As widely reported, on 29 January 2018 authorities of the executive branch of the United States of America (US) issued their much-anticipated report to Congress on senior foreign political figures, oligarchs, and parastatal entities (the Report), pursuant to Section 241 of the Countering America’s Adversaries Through Sanctions Act (CAATSA), the major US sanctions law enacted last August. In this alert, we share our initial conclusions and recommendations about the Report. We also discuss several other notable recent developments concerning the US sanctions regime against Russia.
Our main conclusions and recommendations regarding the Report are as follows:
- The Report unambiguously states that it does not impose any sanctions against, or other restrictions, prohibitions, or limitations on dealings with, any persons listed in the Report (the Listed Persons), either by US persons or non-US persons. Nor does inclusion in the Report signify that a Listed Person is necessarily engaged in “malign activities” or satisfies the criteria for designation under any sanctions program. For the time being at least, the Report changes nothing from a legal standpoint. As discussed below, however, the Report may form a basis for future sanctions.
- The scope of Listed Persons in the unclassified part of the Report (the Unclassified Report) is both broader and more simplistic than most observers had expected. The list of 96 “oligarchs” in particular is simply a list of persons with estimated net worth over $1 billion, without regard for their significance and “closeness to the Russian regime” (as specified by CAATSA Section 241) or indeed their involvement in politics or government, and was largely taken from the Forbes list of wealthy Russians. A number of the listed oligarchs are regarded as apolitical entrepreneurs, and some are even associated with the political opposition or have close ties to the US. The list of 114 senior political figures has likewise been enumerated with little apparent regard for their actual proximity to the center of government or to the predominant political party. One veteran Western commentator on Russian affairs has even claimed that the prior draft of the Report carefully targeted only select senior political figures and oligarchs, and that the US administration decided at the last minute to replace it with a more anodyne and indiscriminate list.
- The Report also contains a classified annex (the Classified Report) which is said to contain hundreds of pages and may name additional Listed Persons who are not mentioned in the Unclassified Report. Parastatal entities are not listed in the Unclassified Report but are described therein as being those companies with Russian state ownership of at least 25% and with 2016 revenues of at least $2 billion.
- Some of the Listed Persons were already under US sanctions prior to issuance of the Report. Other Listed Persons would seem to be unlikely targets even if the US does escalate its sanctions regime against Russia, although they could be caught up if (as discussed below) blanket sanctions are imposed against all Listed Persons collectively. Russian political and business figures not listed in the Report may still be sanctioned in the future.
- The Report is an information resource that may be used in the future by Congress or the US executive branch if there is a desire to expand sanctions against Russia by targeting powerful Russian individuals. Indeed, the Classified Report is said to contain, as required by CAATSA Section 241, an assessment of the potential impacts of imposing sanctions on Listed Persons. The US Treasury Secretary, in testimony to a Senate committee on the day following publication of the Report, suggested under rather sharp questioning that the US administration intends to use the Report and the intelligence used to develop it to “go forward with additional sanctions” in the next one to two months. Time will tell if this proves to be the case.
- Generally we would not expect any new sanctions to be imposed against Listed Persons without consideration for either the actual involvement of specific Listed Persons in matters that the US has sought to influence through its sanctions policy (in particular Crimea, eastern Ukraine, cybersecurity, and elections), or for their proximity to the Russian government. In that regard, the Classified Report reportedly contains at least some analysis of factors required by CAATSA Section 241 to be included in the Report that would be relevant to future determinations about whether to sanction individual Listed Persons. These factors include the relationship between Listed Persons and President Putin or other members of the “Russian ruling elite”; the net worth, sources of income, and assets of Listed Persons and their family members; “indices of corruption”; and, as noted above, the potential impacts of imposing sanctions on such persons.
- Listed Persons may find that their US and other western partners seek an extra degree of reassurance as a result of the Report. For their part, current and potential counterparties of Listed Persons or of companies connected to them should not overreact to the Report, but should take note of the contents of the Report and monitor its future application, if any, as part of their ongoing compliance risk management processes, which should entail attention to all of CAATSA’s provisions and other aspects of the US sanctions regime.
- Listed Persons may also wish to consider other measures to mitigate the consequences of the Report for them. There is no procedure to dispute inclusion in the Report and a court challenge would almost certainly fail. In select cases, lobbying US authorities by giving reasons why the Listed Person is an inappropriate target for any future sanctions might be worthwhile, although this may carry risks.
- Listed Persons, and other persons concerned that they may have been named in the classified annex to the Report, may also wish to consider taking measures to reduce or eliminate their exposure to the US financial system (e.g., dealings or holdings in US dollars; borrowings in US dollars; investments in US-based assets; contracts with US counterparties, and so forth), although this will entail both actual costs and opportunity costs. Obviously, this should not be undertaken without careful consideration of the actual likelihood of such persons becoming targeted by future sanctions.
- In this regard, the risk that the Report might be used to implement blanket sanctions against all persons named therein cannot be entirely excluded, although it should not be overstated. We strongly doubt that the US executive branch, which primarily drives US sanctions policy, would take such an approach, as this would represent an extremely severe escalation of what are intended to be carefully calibrated US sanctions, and a further de-coupling from the Russia sanctions policies of the European Union, Canada and other US allies. Instead, the impetus for such sanctions could come from Congress. In this regard it is notable that parallel bills were introduced in both chambers of Congress shortly before issuance of the Report, which if adopted would require the President, in the event of future Russian interference in US federal elections, to impose full-scale blocking/freezing sanctions against all Listed Persons (i.e., to designate them as SDNs). However, it is far from certain that these bills will become law, especially in their current form and in view of the unexpectedly broad scope of Listed Persons. Nevertheless, the status of these and any future similar bills should be carefully monitored.
Although issuance of the Report garnered the greatest attention, there were also several other significant developments in US sanctions against Russia over the past week:
- CAATSA Section 242 required certain US agencies to deliver a separate report to Congress on the potential effects of expanding sanctions under Directive 1, which restricts US persons from transacting in equity or debt of Russian state-owned banks or providing financing to them, to include Russian sovereign debt as well as “the full range of derivative products”. (A general license allowing US persons to transact in derivatives whose value is tied to assets covered by Directive 1, which would otherwise be unlawful.) Initially this report was issued only in classified form at the same time as the Report, but an unclassified version was released on 2 February 2018. In the brief unclassified report, the Treasury Department noted that expanding Directive 1 to cover new Russian sovereign debt would be likely not only to have material adverse effects on Russian monetary and fiscal policies (which the Russian Central Bank had estimated would include an interest rate spike of 30-40 basis points) and dampen Russian economic growth, but would also “potentially have negative spillover effects into global financial markets and businesses” and harm US investors and businesses, especially if the European Union did not implement equivalent sanctions. (Interestingly, the report also referred to the “likely over-compliance by global firms” with US sanctions.) While the unclassified version of the report stopped short of expressly recommending against the imposition of such sanctions, it did clearly signal the administration’s skepticism about them, although a US Treasury Department official was also quoted in the media as stating that such measures have not been ruled out.
- CAATSA Section 231 requires the Secretary of State, in consultation with the Secretary of the Treasury, to impose secondary sanctions against non-US persons that engaged in a “significant” transaction after the date of CAATSA with any of 39 Russian companies and government agencies operating in the defense and intelligence sectors. The Department of State announced on 29 January 2018, the deadline for imposing the sanctions, that it was not imposing any new sanctions under Section 231, because foreign governments had “already abandoned planned or announced purchases of several billion dollars in Russian defense acquisitions”, and accordingly the “law is working … and serving as a deterrent.” This may signal that the current administration is inclined to take a more conservative approach to the application of sanctions under CAATSA, particularly secondary sanctions that could target persons from other countries, including US allies.
- The administration’s Section 231 decision prompted a harsh letter the following day from a group of 21 Democratic Senators to the US Secretary of State. The Senators denounced the administration’s failure to impose any new sanctions under Section 231 or any other provision of CAATSA. While there may have been a political element to the letter, and notwithstanding the Treasury Department’s subsequent insistence that it is complying with both the letter and spirit of CAATSA, it seems fair to say that enthusiasm for new sanctions against Russia is greater in Congress than in the executive branch, which is sympathetic to business interests and appears to be more focused on North Korea as a threat to US national security. Still, it is possible that the President may choose to demonstrate that he is “tough on Russia” by implementing further sanctions, either to forestall further sanctions legislation by Congress or as a result of political pressure arising from the independent counsel’s ongoing investigation of possible Russian interference in the last US election and related issues
- Finally, the US Treasury Department’s Office of Foreign Assets Control (OFAC) designated certain individuals believed to be involved in the transfer of Siemens turbines to Crimea. This follows similar sanctions imposed by the European Union in August 2017.