Centre for Eastern Studies NUMBER 259 | 05.02.2018 www.osw.waw.pl

Washington’s game of ‘sanctions poker’ awaits America’s decisions

Iwona Wiśniewska, co-operation Marek Menkiszak, Witold Rodkiewicz

On 29 January, the administration of President Donald Trump sent Congress a batch of doc- uments which provide the basis for a possible further expansion of sanctions against Russia: a report on the Russian business and political elite, and a report on the consequences of se- lected financial sanctions. At the same time, the authorisation for the possible introduction of extraterritorial sanctions against entities from the Russian security sector and arms industry came into effect. This was in line with the requirements of the Countering America’s Adversar- ies Through Sanctions Act, No. 3364 from 2 August 2017. This Act covers US sanctions against Iran, Russia and North Korea. As of now, President Trump’s administration has not decided to implement any new sanctions against Russia, although it has the ability to do so at any time.

The absence of new sanctions and the publi- Therefore, even though no new sanctions have cation of an extensive and purely formal list of been introduced, they have partly achieved the members of the Russian business and political desired effects by creating an atmosphere of elites by the US administration has, on the one uncertainty and unpredictablity for the Kremlin. hand, been received in Russia with some relief. Russia’s future behaviour will depend on wheth- The Kremlin’s decisions and the actions taken by er and what kind of new sanctions the US gov- Russian businessmen have demonstrated that ernment will impose during the coming weeks Russia had been preparing itself for a ‘black and months. If Washington fails to impose sig- scenario’ of new, severe, and precisely targeted nificant new sanctions, or imposes merely sym- US sanctions. On the other hand, the Russian bolic ones, it will encourage to harden reactions reveal their continuing uncertainty its stance and become more assertive. Compre- regarding Washington’s intentions. The Krem- hensive and very painful sanctions, especially if lin is clearly unsure whether the US decisions introduced before the elections, could spur the represent a step back and a desire for a limit- Kremlin to respond aggressively and asymmetri- ed normalisation of relations with Russia (thus cally. In turn, painful but selective sanctions are revealing the relative weakness of the Ameri- likely to incline Moscow to make concessions, can government), or a sophisticated strategy especially with regard to regional conflicts. of keeping a constant threat over Russia’s head of increasingly tough sanctions that could be The US’s sanctions against Russia triggered at a time convenient for Washington. The Kremlin is obsessively worried that such Act No. 33641, adopted at the initiative of Con- sanctions might be introduced right before the gress, confirms all the previously introduced presidential elections in March, with the aim of destabilising the domestic political situation. 1 For the full text of Act No. 3364, see https://www.con- gress.gov/bill/115th-congress/house-bill/3364

OSW COMMENTARY NUMBER 259 1 sanctions against Russia and imposes new ones; and siblings. This part of the report is also said this not only makes it more difficult for Presi- to include assessments of Russian parastatal dent Donald Trump to lift them, should he wish entities, information about their management to, but also requires him to monitor and make structure and beneficial ownership and their periodic assessments of Russia’s behaviour, in international ties, as well as their significance order to consider imposing tougher sanctions for the Russian economy. The document also if the Kremlin perseveres with policies harmful allegedly presents the exposure of key sectors for American interests2. In accordance with the of US economy (in particular in banking, insur- requirements of this Act: ance, securities and real estate) to Russian po- • On 29 January 2018 (180 days after the act litical and business figures, and the parastatal comes into force), the US President sent Con- entities enumerated in the report. As suggest- gress a report on Russian parastatal entities ed by the US administration, the confidential (companies partially or entirely controlled by part may also contain the names of more Rus- the state) and members of the Russian busi- sian citizens. The presentation of this report to ness and political elite (Russian politicians and Congress did not mean the introduction of any oligarchs with close ties to , new sanctions against the Russian business and the Russian ruling elite, and members of their political elite, as underlined in the report itself. families). This report consists of two parts. The public part lists 210 individuals, includ- ing 114 Russian state officials: functionaries So far, President Trump’s administration of the President’s Administration, ministers, has not decided to introduce any new heads of government agencies, the speakers restrictions against Russia. of both chambers of Parliament, members of the Security Council, and the heads of the larg- est state-owned companies; as well as the 96 • Another report submitted to Congress on 29 richest Russians with fortunes that are valued January included an analysis of the potential at $1 billion or more3. 22 people from this list effects banning American entities from dealing have already been covered by individual sanc- in any new Russian sovereign debt . The report tions (i.e. a freeze of their assets in the United concludes that this type of restriction would States, a ban on American entities conclud- not only be a blow to the Russian economy, but ing any transactions with such persons or the would also affect American entities and have companies they control, and a ban on them negative consequences for the global financial entering the United States). The second part market. For the time being, the US administra- of the report – which is confidential – allegedly tion has decided not to take such steps. (in accordance with the requirements of Act • Act No. 3364 also obliged the President – at No. 3364) details the involvement of these per- any time starting on 29 January (i.e. 180 days sons in corrupt transactions, as well as the size after the act comes into force) – to impose and origins of their assets, including the finan- sanctions against persons engaging in ‘signifi- cial status of their spouses, children, parents cant’ transactions with the Russian intelligence, military and arms industry. In October 2017 the 2 For more on Act No. 3364, see I. Wiśniewska, S. Kardaś, administration had already specified 39 entities ‘Ustawa o amerykańskich sankcjach przeciwko Rosji’, in these sectors (of which 30 had already been OSW Analizy, 4 August 2017, https://www.osw.waw.pl/ pl/publikacje/analizy/2017-08-04/ustawa-o-amerykans- covered by US sanctions)4. The criteria under kich-sankcjach-przeciwko-rosji 3 For a complete list of the names listed in the public portion of the report: http://prod-upp-image-read. 4 For a complete list of entities: https://www.state.gov/t/ ft.com/40911a30-057c-11e8-9650-9c0ad2d7c5b5 isn/caatsa/275116.htm

OSW COMMENTARY NUMBER 259 2 which these transactions will be considered political, military and special services (in March ‘significant’ have not been revealed. For the 2017); starting bilateral consultations concern- time being, the US administration has decided ing cyber-security; and an exchange of dec- not to exercise this option. larations between the two countries about In parallel with the sanctions against Russia not interfering in the other’s domestic affairs arising from Act No. 3364, the US Govern- (in July 2017). These proposals were rejected by ment is regularly updating the specially desig- Washington as insufficient. nated nationals and blocked persons list. For example, on 26 January 2018 these lists were expanded to include Russian companies and The Kremlin is obsessively worried that individuals associated with the delivery of Sie- the US might introduce sanctions to mens turbines to occupied Crimea, as well as destabilise the situation in Russia be- entities involved in trade (mainly steel and coal) fore the presidential elections. between the occupied Donbas region & Russia and other countries. However, Russian and US intelligence services Russia’s preventive actions and the military continued to maintain contacts in order to the fight against terrorism and to Act No. 3364, which obliges the US adminis- avoid incidents in Syria (the so-called ‘decon- tration to closely monitor the situation in Rus- fliction agreement’). In December 2017 Russia sia, and encourages it to implement successive announced that it had been able to prevent sanctions against that country, sparked huge a terrorist attack in St. Petersburg with the aid concern among the Russian business and po- of information obtained from the CIA. litical elite, as demonstrated by the actions It should be assumed that another element subsequently taken by the Kremlin and Russian of Russian policy aimed at persuading . The Kremlin has been clearly obses- United States not to introduce new sanctions, sively worried that sanctions would be imposed especially against the Russian secret servic- right before the presidential elections in March, es and enterprises in the armaments sector, which in their opinion would constitute a dest- was the unprecedented visit to Washington abilisation of the domestic political situation. at the end of January 2018 by three heads of In view of the above, the Kremlin has first of the Russian special services: Sergei Naryshkin, all tried to convince Washington of the need to the head of the Foreign Intelligence Service; normalise Russian/American relations, and of Aleksandr Bortnikov, the head of the Federal its readiness for constructive cooperation with Security Service; and Igor Korobov, the head the US, especially in the area of international of military intelligence (GRU). Both Naryshkin security (particularly with regard to Syria, North and Korobov are covered by US sanctions, in- Korea and Ukraine), if Washington withholds cluding a travel ban to the United States. Nar- further sanctions. As far as we can discern, the yshkin’s visit was revealed on 30 January by proposals Russia submitted were purely declar- Anatoly Antonov, Russia’s ambassador in the atory and did not include any specific promises United States; the others’ visit was reported to discontinue the activities Washington per- by the Washington Post, according to which ceives as being harmful to the United States Bortnikov and Naryshkin met Mike Pompeo, and its allies. Moscow’s proposals included the head of the CIA, among others. The meet- the reactivation of the three regular commu- ing supposedly concerned the fight against nications channels between Russia & the USA: terrorism.

OSW COMMENTARY NUMBER 259 3 It is most likely that the heads of the Russian nancial problems it underwent restructuring and intelligence services came to Washington to passed under the control of the central bank. persuade the US administration that the intro- At the same time, the central bank ceased pub- duction of new sanctions would have a very lishing information about which Russian banks negative impact on their ongoing cooperation. were authorised to process transactions con- Presumably they offered enhanced consulta- cerning public procurement in the defence sec- tion and cooperation with the US on issues tor. These two decisions were related to Russian relating to the fight against terrorism, as well banks’ concerns over the next round of Amer- as cooperation on regional conflicts affecting ican sanctions. For example, in December the American interests (North Korea, the Middle private Alpha Bank reported that it was ceasing East and Afghanistan). cooperation with Russian armaments companies for fear of reprisals from the United States. Thirdly, within the military-industrial commit- The Russian government has undertaken tee (a key body assigning military contracts) a series of actions aimed at limiting the a special team was created with the specific negative effects of introduction of new task of ensuring a smooth fulfilment of mili- sanctions by Washington to the Russian tary contracts by the arms sector in conditions economy. of the anticipated expansion of the sanctions (the Deputy Prime Minister Dmitri Rogozin re- vealed this fact in January 2018). At the same time, the Russian authorities have The Russian authorities have also undertaken been taking steps to shield the Russian securi- activities aimed at creating favourable con- ty sector and arms industry from future sanc- ditions for Russian oligarchs (especially those tions. First of all (by a regulation of November at risk of US sanctions) to move their capital 2017), the Russian government permitted state to Russian jurisdiction. First of all, Vladimir Pu- corporations and the Defence Ministry, the tin has declared that in 2018 the Russian gov- Federal Security Service and the Foreign Intelli- ernment will issue special anonymous sover- gence Service not to disclose information about eign bonds denominated in foreign exchange. their transactions, including information about According to the Russian Ministry of Finance, their business partners (vendors, contractors, these Eurobonds (worth around US$3 billion) etc.) until 1 July 2018. According to unofficial will be issued within the framework of the do- reports, Russian companies had complained mestic Russian financial infrastructure; these in- that they were having difficulty finding foreign struments will not trade on the secondary mar- counterparties because of the American sanc- ket, and their owners will not appear on the tions (this allegedly applied to Roskosmos and international lists of depositaries. Rostech, among others, especially after the Secondly, an amnesty on capital repatriated scandal concerning the supply of Siemens tur- to Russia by individuals and legal entities will bines to occupied Crimea). be introduced by the end of 2018. The assets Secondly, the Ministry of Finance decided to con- and foreign accounts which individuals have centrate the financial servicing of the arms com- declared will be exempt in Russia from respon- panies and the Ministry of Defence in a single sibility for tax infringements and taxation for state bank. Russian media have speculated that previous years. Russian residents liquidating this role was granted to Promsviazbank, which their companies in tax havens will be able to until December 2017 had been one of the larg- move their assets to Russia without suffering est private banks in Russia, although due to fi- any tax consequences.

OSW COMMENTARY NUMBER 259 4 In recent months, Russian businessmen have cease its cooperation with the Russian arma- also taken a number of actions which can be ment industry in December 2017, and in Janu- interpreted as attempts to avoid US sanctions, ary 2018 it closed its branch office in New York. or minimise their losses should they be im- In October 2017 Polina Deripaska (since 2001 posed. These have primarily focused on lobby- the wife of , although Russian ing against being included on the list of people media have recently rumoured that the couple associated with the Kremlin, through American have divorced) became the owner of almost 7% law firms and experts in Washington. of the shares of the En+ Group (a vertically inte- grated aluminium-energy company controlled by Oleg Deripaska); these shares were worth Russian business is trying to minimise around US$500 million, thus making her one of the losses which would be caused by the richest women in Russia. potential sanctions. As the Russian media have speculated, divorces may be one of the ways in which Russian oli- garchs can minimise their losses from potential The last year has also seen Russian business- sanctions. In this way, their spouses and chil- men making a number of financial transactions dren (who often live outside Russia) could be which will limit their losses if the sanctions are protected from restrictions (in particular con- extended; in particular this involves reducing cerning visas), and some of their assets can be the assets they hold abroad. To list some ex- transferred as a result of the division of prop- amples: at the end of 2017 erty. Recently, the media have reported on the (owner of the ) sold his shares in divorces of Yekaterina Tikhonova (probably the the Petropavlovsk gold mining company (reg- daughter of President Putin) and Kirill Sham- istered in the UK); in May 2017 Kirill Shamalov alov (January 2018); and (the youngest in Russia, and proba- Daria Zhukova (reports about their separation bly President Putin’s ex-son-in-law) sold 17% of appeared on 7 August 2017); and Igor Sechin the shares (he still retains 3.9%) in the chemical (who is covered by individual US sanctions) and company Sibur to , the chair- his wife Olga (in May 2017). man and largest shareholder in the gas compa- ny (which is subject to US sanctions), Russian reactions to the reports submit- who in December 2017 handed over 14.4% of ted to Congress the shares to the board of Gazprombank, re- ducing his stake in Sibur to 34%. As a result, the For months the Kremlin had been preparing share in Sibur held by businessmen potential- for a ‘black scenario’: the introduction of fur- ly vulnerable to American sanctions has fallen ther restrictions, especially on the armaments below 50%, which means that if they are sub- sector. It feared that the US administration, jected to individual sanctions, the restrictions with the cooperation of intelligence services, will not be automatically extended to Sibur as would select a narrow group of people from a company. Meanwhile in August 2017 Mikhail the president’s ‘inner circle’ and hit them with Prokhorov sold 7% of shares in Rusal (a compa- new sanctions. In spite of these fears, the list ny registered on the Channel Island of Jersey), automatically named Russian government offi- and in December 2017 he sold 49% of shares in cials, the presidents of the largest state com- the US basketball club the Brooklyn Nets (31% panies (most likely based on the Russian con- of which he retains). Alfa Bank (the biggest pri- sulting firm RBK’s top 500 ranking in 2017) and vate bank in Russia) initially announced it would the country’s richest businessmen according to

OSW COMMENTARY NUMBER 259 5 the 2017 Forbes ranking. Premier Dmitri Med- sary. On the contrary, he stressed that Russia is vedev even joked that any officials who had not ready to patiently build up its relationship with been named on the list should consider resign- America to the extent that the latter was ready ing from their posts. Since the list does not dif- to do the same. ferentiate the members of the Russian political and especially business elite according to the degree of their proximity to the president, and On the one hand, the Kremlin was posi- omits entirely some of its members who belong tively surprised by the US’s decision not to to the president’s ‘inner circle’, it does not pose introduce new sanctions, but on the other, a serious threat to the Kremlin. That is why, on it is afraid that Washington may be plan- the one hand, the Russian government reacted ning a sharp increase in their restrictive- with positive surprise, in particular at the Amer- ness in the near future. ican administration’s decision not to introduce new sanctions. On the other hand, the Russian authorities’ re- Putin’s reaction to the published list seems to actions revealed that they still lacked a clear have been addressed primarily to Trump him- and unambiguous interpretation of the US ad- self, and is aimed at continuing to play off the ministration’s intentions and were uncertain differences between Trump on the one hand what to expect in terms of future sanctions and Congress and the American establishment policy. Moscow is aware that the risk of the US (the ‘deep state’) on the other. Putin’s state- introducing further sanctions has not passed, ment is based on the assumption that Trump and the US administration may take such – in contrast to the political establishment – is a step at any time. In particular, the report also looking for ways to improve relations with Rus- includes a confidential section which may in- sia. His reaction is a signal to Trump that the clude information much more detrimental to Russian president appreciates the fact that the Russia’s government. This is why Moscow also announcement was not accompanied by any has a problem with interpreting the signal sent additional sanctions, and that therefore he is it by the Trump administration, which for the not going to complicate matters for Trump by time being has not expanded the sanctions, but taking any retaliatory steps. At the same time, has drawn up a very superficial list of members Putin has indicated that if the US escalates its of the political-business elite. The Kremlin is sanctions policy significantly, he will be forced unsure whether this signifies weakness on the to respond, thereby further hindering Trump in part of the American government and a desire his declared goal of improving relations with for a limited normalisation of relations and Russia and exposing him to attacks from Con- cooperation, or whether it is a sophisticated gress and his political opponents. strategy for harassing Russia with continuous The Kremlin list which the US published was threats and preparations for imposing harsher met with surprise by Russian analysts and ex- sanctions on the country at the US’s conven- perts. They faulted the American administra- ience. Commenting on the publication of the tion for its lack of professionalism and its igno- American report, President Putin admitted that rance of the situation in Russia. They pointed Russia had been waiting for its publication, and out that the list, while supposedly naming per- was preparing to respond to it by taking real sons closely associated with President Putin, actions that would “reduce relations with the also includes businessmen who have little con- United States to zero”. Nevertheless, he stated nection with the Kremlin, such as the Ananyev that for now, such steps were deemed unneces- brothers (who have just had Promsviazbank

OSW COMMENTARY NUMBER 259 6 taken from them) and Yuri Shefler (a producer Summary of alcoholic beverages who has been living out- side Russia for 15 years). At the same time, it • The US government has intentionally in- omits many of the people (like Sergei Roldugin) creased the ambiguity and unpredictability whose close ties to the President (including fi- of its process for extending sanctions against nancially) have been reported in journalistic in- Russia. The American administration has ob- vestigations based on the disclosed documents tained great freedom and flexibility in applying about tax havens (such as the Papers them. For example, in the case of the sanctions and the ). The Russian experts against the armaments sector – apart from in- were also surprised at the list of government formation about the 39 Russian entities which officials, which omitted many high-ranking are potentially vulnerable to restrictions – the people who have cooperated with the Krem- criteria for ‘essential’ transactions detrimental lin such as Elvira Nabiullina, the President of to the interests of the United States or its allies the Central Bank, and the Chechen leader have not been specified. The US government’s Ramzan Kadyrov. clear aim was to create a range of flexible tools for use against Russia, in order to deter the Kremlin from taking any action which could be The US administration has great free- aggressive and/or harmful to the United States, dom and flexibility in imposing sanc- its allies and partners. tions on Russia, which is an important • One important feature of the potential new instrument of pressure on the Kremlin. US sanctions against the Russian defence sec- tor is their extraterritorial nature. Cooperating with Russian entities can also lead to sanctions Experts have pointed out that, on the one hand, against their foreign partners from third coun- the effect of publishing this list could be counter- tries (both natural & legal persons and state productive for the US. Persons who have found institutions), even those allied with the United themselves on the list ‘unfairly’ could close ranks States. For example, in a situation when Rus- behind President Putin in the current situation, sian armaments contractors are also involved in resulting in greater consolidation of the business transactions on the American market, the intro- and political elite. On the other hand, absence duction of sanctions against them could lead from the list could ‘stigmatise’ other members to the cancellation of some Russian export con- of the political elite, who may be forced to prove tracts in the defence and industry sector. In this their loyalty to the Kremlin. In contrast, being sense, another aim of the sanctions is to narrow named on the list is a serious problem for Rus- Russia’s room for cooperation in sensitive are- sian businessmen who operate on international as, and to deter other states from undertaking markets, as this would make conducting busi- such cooperation. ness with them more risky. For example, most • The preparation of the report concerning the likely due to potential sanctions in January 2018, members of the Russian elite did not result in an the buyout for US$1 billion by the American automatic expansion of US sanctions, although company Halliburton (which offers its services it has created a potential threat to those indi- to petroleum extraction projects) of 100% of viduals and entities. However, this list presents the shares in the Novomet Oil Services Holding an incentive for the United States and interna- (based in Perm) will have to be cancelled. tional organisations to monitor transactions

OSW COMMENTARY NUMBER 259 7 by the Russian entities named on the list. This 1. Withholding new sanctions in the coming document also gives American authorities the weeks/months, or the introduction of merely option of launching unexpected, targeted re- symbolic sanctions, will be read by the Kremlin as sponses and undermining contracts signed with a signal of the US’s weakness, and strengthen the Russian entities. Russian leadership in its belief that it should con- • As a result, the American list could cause fur- tinue its aggressive foreign policy. This will most ther tensions within the Russian political and likely increase Moscow’s assertiveness and dis- business elite, especially since it is not known courage it from making any concessions. what is contained in the report’s confidential 2. If the US introduces comprehensive, deep and part, or whether any sanctions will be im- very painful sanctions, especially in the run-up to posed against the persons named therein. The the presidential elections in Russia (18 March 2018), mere announcement that new US sanctions this will put the Russian authorities in a difficult might be imposed caused visible concern in position, as Russia has a relatively limited potential the Kremlin and among the Russian oligarchs. to respond adequately to the US in the sphere of The latter had already lobbied for months in economics. The Kremlin would deem such a move the United States against being added to the to be a direct attempt to remove Putin’s team from list of those cooperating with the Kremlin. power, and would thus move the conflict with the Meanwhile, the Russian government has tried US into areas where it has better instruments than to make it easier to repatriate capital to Russia, in the economic sphere (military, cyberspace, hy- which shows that the Kremlin sees the risk of brid actions), and can undertake actions intended rising dissatisfaction among the business com- to show Washington the cost of further deepening munity, and is trying to calm unsteady nerves. the conflict with Russia. These could include strik- At the same time, in recent months the Kremlin ing at American interests through the escalation of has tried to create a semblance of readiness for regional conflicts, the implicit support of attacks the normalisation of relations with the Unit- on US forces, or a series of cyber-attacks against ed States (including by undertaking ‘peaceful the United States and its allies. initiatives’ in Syria and Ukraine). The above 3. The introduction by the United States of demonstrates that even without further sanc- severe but precisely targeted sanctions may tions, their desired effect has to some extent prompt Moscow to intensify its attempts to al- been achieved. leviate the conflict with Washington by making • What shape Russian-American relations and real concessions on contentious issues (such as Moscow’s policy towards Washington assume Ukraine, North Korea or the Middle East), includ- depends to a large extent on whether and to ing by limiting its actions in these regions which what degree the Trump administration will in- are damaging to US interests, and possibly by troduce new sanctions. Three main scenarios providing limited support for Washington in the are possible: resolution of regional problems.

EDITORS: Adam Eberhardt, Marek Menkiszak, Centre for Eastern Studies Anna Łabuszewska, Katarzyna Kazimierska Koszykowa 6a, 00-564 Warsaw TRANSLATION: Jim Todd phone: +48 | 22 | 525 80 00 DTP: Wojciech Mańkowski e-mail: [email protected]

The views expressed by the authors of the papers do not necessarily reflect the opinion of Polish authorities Visit our website: www.osw.waw.pl

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