s second-largest aluminum company.

The impetus for the April 6 sanctions, as was intended in the report required by CAATSA, was to increase pressure on Russian President Vladimir Putin by exposing the oligarch class close to him, beyond the sanctions actions already imposed on certain well-connected Russians (e.g., Gennady Timchenko, Boris and Arkady Rotenberg, etc.). For many familiar with Russia, Deripaska seemed an obvious choice for such an expansion. Add to that the reports of Deripaska’s potential role in the Russian interference in the 2016 US election, and it is easy to see why he became a target. There were likely concerns about the sanctions’ impact on US and EU firms and metals markets, which stand to face significant impact if Congress disapproves the delisting, as the market impact to date has been blunted by OFAC licenses authorizing continued business until ownership issues could be settled.

Once the Trump administration decided to designate Deripaska, it also became necessary to designate his companies, among them Rusal and its parent company, EN+, with whom the divestiture deal has been struck. This served two primary purposes. First, it removed any confusion about whether the companies were subject to sanctions under OFAC’s 50 Percent Rule, which dictates that entities owned 50 percent or more by sanctioned persons are themselves automatically sanctioned, and would have been in question given the shareholding structure for Rusal was unclear. Second, it gave OFAC and the US government leverage over how a divestiture below that 50 percent line would occur, given the potential for sham divestments, as had occurred with the transfer of companies from the brothers Rotenberg to their children (who are now themselves designated).

OFAC has successfully implemented divestiture and delisting deals in other significant cases before, most notably involving narcotics money launderers in Panama and Honduras who owned economically significant entities. Pulling Rusal out from under Deripaska’s control would potentially send a strong message to other Russian oligarchs who would have reason to be fearful of US sanctions, with the goal of trying to drive a wedge—even a small one—between the Kremlin and those oligarchs not fully beholden to Putin.

As Congress reviews the delisting deal that has been struck by EN+ and OFAC it should focus on a few key questions.

To begin, why is this a good deal right now? As discussed above, the sanctions were intended to target the oligarchs close to Putin (as guided by the report that Congress required in CAATSA) not necessarily the economically significant entities they control that could be sanctioned to cause harm to the Russian economy. And, as always, the point of sanctions is to inflict maximum impact on the target (Deripaska) while minimizing collateral spillover to the United States and its allies.

The direct impact of this deal is significant and helps to mitigate the significant costs that would otherwise be imposed on US and European companies that rely heavily on Rusal’s products in their supply chains, as well as the broader metals markets.

To wit, Deripaska remains designated and cannot deal with any US persons or the US economy, a significant blow to someone who has gone to great lengths to try to legitimize his business dealings internationally over the last fifteen years. Further, under CAATSA, OFAC is mandated to use secondary sanctions on any person who knowingly facilitates a significant transaction for or on behalf of Deripaska, meaning even his foreign friends will need to think twice about any future cooperation. The deal mandates that Deripaska give up 25 percent of EN+, a company with more than $3 billion market share, without receiving a dime. Furthermore, it effectively freezes his remaining shares in EN+, Rusal, and ESE, another EN+ subsidiary, and prevents him from benefitting financially from them—he cannot sell/buy shares nor can he receive dividends—unless he is personally delisted. EN+ and the subsidiaries must ensure that Deripaska exerts no direct or indirect control over the companies under a reporting arrangement that mandates certification from independent, Western auditors (a setup we cannot recall OFAC using before).

Some observers have taken issue with several aspects of this deal. As it stands, Deripaska’s stake in EN+ decreases from 70 percent to nearly 45 percent, and although he cannot benefit financially, he can still appoint a minority of the board of directors. Deripaska can only vote 35 percent of that stake, however, as the deal places the remaining 10 percent into a voting trust that he cannot influence. There is a legitimate critique that allowing Deripaska to retain any shares allows him to retain influence. However, total divestiture was never a realistic goal in this circumstance. Simply put, there was almost certainly no market to take on the full 70 percent of EN+’s shares that Deripaska held at the time of his designation. OFAC did well to find ways to limit Deripaska’s stake below 50 percent in our estimation, particularly given how toxic he has become under sanctions.

Others have alleged that this deal only transfers Deripaska’s influence to family, friends, and the Kremlin. We beg to differ. First, while the divesture deal does have Deripaska offloading a block of his EN+ shares to a charitable foundation, Volnoe Delo, which is run by Deripaska’s family, the foundation is required to transfer its voting rights to an independent third party.

Second, the notion of Deripaska’s friends potentially benefitting generally refers to the transfer of a block of shares to Glencore, the trading and mining giant which has its many legitimate detractors. However, this opens Glencore up to increased reporting to and attention from OFAC when the company already faces heavy scrutiny from its ties to Israeli billionaire Dan Gertler, who was designated under the Global Magnitsky Human Rights and Corruption sanctions for corrupt dealings in the Democratic Republic of the Congo. Our view is that Glencore is taking a risk here, and likely not getting the alleged windfall.

Third, the Kremlin involvement refers to the final block from that 25 percent divestment being transferred to VTB, a Russian government-owned bank. The deal, however, requires that VTB’s voting rights from those transferred shares be assigned to an independent third-party. VTB had claim to those shares due to a preexisting collateral arrangement, and this deal actually removes the Kremlin from the voting influence those shares would have otherwise provided. As a kicker, OFAC required Rusal to remove Matthias Warnig, a long-time Putin insider, as company chairman, which to us demonstrates OFAC’s attention to detail and resolve to limit Kremlin influence, which was the original intent of the sanctions.

Ultimately, the question on everyone’s mind is whether Deripaska and/or the Kremlin can cheat on this deal and back channel their influence. And if they do, will the Trump administration actually stick to its guns and re-designate these companies? These are critical concerns, but they are best addressed through congressional oversight of the administration’s monitoring of the divestiture, not by quashing a good deal. Congress would be well within its authorities to require regular reporting from the Treasury Department certifying that EN+ and Deripaska are living up to their end of the deal, and should require periodic briefings to discuss with Treasury officials what they see in their monitoring of the companies and any attempts to cheat the deal.

Many in Congress may also be questioning if this deal reflects another dive by a president widely perceived as soft on an ever-more aggressive Russia. We do not share in any assessment that this is an effort to appease the Kremlin, and believe such concerns are generated more by angst over the lack of US response to Russia’s recent aggression in the Kerch Strait, a worsening situation in Ukraine where a settlement based on the Minsk Accords seems to mean nothing to a Kremlin content with the status quo of a destabilized neighbor, additional sanctions as required under the Chemical and Biological Weapons Act and under the Magnitsky Act, and what response is needed for Russia’s reported interference in the 2018 US midterm elections. These issues are separate from the Rusal delisting, however, and should not detract from evaluating this deal on its merits alone. We recommend that Congress engage the Trump administration on these other issues on their merits, and as part of a broader conversation around shaping US foreign policy toward Russia.

Politics are what they are in the United States, especially with regard to Trump and Russia, but they should not stand in the way of effective, technocratic work by the professionals who are charged with executing US government sanctions policy on Russia.

Brian O’Toole is a nonresident senior fellow with the Atlantic Council’s Global Business and Economics Program. He is a former senior adviser to the director of the Office of Foreign Assets Control (OFAC) at the US Department of the Treasury. Follow him on Twitter @brianoftoole.

Samantha Sultoon is a visiting senior fellow with the Atlantic Council’s Global Business and Economics Program and the Scowcroft Center for Strategy and Security. She is a former sanctions policy expert for the Department of the Treasury’s Office of Foreign Assets Control (OFAC).


Related Experts: Brian O’Toole and Samantha Sultoon

Image: The US Treasury Department said on April 23 that it would consider lifting sanctions on RUSAL if Russian billionaire Oleg Deripaska relinquished control over the aluminum giant. (Reuters/Ruben Sprich)