On January 29, 2018, the U.S. Department of the Treasury delivered five sanctions-related reports to Congress as required under the Countering America's Adversaries Through Sanctions Act (CAATSA), including the long-awaited Section 241 report on Senior Political Figures and Oligarchs in the Russian Federation. Although no sanctions were immediately imposed on members of the so-called “Oligarch List,” the potential for future sanctions is real. Also, the U.S. State Department announced that no secondary sanctions would be imposed under Section 231 of CAATSA on foreign persons engaging in significant transactions with the Russian defense and intelligence sectors, noting that the threat of sanctions is already serving as a deterrent to such transactions. While no new sanctions were announced in conjunction with these steps, Treasury Secretary Mnuchin stated that future sanctions against Russia are in the pipeline and will be based on the Section 241 list and other reports delivered by Treasury.
Treasury’s Oligarch List under Section 241 of CAATSA
The U.S. Department of the Treasury released five reports to Congress pursuant to CAATSA, including the list of oligarchs and senior foreign political figures required by Section 241. The list of senior foreign political figures includes (1) senior members of the Russian Presidential Administration, (2) members of the Russian Cabinet, Cabinet-rank ministers, and heads of other major executive agencies, and (3) other senior political leaders, including the leadership of the State Duma and Federation Council, other members of the Russian Security Council, and senior executives at state-owned enterprises. The unclassified version of the list of oligarchs lists Russian individuals who have an estimated net worth of $1 billion or more according to publicly available sources. The report states that the classified annex to the report includes less senior individuals and those who have a net worth below $1 billion. The classified version of the report also includes information relating to Russian parastatal entities (entities in which state ownership is at least 25% and had annual revenue of $2 billion or more) and the possible impact of sanctions against parastatals and other persons listed in these reports. The Treasury Department’s Office of Foreign Assets Control (OFAC) issued an FAQ stating that this report is not a sanctions list, and a person’s inclusion does not itself imply wrongdoing or eligibility for future sanctions.
Section 241 requires several additional pieces of information that were not included in the public report, but which may have been included in the classified report. These include:
- An assessment of the relationship between the political figures and oligarchs and President Vladimir Putin or other members of the Russian ruling elite;
- Identification of any indices of corruption with respect to each political figure or oligarch;
- Estimated net worth and known sources of income of each political figure or oligarch and their family members, including assets, investments, other business interests, and relevant beneficial ownership information;
- Identification of non-Russian business affiliations of each political figure or oligarch;
- An assessment of Russian parastatal entities, including their role in the Russian economy, their leadership and beneficial ownership structures, and the scope of the non-Russian business affiliations of each entity;
- The exposure of key U.S. economic sectors to Russian politically exposed persons and parastatal entities, including the banking, securities, insurance, and real estate sectors;
- The likely effects of imposing debt and equity restrictions on or designation of Russian parastatal entities as specially designated nationals; and
- The potential impacts of imposing secondary sanctions on persons listed in the report.
Though the Section 241 list does not impose sanctions, it is likely to lead to sanctions in the future. Russian media have reported for months on preparations undertaken by the Russian elite to avoid being named on the list. Russian oligarchs have hired lobbyists, divested investments in state-run entities, and distanced themselves from President Putin to avoid scrutiny by OFAC. Treasury Secretary Mnuchin, addressing the Senate Banking Committee yesterday, stated that sanctions would result from the Section 241 list within the next several months. Given the breadth of the list, it seems unlikely that it would form the basis of a comprehensive sanctions list or blocked persons list. However, less severe sanctions, such as debt and equity restrictions under OFAC’s Sectoral Sanctions Identifications (SSI) List, could potentially be on the horizon. U.S. banks and financial institutions have not formally responded to the list, but all U.S. companies who do business with Russia, particularly financial institutions, should review the level of their exposure to persons on the Section 241 list and make contingency plans for the potential imposition of sanctions.
State Department Actions Under Section 231 of CAATSA
Last October, the State Department released guidance containing a list of persons that are part of, or operating on behalf of, the Russian defense or intelligence sectors. CAATSA requires the U.S. government to impose certain menu-based sanctions on persons worldwide that knowingly engage in a significant transaction with a person listed in the Section 231 Guidance. Yesterday, U.S. State Department Spokesperson Heather Nauert issued a statement that the administration was declining to impose sanctions under Section 231 of CAATSA. She stated that Section 231 and its implementation have acted as a deterrent to Russian defense sales, estimating “that foreign governments have abandoned planned or announced purchases of several billion dollars in Russian defense acquisitions.” Accordingly, she explained, specific sanctions do not need to be imposed because Section 231 has already had its desired effect.
CAATSA’s language states that the President “shall impose” sanctions “with respect to a person the President determines knowingly, on or after [the date CAATSA was enacted], engages in a significant transaction with a person that is part of, or operates for or on behalf of, the defense or intelligence sectors of the Government of the Russian Federation, including the Main Intelligence Agency of the General Staff of the Armed Forces of the Russian Federation or the Federal Security Service of the Russian Federation.” It was not immediately clear whether the President was implying that no persons have conducted such transactions since CAATSA was enacted or if there was a separate rationale for declining to issue sanctions under Section 231.
Sanctions under Section 231 may yet be imposed in the future if the President determines that the criteria have been met or that Section 231 is no longer operating as a deterrent to transactions with the Russian defense or intelligence services. The failure to impose sanctions at this point is in clear contravention of bipartisan congressional intent and reflects a deepening divide between the administration and Congress on the issue of Russia sanctions.
Additional OFAC Actions
OFAC’s revised Directive 4, which was amended pursuant to CAATSA on October 31, 2017, went into effect on January 29, 2018. Directive 4, which targets the Russian oil industry, now prohibits U.S. persons from providing goods, services, or technology in support of exploration or production for new deepwater, Arctic offshore, or shale projects anywhere in the world if a listed individual or entity has a controlling interest or a 33% or greater interest in the project. The previous version of Directive 4 applied only to projects that had the potential to produce oil within Russian waters or territory. OFAC also sanctioned additional persons under the Russia and Ukraine sanctions programs on January 26, 2018.
Though the status of Russia sanctions under the Trump administration remains in flux, both U.S. and non-U.S. companies should review their business dealings with Russian persons to determine if any of their contractual counterparties are listed in the Section 231 Guidance on the defense and intelligence sectors. If so, they should further evaluate whether the dealings may be considered “significant transactions,” given the broad and potentially changing interpretation of that term. Additionally, U.S. companies who provide oil services should review the expanded scope of Directive 4 and determine if it applies to any of their customers. Companies that deal with Russia and Ukraine generally should continue to be vigilant about sanctions updates and ensure their compliance policies are up to date.