John E. Smith, John P. Carlin, and Michael V. Dobson
National Security, CFIUS, Sanctions + Export Controls
Yesterday afternoon, Treasury’s Office of Foreign Assets Control (OFAC) took two complementary actions involving U.S. sanctions related to Russia. The first was notifying Congress of the office’s intent to terminate sanctions on three systemically important companies tied to Russian oligarch Oleg Deripaska. That is scheduled to happen in 29 days (30 from yesterday). Normally OFAC wouldn’t give notice like this, but the Countering America’s Adversaries Through Sanctions Act (CAATSA) and a delegation of authority from the President say it has to. The second OFAC action was “designating,” or imposing severe blocking sanctions on, a slate of Russian individuals and entities involved in election interference, hacking, and other malign activities. From a political optics perspective, the combination pairs well. (The timing is also shrewd in light of lawmakers heading out of town for the holidays.)
You might recall back in April when OFAC sent shockwaves through the global economy by designating En+ Group plc, UC Rusal plc, and JSC EuroSibEnergo (“ESE”) for being variously owned and controlled by Deripaska and each other. Rusal’s designation drew particular attention, as the company accounts for between seven and 10 percent of the world’s aluminum and alumina outputs. Customers and downstream markets the world over felt the pain immediately. OFAC responded with general licenses allowing specified activities to continue for defined periods that have since been extended several times. Those reprieves gave OFAC the space to negotiate behind the scenes to get Deripaska to reduce his ownership stake in En+ to less than 50% and relinquish his control over that entity and the others. Apparently, after months of grueling back-and-forths, compromise was struck. Now it’s on Congress to decide whether to play Grinch and oppose terminating sanctions. Company stakeholders could be spoilers too, but it’s hard to come up with a reason they would.
A few key takeaways here:
Timing the notification to Congress with sanctions on a fresh crop of Russian malign actors was a savvy play by the Administration, demonstrating that, regardless of what is happening with the Special Counsel investigation, civil servants are continuing to identify and expose Russian meddling in the U.S. political system. Among those targeted were a former Russian intelligence official who OFAC claims acted on Deripaska’s behalf, as well as entities and individuals who tried to stoke tension in the United States as recently as June 2018. The State Department took concurrent action to add 12 of the 18 individuals and entities OFAC designated to its List of Specified Persons under Section 231 of CAATSA. That list identifies persons that are part of, or operate for or on behalf of, the defense or intelligence sectors of the Russian government. Significant transactions with persons on that list can result in sanctions, and listed parties are not automatically added to the SDN List. Separately screening parties with ties to the Russian defense and intelligence sectors is therefore highly advisable.
That OFAC publicly acknowledged Russian meddling in U.S. domestic life as an ongoing phenomenon is particularly striking in its implications. Elements within Congress have shown in draft legislation that they see such activity as a provocation warranting an extreme sanctions response (see: the Defending Elections from Threats by Establishing Redlines, or DETER, Act of 2018). By making the Kremlin’s continued shenanigans public, the Administration might be signaling that the President holds a similar view. We could see this turn into a footrace between the Executive and Legislative Branches to see who can erect a more draconian automatic sanctions response framework first. January should be very interesting.
Stepping back for a moment, it is worth stating explicitly that this is a significant victory for OFAC and the sanctions programs it is charged with administering. The purpose of sanctions, as the office often says, is not to punish, but to protect the U.S. financial system and change behavior. Sanctions are about creating credible threats and incentives. In this case, OFAC did just that.
Forcing an oligarch to publicly and substantially reduce his holdings and give up control over some of his most prized assets sends several messages. The move shows other Russian oligarchs that neither Putin nor interests in systemically important companies can shield them entirely from the consequences of being associated with the Kremlin and its malign activities. It also shows that, despite the Sturm und Drang in Washington surrounding all things Russia right now, the OFAC delisting process is still a boring, apolitical administrative affair focused entirely on objective facts. Has the sanctioned party’s ownership interest decreased below 50 percent? Have other indicia of control been extinguished? Then delisting commences, full stop.
This is profoundly important to not only markets and shareholders, but to designated individuals and entities as well. If being delisted doesn’t seem like a real possibility, then there’s no reason for a sanctioned party to change its ways. OFAC taking the first step to delist in this case is a boon to faith in the process, and, if all goes according to plan, will probably result in a model for significant actions that the office will look to borrow from in the future.
Now if only we could figure out how to use the model ourselves to help with our New Year’s resolutions.
Happy holidays, and we look forward to keeping you updated as this situation continues to unfold in 2019.
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