On 29 January, the deadline expires for the US Treasury, the State Department and intelligence services to submit a report that identifies persons close to the Russian government and their net worth. The legislation will have a significant effect on targeted individuals’ ability to do business, but will also risk a split between the US and EU on sanctions policy.
Congress’s new blacklist
Backed by a veto-proof bipartisan support, legislation passed by Congress on 2 August 2017 gave the Treasury, the Secretary of State and the Director of National Intelligence 180 days to identify top Russian officials and businessmen close to Putin’s power structure. The legislation was initiated after the alleged Russian meddling in the 2016 US presidential elections, and limits President Trump’s ability to lift sanctions by an executive order.
The US Congress´ main goal has been to pre-empt any damage from Trump´s potential inclination to lift or weaken sanctions against Russia. Because previous sanctions were imposed by Obama by an executive order, a new president could lift them altogether by another executive order. It was a message to Russia in particular (although the bill also includes sanctions against Iran and North Korea) that the US will not have a friendlier stance because of Trump´s rhetoric. The bill urges the president to “increase efforts to vigorously enforce compliance with sanctions in place as of the date of the enactment of this Act with respect to the Russian Federation in response to the crisis in eastern Ukraine, cyber intrusions and attacks, and human rights violators in the Russian Federation”.
According to the “Countering America´s Adversaries Through Sanctions Act” (CAATSA), the report required to be produced by 29 January should list all the senior foreign political figures and oligarchs, who are close to the Russian government, together with their estimated net worth. The report will include an assessment of their proximity to the Russian political elites and identify any indication of corruption in their business activities inside and outside of Russia. It will also identify their known sources of their income (and that of their family members), including assets and investments.
In addition, the Act requests the completion of three reports:
- report on the effects of expanding sanctions on Russian sovereign debt and derivative products;
- report on the potential impacts of imposing secondary sanctions on the blacklisted oligarchs;
- report on illicit finance related to the Russian Federation.
The resultant blacklist will be more comprehensive than previous restrictive measures (travel ban and asset freeze) as it also targets a blacklisted person’s relatives (spouses, children, siblings, parents) and assets outside of Russia. It is likely to include the names that are already on sanctions lists (including under the Ukraine measures), but because of its broader scope it will target loopholes the oligarchs are currently using, whereby a targeted person transfers their business activities to a relative and/or to an offshore jurisdiction, in Cyprus for example.
Who is at risk?
Although the Act does not give information as to who might be blacklisted, nearly 50 Russian businessmen – together with their families, 300 individuals – could be targeted. One of the indicators that might be used for the blacklist is the targeting of entities that have received more than $300 million from the Russian state. With a high degree of certainty, these Forbes businessmen are likely to be on the list:
- Oleg Deripaska, a Russian aluminium billionaire, was previously employed by Paul Manafort, Trump´s former campaign manager. Recently his name came up in relation to a money laundering case. In 2008, his company US Rusal was the largest receiver of state help – $4.5 billion were given by Vneshkombank, Russia´s development bank, sanctioned by US and EU;
- Mikhail Fridman and Alisher Usmanov, two of Russia´s richest oligarchs, received $2 billion and 31 billion rubles via their companies Alfa Group and Metalloinvest from Vneshkombank, respectively.
- Roman Abramovich, a Russian tycoon who earned his assets in oil and gas business, and his company Evraz obtained $1.8 billion.
As before in response to the imposition of Western sanctions, tit-for-tat measures are likely to be called for in Russia. Kremlin spokesman Dmitry Peskov has already stated that Russia will retaliate against punitive measures imposed on its business owners.
With presidential elections on the horizon this year, such measures are also likely to be loudly decried by the Kremlin. Deputy Foreign Minister Sergei Ryabkov has even called them an attempt to influence the upcoming elections. Indeed, to some extent such a blacklist corresponds to what Russia’s political opposition has been calling for, and will offer support to their narrative regarding corruption within the Russian elites. However, the overall impact is more likely to stir up anti-Western sentiment among Putin’s electoral base, than to significantly improve the opposition’s chances.
All that said, Russia’s options for retaliation are once again likely to be limited. Previous rounds of sanctions and counter-sanctions have demonstrated that Russia’s reaction tends to be strong rhetoric combined with some symbolic measures, but avoiding overly aggressive action that would cause an escalation and damage to the economy. Responses may take the form of sanctions against specific U.S. imports or regulation that makes it more difficult for high profile U.S. companies to do business in Russia.
Meanwhile, protective steps are already being taken by the Kremlin. To counter a potential expansion of sanctions on Russian bonds, President Putin approved the issue of special bonds which will keep dollar assets immune to the US Treasury. To defend his elites, the Russian president also announced a capital amnesty programme to incentivize wealthy Russians to repatriate their overseas assets. It is estimated that $200 billion in financial assets are held in offshore tax heavens, which constitutes 60% of Russia´s overall wealth. A “de-offshorization” law, passed in 2014 before sanctions to encourage repatriation, had limited success among Russian tycoons, but under threat of blacklisting, they seem to be looking for new ways to bring cash home. Finally, Prime Minister Dmitry Medvedev signed a decree which exempts Russian companies from disclosing any information about sanctioned entities.
The impact: business uncertainty and a rift with Europe
Uncertainty is the biggest risk factor for Russian business
It’s important to note that the blacklist should not be conflated with sanctions. It will not be issued by the Office of Foreign Asset Control (OFAC), so no assets will be automatically frozen. However, being on the list will increase the risk of being sanctioned in the future – under so-called secondary sanctions. For instance, Section 232 of the relevant bill, with respect to Russia´s energy export pipelines reads:
“The President, in coordination with allies of the United States, may impose five or more of the sanctions […] to a person if the President determines that the person knowingly, on or after the date of the enactment of this Act, makes an investment described in subsection (b) or sells, leases, or provides to the Russian Federation, for the construction of Russian energy export pipelines, goods, services, technology, information, or support”.
These sanctions would be especially effective, as they will be valid beyond the US territory. It means that anyone doing business with sanctioned entities – inside or outside of the US – will be in violation of US sanctions and will face heavy fines. But there are a number of unknowns surrounding the imposition of these extra-territorial (secondary) sanctions: firstly, it is discretionary, depending on whether the President considers it to be necessary. Second, no mechanism is specified of how “in coordination with allies” will be achieved. And finally, the post of the State Department sanctions policy coordinator remains vacant, increasing uncertainty further.
Finally, there is a risk of the blacklisted persons being included in the Specially Designated Nationals List, in which case they will face an entry ban to the US, their assets on the US territory will be frozen, whereas all the business deals with US companies will be prohibited.
Thus, despite the fact that for the present this will only be a blacklist, its signaling effect will be significant – creating perceived risks for US or EU companies in working with listed persons and their companies.
Secondary sanctions and U.S. relations with Europe
Last August’s Congressional legislation already caused outrage in Germany and Austria last year. In the original version of the text around extra-territorial sanctions on Russia’s energy export pipelines, there was no stipulation around co-ordination with the EU. Since many European energy companies are currently involved in the Russia-led Nord Stream 2 pipeline, this caused an outrage in Germany and Austria as the main supporters of the pipeline. The amended text includes the application of secondary sanctions “in coordination with allies of the US”, however, as noted above, it is not clear how that will be implemented.
Brigitte Zypries, German Minister of Economy, called the US sanctions poorly coordinated, illegal and threatened to impose counter-measures. Similarly, last summer, in a joint statement Sebastian Kurz, then Austria´s Foreign Minister, and Sigmar Gabriel, Germany´s Foreign Minister, strongly criticized US sanctions, saying that they will endanger US-EU relations “in a new and very negative way”. Both countries are involved in the building of Nord Stream 2, funded by Gazprom, which is sanctioned by the U.S. In his latest statements on the matter, Gabriel suggested taking a friendlier stance on Russia and lifting sanctions in exchange for a ceasefire in Ukraine. However, this looks very unlikely given the situation in the U.S. – and the longer the rift continues, the less likely effective, co-ordinated sanctions on Russia become – which ultimately plays into the Kremlin’s hands.