Attempted measures against an aluminum company caused so much market havoc the U.S. was forced to scale back.
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| © Vladimir Smirnov/TASS/Getty Images
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By Jeanne Whalen, John Hudson, The Washington Post
When the Treasury Department imposed tough sanctions on Russian oligarch Oleg Deripaska and his companies in April, the fallout for the Putin ally was fast and fierce.
Western customers stopped buying from the aluminum company he controls, sinking its share price and shaving Deripaska’s fortune from $6.7 billion to $3.4 billion, according to Forbes estimates.
The sanctions also caused havoc far beyond Russia. Global aluminum prices spiked, battering U.S. and European companies that use the metal. After an outcry from manufacturers and foreign governments, Treasury softened its stance, giving companies more time to end dealings with the aluminum producer, Rusal, and suggesting it could lift sanctions on the company if Deripaska cedes control.
The episode is a cautionary tale as the United States readies more sanctions against Russia, including some beginning Monday that will affect U.S. technology exports, and some under consideration in Congress that could prove painful for European oil and gas companies.
Compared with other countries that have been under U.S. sanctions, including Iran, Cuba, Myanmar and North Korea, Russia plays a bigger role in global commerce, giving the sanctions more potential to sting — both their intended targets and unintended bystanders in the United States and Europe, economists and trade experts say.
Russia “is part of the world economy,” said Richard Sawaya, a sanctions expert at the National Foreign Trade Council, an industry-financed organization that advocates free trade. “It’s a member of the World Trade Organization,” he said. “Its banks are connected throughout Europe and the U.S.”
The sanctions beginning this week are the administration’s response to what the United States and Britain say was Russia’s use of a nerve agent to try to assassinate a British citizen and former Russian intelligence officer.
After an initial ban on some U.S. technology exports to Russia, a second stage of the sanctions could follow later this year with penalties including a ban on Russian airlines landing in the United States.
Russian lawmakers say the measures could prompt Moscow to halt exports of its RD-180 rocket engines, which the United States uses to launch government satellites. Russian state television said Moscow could also retaliate by charging U.S. airlines more to traverse Russian airspace en route to Asia.
Congress, meanwhile, is considering additional sanctions to punish Russian “aggression,” including its interference in U.S. elections. The bipartisan legislation would ban U.S. investors from buying new shares of Russian government debt. It would also cut some Russian banks’ access to U.S. dollars, a step that would “very, very seriously hit the Russian financial system,” said Vladimir Milov, economic adviser to Russian opposition politician Alexei Navalny, a foe of President Vladimir Putin.
The bill’s energy-related sanctions could prove particularly harmful to European companies, said Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics in Washington. Those measures would ban companies from investing in crude-oil infrastructure inside Russia, or in large energy projects outside Russia if they involve a Russian state-controlled company. Kirkegaard said that would probably complicate investments by German companies and Royal Dutch Shell in Nord Stream 2, a planned pipeline that would ship Russian natural gas to Germany.
Deripaska’s camp is dangling the threat of even worse outcomes for the United States if Washington doesn’t lift the Rusal sanctions. Failure to reach a deal could lead the holding company through which Deripaska controls the aluminum producer to seek “other avenues to resolve the current impasse, including a potential acquisition by Chinese interests or the potential nationalization of the company by Russia,” according to Justice Department filings made by a U.S. lobbying firm representing the holding company’s chairman.
One former Treasury official said the tumultuous rollout of the Rusal sanctions showed a lack of coordination with U.S. allies and ignorance about the global metals market.
“One lesson we should draw from this is that while folks at Treasury have a pretty good sense of how their sanctions on financial products will play out, they don’t have the same expertise and knowledge of nonfinancial commercial sectors,” said Liz Rosenberg, who handled sanctions policy during the Obama administration and is now a senior fellow at the Center for a New American Security.
The Treasury Department says its strike was well thought out.
“We understand this was a very significant action targeted against Deripaska and the companies he has ownership of,” Sigal Mandelker, undersecretary of the Treasury for terrorism and financial intelligence, said in an interview. “We were well aware this was going to be impactful, and are focused on sanctions that have impact.”
Deripaska isn’t likely to make a clean escape even if Rusal sanctions are lifted because sanctions on him personally will remain intact. And he is having to make serious concessions as he seeks relief for his aluminum company.
To placate Treasury, Deripaska has “agreed in principle” to reduce his shareholding in En+ Group, the holding company that controls Rusal, from 70 percent to below 50 percent, according to En+, which says it is working “with Mr. Deripaska and his family to transfer their assets to approved organizations or trustees.” Deripaska and his allies have also resigned from the boards of Rusal and En+.
Deripaska, Rusal and En+ did not respond to requests for comment.
The Deripaska-controlled holding company is leaning on several Western establishment figures to plead its case in Washington. Leading that effort is En+ Chairman Gregory Barker, a former U.K. energy minister and a member of Britain’s House of Lords. To help press his agenda, Barker hired Mercury Public Affairs, which assigned an influential lobbyist to the case: former U.S. senator David Vitter (R-La.).
In Mercury lobbying documents filed with the Justice Department, Vitter and Mercury warned that failure to lift Rusal sanctions would “open the Trump administration up to criticism for harming U.S. manufacturers and consumers” and “cause significant disruptions to global aluminum and metals markets.”
In a May 1 email to State Department officials, Vitter thanked them for a “productive meeting” and attached media reports about the London Stock Exchange’s plans to halt trading of En+ shares unless the company won a sanctions reprieve. The reports underscored a “deadline upon us,” Vitter wrote, according to a copy of the email filed with the Justice Department.
Asked about the email, a State Department spokesperson said: “We regularly meet with business and other representatives as part of our outreach efforts.” Vitter and Mercury declined to comment. Barker didn’t respond to a request for comment.
Deripaska started amassing his fortune in the 1990s, when Boris Yeltsin was Russia’s president and rival groups vied for control of previously state-owned industries. In lawsuits, former allies and rivals accused Deripaska and his associates of using fraud and violence to take over aluminum assets, allegations Deripaska denied. Between 1998 and 2000, the United States denied Deripaska visas under a statute deeming foreigners ineligible “based on security, unlawful activity and related reasons,” Rusal has disclosed in securities filings. Deripaska called those concerns “unwarranted” in the filings.
By the early 2000s, his company’s output of aluminum was second only to that of U.S. giant Alcoa Corp. After the 2008 financial crash, Rusal was forced to take a $4.5 billion bailout loan from a Russian state-owned bank, which political analysts say made Deripaska more reliant on Putin.
The oligarch’s business came crashing to a halt when Treasury issued its April 6 sanctions, barring global banks and companies from dealing with him personally or with the companies he controls.
The London Metal Exchange, a global clearinghouse for aluminum, announced it would no longer allow Rusal ingots in its warehouses. Share prices for Rusal and En+ collapsed on the Hong Kong and London stock exchanges, and many of their Western board members resigned.
Rusal is a major supplier of alumina, a raw material used to produce aluminum, so global prices for alumina also shot up. Roy Harvey, chief executive of Pittsburgh-based Alcoa, said that the price spikes were “throwing a lot of the market into an uproar.”
U.S. allies, including Germany, Ireland, France and Britain, warned the State Department that the move was disrupting global markets and hurting European factories that relied on Rusal, diplomats said, speaking on the condition of anonymity to discuss sensitive conversations. Ireland expressed concerns about a Rusal-owned alumina plant in rural Ireland that employs 470 people in a region “where there isn’t alternative sources of employment,” Daniel Mulhall, the Irish ambassador to the United States, said in an interview.
In an apparent nod to those concerns, Treasury softened its stance 17 days later, giving banks and companies more time to wind down dealings with Rusal and saying it might consider lifting the Rusal sanctions under certain conditions.
“The company has petitioned us for delisting. And I’m not going to comment on the specifics of what that would entail, but one of the issues will be selling down the majority interest,” Treasury Secretary Steven Mnuchin said in an April 30 interview with Bloomberg TV. “We’re having conversations with the company.”
Treasury’s Office of Foreign Assets Control, or OFAC, has extended the grace period for companies to wind down dealings with Rusal until Oct. 23, giving both sides until then to reach a deal. “The company has been in continuous communication with OFAC trying to find a solution aimed at its delisting,” Rusal said on Aug. 6.
jeanne.whalen@washpost.com
john.hudson@washpost.com
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