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Business News/ Politics / Policy/  The US sanctions a Russian oligarch—but exempts his companies
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The US sanctions a Russian oligarch—but exempts his companies

wsj

Treasury Secretary Janet Yellen said sanctions would ‘impose massive costs on Putin’s closest confidants.’ In reality, the impact is far milder.

Russian President Vladimir Putin (L) shakes hands with Russian businessman and founder of USM Holdings Alisher Usmanov during an awarding ceremony at the Kremlin in Moscow, Russia November 27, 2018 (REUTERS)Premium
Russian President Vladimir Putin (L) shakes hands with Russian businessman and founder of USM Holdings Alisher Usmanov during an awarding ceremony at the Kremlin in Moscow, Russia November 27, 2018 (REUTERS)

On March 3, the day the U.S. Treasury Department sanctioned Russian oligarch Alisher Usmanov, a cargo ship arrived in Mobile, Ala., carrying 53,000 tons of pig iron destined for a Mississippi steel plant. It came from a subsidiary of the company that accounts for much of Mr. Usmanov’s wealth, shipping records show. Another subsidiary owns the shipping firm that delivered it.

It was all legal.

In imposing economic sanctions after Russia’s invasion of Ukraine, U.S. officials created exceptions. Their worry was that oligarchs like Mr. Usmanov had interests so deeply woven into the global economy that curtailing their businesses could trigger broader economic pain and legal blowback, said current and former Treasury officials.

Treasury Secretary Janet Yellen, in announcing penalties against Russian oligarchs including Mr. Usmanov, said the measures would “impose massive costs on Putin’s closest confidants and their family members and freeze their assets."

At the same time, the Treasury’s exceptions ensured that the damage for these targeted people, who the U.S. says have become some of the world’s richest people partly by supporting Russian President Vladimir Putin, has been milder than the Biden administration’s rhetoric might suggest.

U.S. officials confront a complicated calculus in penalizing Russian billionaires. Detaining yachts and aircraft deprives them of lavish comforts and produces flashy headlines. Freezing their businesses can cause turmoil in markets, harm investors in oligarchs’ companies who are otherwise unconnected to sanctioned individuals, and lead thousands of workers to lose jobs.

As a result, even though sanctions have helped hobble Russia’s economy, the U.S. government’s fears about disrupting global trade prompted it to water down or avoid imposing financial penalties against key Russian entities and individuals, according to the current and former Treasury officials and internal Treasury and National Security Council emails reviewed by The Wall Street Journal.

The official overseeing sanctions, Deputy Treasury Secretary Wally Adeyemo, traveled this week to London and met with investors who expressed concerns about sanctions, said a person familiar with the meetings. Without broad exemptions, the investors said, they were likely to pull their money out of any company associated with a sanctioned individual even if the U.S. didn’t mandate it, according to the person.

‘Usmanov mitigation’

The Treasury held back on Mr. Usmanov out of concern that curtailing his business empire could have unplanned effects on global trade, said the current Treasury officials. In an email exchange on March 1 with the subject line “Usmanov mitigation," Treasury official Lisa Palluconi told colleagues about the plan. Public “messaging will be that we continue to look into his entities…or something like that," she wrote in an email viewed by the Journal.

Ms. Palluconi didn’t respond to a request for comment and the Treasury declined to make her available. A Treasury spokeswoman said: “Financial sanctions on Russian elites immediately cut them off from their wealth, their ability to make or receive payments, their travel, and their ability to extract revenue from their companies. The United States will continue to freeze and seize assets of these elites and their proxies as they support President Putin’s unprovoked invasion of Ukraine."

The Treasury worked on a tight time frame and couldn’t do a detailed analysis of how sanctioning Mr. Usmanov would affect global trade, said Treasury officials. “Often times when we go after elites, we take time to understand their holdings and come up with a detailed mitigation plan," one person familiar with the process said. In this case, the person said, the Treasury decided “to go after the individual right away" and decide later whether to go after companies until it could better understand how they related to global trade.

Mr. Usmanov, whose net worth Forbes currently estimates at $12.5 billion, is tied to hundreds of companies around the world, according to a person familiar with the Treasury’s deliberations and a Journal examination of corporate records. His main publicly known asset is OOO USM Holding Co., a Russian metals, mining and telecom conglomerate in which he holds a 49% stake.

The sanctions don’t apply to entities in which the targets of sanctions own less than 50%. Instead of blocking businesses in which Mr. Usmanov holds a majority stake—the norm when sanctioning oligarchs—the Treasury issued a special addendum exempting all businesses of which he owns 50% or more, unless otherwise specified. There are currently no additional specifications.

The U.S. can block assets tied to Mr. Usmanov personally, such as bank accounts and homes. When the Treasury blocks assets, it prohibits U.S. persons and businesses from using, transferring or otherwise transacting with them. The U.S. blocked a yacht it said Mr. Usmanov owns, as well as an Airbus A340-300 aircraft.

But his business entities can continue to do business with companies subject to U.S. jurisdiction. He can still receive funds in rubles from companies based in Russia, which are outside the Treasury’s reach.

“I’ve never seen any such exemption before, especially against a Russian billionaire," said George Voloshin, head of the Paris office for Aperio Intelligence, a London-based risk consulting firm.

The exceptions help remove doubt about the legality of the 53,000-ton pig-iron shipment to the American steelmaker, Steel Dynamics Inc. A Steel Dynamics spokeswoman said the company relies on foreign suppliers for pig iron, a raw material for making steel. It has bought slightly more than a million tons of it from Metalloinvest, a USM subsidiary, since 2019, she said, and is contractually obligated to take a certain volume of pig iron from it this year.

The Treasury’s measures allow Mr. Usmanov’s companies to keep paying U.S. bondholders, which include funds that manage Americans’ retirement investments. “Many of the companies that Mr. Usmanov founded are indeed important elements of international supply chains," said a USM representative, Grigory Levchenko, adding that the companies supply 50% of the world’s merchant hot briquetted iron, a raw material for steel production.

Mr. Usmanov declined to be interviewed. He considers the sanctions against him to be “unfounded and unfair," Mr. Levchenko said, adding that Mr. Usmanov hasn’t “acquired anything or benefited from any state or government, including Russian." Personal properties such as the yacht and plane are in irrevocable family trusts of which Mr. Usmanov isn’t a beneficiary, he said.

Mr. Usmanov was an early major investor in Facebook, now Meta Platforms Inc., which netted him a hefty profit shortly after the social-media company went public. He also invested in Twitter Inc., Spotify Technology SA, Airbnb Inc., Uber Technologies Inc. and Alibaba Group Holding Ltd., among other tech firms, according to a section of USM’s website that was recently deleted. He no longer owns shares in these companies, said Mr. Levchenko. Mr. Usmanov, who is retired from business activity, has also drawn income from dividends from companies in Russia, Mr. Levchenko said. He doesn’t hold controlling stakes in these companies, he said.

Mr. Usmanov is one of hundreds of Russian billionaires, politicians and companies whom the U.S. government has sanctioned over the invasion of Ukraine and other Russian government actions.

The U.S. has avoided sanctioning Roman Abramovich, who owns London’s Chelsea Football Club, in part over concerns about his steel holdings, said the person familiar with the Treasury’s deliberation. Mr. Abramovich owns a 29% stake in U.K.-based steelmaker Evraz PLC, which operates steel facilities in Oregon and Colorado.

Mr. Abramovich, who for years denied having a close relationship with Mr. Putin, has recast himself as a peace negotiator, the Journal reported this month. Though the Treasury prepared sanctions for Mr. Abramovich, the White House held them back after Ukraine’s president, Volodymyr Zelensky, said Mr. Abramovich is a go-between for him and Mr. Putin, the Journal reported. Mr. Abramovich declined to comment.

The Treasury has similarly allowed American firms to continue doing some business with certain sanctioned Russian banks—including several that are state-owned—on transactions related to oil and energy production, at least until June 24 of this year. And the U.S. allows business activities of Russian energy companies to continue, even though it banned Russian oil imports.

The U.S. hasn’t sanctioned oligarch Alexey Mordashov, who owns Severstal PAO in Russia, which exports steel to Europe mostly for construction, whom the European Union hit with sanctions days after the Ukraine invasion began. Mr. Mordashov said in a written statement: “I have absolutely nothing to do with the emergence of the current geopolitical tension and I do not understand why the EU has imposed sanctions on me."

The effect on Severstal, in which Mr. Mordashov owns a 77% stake, has been profound. The company, which has 52,000 employees, immediately lost about a third of its sales after the EU imposed sanctions on Mr. Mordashov, and is at risk of a debt default, despite having funds available, spokeswoman Anastasia Mishanina said.

Economic pain

The situation is particularly sensitive with the U.S. facing inflation and high gas prices. The Treasury wants to “maximize the amount of economic pain inflicted on adversaries, while minimizing" consequences to the U.S. economy, said Christopher Swift, a national security lawyer at Foley & Lardner LLP who helped enforce sanctions at the Treasury before entering private practice.

There was disagreement within the Treasury about the approach to Mr. Usmanov’s sanctions, said people familiar with the deliberations. Mr. Usmanov’s exemption “basically turns his designation into a PR thing, rather than a financial thing," said one of the people, who wanted the moves to be tougher.

The Treasury became more cautious after the reaction to previous sanctions the Trump administration leveled in 2018 against billionaire aluminum magnate Oleg Deripaska and energy and aluminum companies he controlled, the current and former Treasury officials said. They covered businesses of which Mr. Deripaska owned more than 50%.

Those sanctions, which the U.S. levied on Mr. Deripaska for acting on behalf of the Russian government as part of a broader effort to pressure Mr. Putin over Russia’s behavior in Ukraine, Syria and elsewhere, created problems for the Treasury, said authorities on Russia and sanctions. They roiled global commodities markets, spiked the price of aluminum and angered U.S. allies.

Subsidiaries of Mr. Deripaska’s Russian aluminum company, United Co. Rusal, in the U.S., Ireland, Sweden and other countries “faced imminent closure without limited sanctions mitigation," the Treasury said in a letter to then-Senate Majority Leader Mitch McConnell later that year. German companies Siemens AG, Mercedes-Benz AG and Volkswagen AG had business ventures affected by the sanctions. The Treasury issued licenses to allow them to continue operating.

“Lots of people would become unemployed and there would be a lot of bankruptcies because of that," said Anders Aslund, a Russia specialist and senior fellow at the Stockholm Free World Forum, a foreign-policy think tank in Sweden.

Siemens and Mercedes-Benz said they had since wound down their joint ventures. VW said its venture continues under a 90-day license last renewed by the Treasury’s Office of Foreign Assets Control, which handles sanctions, at the end of January.

Rusal’s parent company, EN+ Group PLC, along with Rusal and another subsidiary, petitioned the Treasury to remove them from the sanctions list. After eight months of talks, the Treasury agreed on the condition that the companies curb Mr. Deripaska’s control, reduce his ownership stake and appoint new independent directors.

Mr. Deripaska sued the U.S. government over his sanction. A judge ruled against Mr. Deripaska, who then lost an appeal of that ruling this week. But the lawsuit and negotiations over Mr. Deripaska’s status ate up time and resources at OFAC, according to the former Treasury officials and sanctions experts.

Larissa Belyaeva, press secretary for Mr. Deripaska, before this week’s ruling said: “The sanctions against Mr. Deripaska are deeply misguided, not to mention supported by baseless and hollow accusations." She didn’t immediately respond to requests for comment after the loss of the appeal.

OFAC managers are wary of another lawsuit that would divert staff time—it has about a dozen Russia specialists—and attention from the business of coming up with new sanctions, said the current and former Treasury officials. The fallout has caused the Treasury at times to tread a lot lighter, they said, even though the agency is getting more money to pursue the assets of sanctioned Russians, along with a new Justice Department task force.

No full accounting

In internal discussions, Treasury officials worried measures against Mr. Usmanov could lead to a Deripaska repeat, said the person familiar with the Treasury’s deliberations.

USM subsidiaries produce iron products they export world-wide to buyers including U.S. plants in Mississippi, Texas and North Carolina. USM companies also include an under-construction copper mine that, when completed, will be one of the world’s largest. Treasury officials worried that acting against Mr. Usmanov could drive up global metal prices, said the Treasury officials. They were also concerned about harming a newspaper publisher Mr. Usmanov owns, the officials said, as it is one of Russia’s most independent remaining publishing companies.

More concerning, the department didn’t have a full accounting of the businesses Mr. Usmanov owns or invests in, the officials said. Its researchers identified some 800 entities in which he owns or owned shares, said the person familiar with the Treasury’s deliberations.

As Russia’s attacks escalated in late February, some OFAC officials argued that nearly all of Mr. Usmanov’s businesses should be exempt from sanctions, said the Treasury officials. His investments could give him the ability to file onerous litigation in U.S. courts, those people argued. In addition to the concern about commodity prices, “the fear is somebody like Usmanov would obliterate OFAC in terms of resources" with such a lawsuit, the person said.

Others within OFAC believed such a cautious approach defeated the purpose of the sanctions, the person said.

In the March 1 email, the Treasury’s Ms. Palluconi wrote that a so-called general license would give the agency space to deal with Mr. Usmanov’s business interests. OFAC grants such licenses, which allow U.S. firms to continue doing business with sanctioned entities, to help the agency fine-tune sanctions, protect the U.S. economy and react rapidly, said Mr. Swift, the former Treasury lawyer.

The March 3 shipment shows how Mr. Usmanov’s businesses can continue to operate without interruption. For years, one of USM’s main assets has been Metalloinvest, which ships pig iron around the world.

The shipment that day was headed to a steel production plant in Columbus, Miss., owned by Steel Dynamics, shipping records show. Since 2019, Metalloinvest has sent more than three-dozen shipments to the facility, according to Panjiva Inc., a New York firm that tracks global trade data.

 

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