Trump’s Sanctions Tested as U.S. Retreats From Rusal Penalty

(Bloomberg) -- President Donald Trump’s attempt to wield U.S. economic strength as a weapon against foreign adversaries is being tested as the Treasury Department struggles to contain the fallout from its sanctions against the world’s second-largest aluminum producer.

The financial penalties imposed on Russia’s United Co. Rusal in April were intended to punish its majority owner, billionaire Oleg Deripaska, as well as Russian President Vladimir Putin.

Trump’s Sanctions Tested as U.S. Retreats From Rusal Penalty

But global aluminum prices shot up as much as 20 percent in the first week the sanctions were announced, throwing the global market into chaos that’s since continued, threatening a worldwide shortage of the metal, and forcing Treasury Secretary Steven Mnuchin to backtrack.

Trump’s Sanctions Tested as U.S. Retreats From Rusal Penalty

Rusal is among the largest companies the U.S. has ever put on its sanctions designation list. The value of the aluminum producer has plummeted to $4.15 billion as of Oct. 5 from $9.2 billion a little more than six months ago. In general, Trump has made unprecedented use of financial levers to pressure countries including North Korea, Iran and even NATO ally Turkey. Sanctions designations jumped 30 percent in 2017 compared to former President Barack Obama’s final year in office, according to the law firm Gibson Dunn.

Sanctions are a valuable tool for U.S. presidents, essentially allowing them to take on adversaries without resorting to actual bloodshed. But the Rusal penalties have caused such widespread pain that Mnuchin may be forced to holster what’s become one of Trump’s favorite weapons in his global economic war.

“The rapid growth in sanctions is giving rise to an equally rapid rise in costs and unintended consequences,” said Peter Harrell, a fellow at the Center for New American Security, a Washington-based research group, and a former Obama administration State Department official. “The U.S.’s aggressive use of sanctions may finally spur allies and major companies to develop alternatives to the U.S. financial system that gives our sanctions enormous global weight.”

The European Union in September announced a plan with Russia and China to sidestep U.S. sanctions on Iran by using a payment system separate from the dollar to give oil buyers a way to buy Iranian crude, which Trump will block in November. The creation of a trade channel outside the U.S. financial system would soften the sanctions’ bite and make it easier for Iran to continue selling its oil.

Venezuela, meanwhile, whose economy the U.S. has helped cripple through sanctions intended to target government corruption, has created a cryptocurrency called Petro, backed by the country’s oil reserves, as a way to avoid using the dollar.

In both cases, the nations’ ability to maintain trade flows while not using the U.S. currency is unclear.

Negotiations Since April

Aluminum markets are now focused on the Treasury Department’s Office of Foreign Assets Control, which implements sanctions, as investors and customers wait for a decision on Rusal. Treasury has been in negotiations since April with Rusal’s parent company, En+ Group Plc, on what it would take to lift the restrictions on the companies. Over the past six months, OFAC has slowly extended the deadline to comply. Each extension has brought relief to aluminum markets, with the first one in April trimming prices nearly 10 percent.

Critics say the large market swings are proof that Treasury went after a target that was too big. As customers rushed to halt dealings with the world’s second-largest aluminum supplier, workers at Rusal facilities across western Europe wondered about their job prospects. Disruptions in supplies of a metal used in everything from aircraft to computers to power lines threatened to ripple across other economic sectors.

Steadfast Defense

But Treasury officials have been steadfast in their defense of taking on Rusal. Mnuchin has said repeatedly that the impact, however large, was expected, and that the goal was not to put the company out of business.

“The U.S. government is able to unleash incredibly powerful sanctions, and can do so confident in the knowledge that as additional information comes in, they can ameliorate the impact of those sanctions on U.S. and third-country businesses,” said John Smith, who was director of OFAC at the time the sanctions on Rusal were announced. He left in May.

Deripaska has paid a price for the sanctions. Since the April 6 announcement, the Russian’s wealth has dropped 59 percent to $3.1 billion, according to the Bloomberg Billionaires Index.

OFAC’s next step is expected in November. It again extended the deadline for cutting ties with companies controlled by Deripaska until just after the U.S. midterm elections, delaying a clash with Congress over the handling of sanctions against Russia.

Deripaska’s companies have approached Treasury about substantial changes that it signaled could lead to being removed from the sanctions list, a move that would be a tough sell to Congress, where lawmakers are eager to go harder on Russia. Treasury may also need Congress’ approval to lift sanctions related to Deripaska.

Treasury is “in a very tough position,” said Dan Fried, who previously served as a coordinator for sanctions policy at the State Department. Europeans companies are agitating to ease sanctions on Rusal because of the impact on the aluminum market, while many U.S. lawmakers argue Mnuchin is going too easy on Russia.

Lawmakers in both parties are considering stiff automatic sanctions, including on new issuance of Russian sovereign debt and the nation’s energy sector. Republican Senator John Kennedy of Louisiana has gone so far as to ask Treasury how Russia’s economy can be “brought to its knees” through sanctions. And Treasury officials have promised more penalties on Russia.

©2018 Bloomberg L.P.