Trump's Rusal Relief Tests Whether Deripaska Is in Driver's Seat

(Bloomberg) -- The Trump administration is engaged in a high-stakes balancing act between pressuring Russia over election interference and easing sanctions on the world’s second-largest aluminum maker.

The U.S. sanctioned 15 Russian spies Wednesday at the same time it agreed to drop penalties against companies tied to Oleg Deripaska in exchange for the Russian billionaire cutting his stake in United Co. Rusal.

Trump's Rusal Relief Tests Whether Deripaska Is in Driver's Seat

Together, the moves were designed to show continued resolve while responding to concerns that the April decision to penalize Rusal -- one of largest companies ever targeted by the U.S. -- had roiled global markets and risked a worldwide aluminum shortage.

Yet, the deal negotiated by the Treasury Department will draw close scrutiny, particularly for any possible loopholes. Congress has 30 days to say whether it will step in to block the agreement, and lawmakers from both parties have long expressed concern that President Donald Trump is too soft on Russian President Vladimir Putin’s government.

Senate Intelligence Committee Chairman Richard Burr, a North Carolina Republican, and the panel’s top-ranking Democrat, Mark Warner of Virginia, said Wednesday in a joint statement that the deal “will require constant monitoring” to ensure that Deripaska and the Russian government abide by its terms.

The relief follows a multi-million dollar lobbying campaign by Deripaska. He will now re-start his efforts to convince Treasury to remove the financial restrictions it has imposed on him, a person familiar with the matter said.

Treasury laid out the terms of the deal in a nine-page letter to Congress released Wednesday, an unusual level of detail and transparency for such an agreement.

Under the agreement, Deripaska -- who remains on the U.S. sanctions list -- will cut his stake in his holding company En+ Group Plc to 44.95 percent from about 70 percent, though he will remain the company’s largest shareholder. That will clear the way to ease restrictions on Rusal, En+ and JSC EuroSibEnergo, a power company that he also controls, in 30 days, unless Congress blocks the action.

Other sizable stakes in EN+ will be held by VTB Bank PJSC, a bank controlled by the Russian state, and Glencore Plc, a long-standing Deripaska ally at Rusal. Deripaska’s voting rights would be limited to 35 percent of the company’s shares, and two thirds of the company’s board of directors would be independent, the Treasury Department said.

En+ and Rusal must also overhaul their boards and commit “to full transparency with Treasury by undertaking extensive, ongoing auditing, certification, and reporting requirements,” the department said.

Another small portion of Deripaska’s stake in EN+ will go to Volnoe Delo, a charity he founded, which will be able to benefit financially from the stake, according to a person familiar with the details of the deal who asked not to be identified because the exact terms of the agreement aren’t public.

Treasury Secretary Steven Mnuchin stressed that Deripaska -- not the companies -- was the intended target of its sanctions, part of broader penalties imposed on Putin associates over Moscow’s interference in the 2016 U.S. presidential election.

“Treasury sanctioned these companies because of their ownership and control by sanctioned Russian oligarch Oleg Deripaska, not for the conduct of the companies themselves,” Mnuchin said in a statement.

When they put Rusal on the sanctions list in April, Treasury officials were surprised by the impact on aluminum prices, which jumped 20 percent in just the first week, according to two people familiar with the matter. Treasury didn’t have a clear to enough understanding of aluminum contracts to avoid such an outcome, and officials’ efforts since have been in part to relieve pressure on the metal market, the people said.

Treasury appears to have met the standards for sanction removal set last week by Senator Bob Menendez of New Jersey, the ranking Democrat on the Foreign Relations Committee. Yet Democratic lawmakers on Wednesday expressed concern that the deal could contain escape hatches that would allow Deripaska to retain a greater than 50 percent stake through different ownership structures.

“The decision raises key questions that the administration will need to answer about whether the structural and governance changes made by these companies are sufficient to ensure that Deripaska is no longer in the driver’s seat,” Senators Chuck Schumer, Sherrod Brown and Menendez said in a statement. “It remains to be seen whether this approach can succeed in Putin’s Russia.”

Treasury, facing criticism in August that it hadn’t done enough to punish Putin, said Deripaska, along with dozens of other Russian individuals and entities, had become “radioactive” in the global community since the April sanctions.

“The administration appears to be trying to signal that it is durably tough on Russia, regardless of de-listing actions,” said Elizabeth Rosenberg, a former Treasury official who is now a senior fellow at the Center for a New American Security.

U.S. officials have cited a significant falloff in Deripaska’s net worth -- a drop of 68 percent this year, according to data compiled by Bloomberg -- as one sign that the sanctions have been working.

Sanctions experts cautioned that the agreement could contain unexpected escape hatches.

“We have to see if there’s some unintended loopholes and if Deripaska exploits it,” said Daniel Fried, who served as assistant secretary of state under President George W. Bush and coordinated sanctions policy. “This is not a case of the Trump Administration loosening sanctions for no good reason.”

Rusal is among the largest companies the U.S. has ever put on its sanctions designation list. Global aluminum prices shot up as much as 20 percent in the first week the sanctions were announced, throwing the global market into chaos and threatening a worldwide shortage of the metal. The fallout forced Mnuchin to indefinitely delay enforcing the penalties.

The move comes amid a strain in relations between Trump and Putin, with the U.S. upset over Russia’s capture of Ukrainian ships and sailors in the Kerch Strait near Crimea. The American president abruptly canceled a planned meeting with Putin at the G-20 gathering in Buenos Aires late last month, citing Russia’s activities in Ukraine. At the same time, Special Counsel Robert Mueller’s investigation into possible collusion between Russia and Trump’s 2016 campaign continues to hang over the administration.

The 15 Russian spies were sanctioned over election meddling and the poisoning of a former double agent in the U.K.

The elections-related sanctions target individuals involved in Project Lakhta, a Russian effort to pose as U.S. persons to interfere in American elections, as well as the release of stolen election-related documents. The theft and release of emails belonging to the Democratic National Committee and Hillary Clinton campaign aide John Podesta have been attributed to Russian intelligence operatives.

The sanctions also hit Alexander Petrov and Ruslan Boshirov, two Russian intelligence operatives who attempted to assassinate former Russian double agent Sergei Skripal and his daughter using the Novichok nerve agent. The Kremlin has denied involvement in the attempted assassination.

“The fear from Trump administration is that it will be accused -- amid all the other hoopla around the special counsel investigations -- of easing sanctions on Russia,” said John Smith, who was director of Treasury’s Office of Foreign Assets Control at the time the sanctions on Rusal were announced. He left in May.

Trump has used sanctions as a primary tool to pressure adversaries, including North Korea, Iran and Venezuela. The success of his Russia sanctions could prove pivotal in whether they work against other countries, too.

“This is absolutely a winning strategy,” Smith said. “It sends the message that if you are targeted by the U.S. government, you ultimately may have to give up ownership and control of your most powerful and profitable assets.”

©2018 Bloomberg L.P.

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