The U.S. government has been on a sad, year-long odyssey of mismanaged Russia sanctions since President Donald Trump, with a display of great reluctance and personal pique, signed the Countering America’s Adversaries Through Sanctions Act (CAATSA) in August 2017. There are reasons to sanction Russia—its meddling in U.S. and other elections, its adventurism abroad, its domestic human rights record—but not every sanction is fit to every purpose. A poorly designed sanction damages the United States more than the target.
On September 21, the Treasury Department finally got something right, but it was a very small thing. The Treasury again extended the start date for fully enforcing sanctions against Russian aluminum giant Rusal, this time from October 23 (just before U.S. midterm elections) to November 12 (just after). The earlier deadline gave Russia’s negotiators too much leverage as they worked through the details of changing the ownership structure to reduce targeted oligarch Oleg Deripaska’s stake in the firm—the administration would be loath to fail just before the U.S. midterm elections, drawing attention to Russia controversies.
The Rusal sanctions have been a strategic failure.
This smart tactical decision, though, cannot change the fact that the Rusal sanctions have been a strategic failure. They did not pressure Russian President Vladimir Putin or the Kremlin to change policies, they hurt the manufacturing economy in Europe and the United States, and they further frayed the transatlantic relationship.
The theory and practice of targeting “influential” Russians
Congress, on a nearly unanimous basis, enacted new Russia sanctions in CAATSA for two reasons. They wanted to distance themselves from the Trump administration’s Russia policy, and they also wanted to highlight opposition to Russian policies, ranging from interference in the 2016 U.S. presidential election, to Russian military intervention in Ukraine. Unsettled by Trump’s soft touch attitude toward Putin, they wanted to box in the administration and prevent any headlong moves to relax sanctions. CAATSA, by design, required rather than simply enabled a set of new restrictions. Like the post-2014 executive orders that preceded them, the sanctions were intended to target regime insiders by making it difficult for international firms to do business with them. As the theory goes, the insiders would try to preserve their access to international assets by pressuring the Russia government to change course. (Other U.S. sanctions on Russia have different targets, of course, including critical sectors of the economy—and are motivated by different theories of how to change government policies.)
CAATSA sought to ramp up this pressure on the insiders. It required the Treasury to issue a report listing senior government officials and wealthy oligarchs by January 2018. Though not actually sanctioning the people on the list, the idea was that this would embarrass the Kremlin, and show that the U.S. government had a sophisticated understanding of power in Moscow and that it could start targeting important people one by one.
That is not how it played out. Instead, the unclassified list was a hodgepodge of publicly known government officials and rich Russians cut and pasted from a Forbes 2017 list of the world’s billionaires, even including wealthy Russians known to be out of Putin’s favor, as well as U.S. citizens.
The unclassified list was a hodgepodge of rich Russians cut and pasted from a Forbes 2017 list of the world’s billionaires.
This amateurish effort led to increasing pressure to show that the administration was willing to use CAATSA authorities to target oligarchs associated with the regime with severe sanctions. By April, the administration was cornered by its own mishandling of the classified list, forced by the political dynamics it had unleashed to identify new sanctions targets. At this point, it would have been politically untenable to avoid including Oleg Deripaska on the list. A multibillionaire with vast holdings in important sectors of the Russian economy, Deripaska is widely believed to have close connections to the Kremlin. If the regime had reason to take any businessman seriously—a deeply questionable proposition given the oligarchs’ dependence on the state—it was Deripaska. Most importantly, Deripaska was Paul Manafort’s erstwhile client and business partner, and he offered to brief Manafort when he was Trump’s campaign chairman. Sanctioning some oligarchs, but not him, would have looked deeply suspicious.
What happened when the United States sanctioned one of the world’s largest aluminum companies
Deripaska’s most important asset is a controlling stake in Rusal (and a holding company, En+). Rusal is Russia’s thirteenth-largest company, the world’s largest aluminum company outside of China, and a key supplier of alumina (an intermediate product in aluminum production). Sanctioning Deripaska meant sanctioning Rusal—in particular, warning non-U.S. companies that if they did business with Rusal, they might also become the target of U.S. sanctions.
When the sanctions were announced on April 6, the U.S. Treasury gave no indication that it perceived this to be a particularly complicated case. It gave international firms one month to wind down some kinds of transactions with Rusal and two months to wind down others, clearly believing that this would be enough time for industrial actors to replace alumina being sourced from Rusal. Thinking of aluminum as a fungible commodity, this makes sense. Rusal is a big company, but selling about 6 percent of global alumina, it does not jump off the page as having oligopolistic power in the market.
The Rusal sanctions hit when markets were already roiled: of course, U.S. steel and aluminum tariffs and tariff threats were part of that, as was an earlier Brazilian decision to halve production at the world’s largest alumina refinery in response to environmental concerns. Alumina prices more than doubled, and aluminum spiked by one-quarter. Beyond market pricing, the Rusal announcement shocked Ireland and Jamaica, the hosts of Rusal-owed alumina plants that are important employers, as well as communities throughout Europe and the United States with Rusal assets and joint ventures.
All of this was obviously disruptive to the manufacturing economy. But it is possible to imagine policymakers seeing this as acceptable collateral damage to put pressure on Russia, just as the United States accepted oil market disruptions when targeting Iran before the nuclear deal. After all, Rusal and Iran hold somewhat comparable shares of their respective markets.
But the Treasury soon discovered that the actual structure of the aluminum market is much more complicated. Alumina and aluminum are not highly fungible commodities, and Rusal is very hard to replace. First, the other largest aluminum companies, and the only firms with meaningful spare capacity in a tight market, are all Chinese. They have historically had higher prices than international firms and so have not been exporters. So there was no easy alternative to Rusal available in the market.
Second, and more important, end users of aluminum often have stringent certification procedures, which means that aluminum producers also have stringent certifications for alumina. As a result, changing suppliers takes at least a year. This makes perfect sense. A lot of aluminum goes into high-value products, like automobiles, aircraft, and parts. A car manufacturer cannot sell a vehicle without very high confidence in the underlying metal. They do not simply buy aluminum; they build and test relationships with their suppliers. Most European automobile manufacturers are at least partially dependent on Rusal in their supply chain, and they have no rapid way to rewire that dependency.
The United States backs off; Rusal looks to deal
After seeing what happened to the alumina and aluminum markets, and getting angry calls from European governments about the threat new U.S. sanctions were posing to European manufacturers, the Treasury backed off. Less than three weeks after announcing the Rusal sanctions, and before any of the original wind-down periods expired, the Treasury extended the wind down, allowing most commercial transactions another six months. Other transactions were given shorter additional periods, though these have in turn been extended again (and again).
After getting angry calls from European governments about the new U.S. sanctions, the Treasury backed off.
None of these extensions are long enough to allow European aluminum end users to build new, Rusal-independent supply lines. Instead, the extensions are to allow the United States and Rusal to negotiate changes to the company’s ownership structure that would sufficiently isolate the firm from Deripaska and allow it to be removed from the sanctions list. Deripaska and his associates resigned from the Rusal board and were replaced by a more operational team, and Rusal began to offer plans to reduce Deripaska’s holdings and to sequester gains from his remaining holdings until he is no longer sanctioned. The devil is in the details in negotiating any such arrangement to ensure that Deripaska’s divestment is real, involves a fair market value transaction, and does not pass control to other equally problematic actors.
Why the Treasury needed to give itself more time—by pretending to give companies more time to tie up their dealings with Rusal
In April, the Treasury extended the wind-down period until October—six months is a nice, round block of time. The responsible department, the Office of Foreign Assets Control (OFAC), is an impressively apolitical institution. So apolitical that they missed that October 23 was a gift to Deripaska and Russia’s negotiators. Presumably, the administration would not want to be accused of favoring Deripaska—drawing attention to Robert Mueller’s investigation, Manafort, and Russia—so close to the U.S. midterm elections. Previous extensions had already drawn flak. It would be best for the administration to get a deal and be able to claim a victory for U.S. interests, even a hollow one. That would give Deripaska tremendous leverage on the details of his disinvestment as October 23 drew close.
The brief extension to November 12 was smart tactics. It took away the leverage of the midterm election without holding out the prospect of regular, long-term extensions that would also reduce the pressure on Deripaska to close a deal.
Deripaska may be on his way out, but the sanctions still failed
Looked at one way, Deripaska, Rusal, and the Kremlin backed down quickly, making major changes at an important Russian company—and offering to make still more—in the face of U.S. economic threats and despite the Russian foreign ministry’s bluster that “of course we will not leave this current and any new anti-Russian attack without a harsh answer.”
But Deripaska’s divestment was not the goal of the sanctions. If it had been, the Treasury could have structured its new listings differently—focusing on Deripaska rather than the holding companies—to make the process much easier. In reality, the Rusal offer is little more than a face-saving way for the United States to extract itself from a difficult position. Deripaska’s shares of Rusal will likely end up with another entity close to the Kremlin (VTB bank, which faces its own less severe U.S. sanctions, may even be involved.) Deripaska may have less ready access to his billions than he did prior to sanctions, but he will still be fabulously wealthy.
The decision to negotiate on Rusal makes most sense as a simple business move for Russia. If U.S. sanctions on Rusal had posed a real threat to Putin, he had a different available course of action: fight. Given European manufacturers’ dependence on Rusal products, there is a reasonable chance that Putin could have forced open cracks between the United States and Europe. Rusal would certainly lose some sales (especially of less specialized products), but it is hard to see Europe endangering automotive and other high-end manufacturing by dropping those supply lines.
The decision to negotiate on Rusal makes most sense as a simple business move for Russia.
The bottom line is that changes to Rusal ownership do not put any pressure on Putin and the Kremlin, the ostensible purpose of the policy. At most, they are a shell game, moving Putin’s assets between Putin’s various controlled entities. They may be even worse—a reminder to the oligarchs who were supposed to pressure Putin that they are wholly dependent on him.
How to do better
If sanctions are going to be more than a signal of displeasure and an irritant in the United States’ closest alliances, they need to be better managed. The Rusal experience highlights a few lessons. Sanctions must be:
- Rooted in a realistic theory of the target country’s political economy, so that the economic harm they cause might plausibly lead to the intended policy changes.
- Informed by a deep understanding of the relevant economic sectors. The Treasury knows a lot about the financial sector. After the sanctions that led to the Iran nuclear deal, they know a lot about oil and aircraft. If they venture into new sectors, like aluminum, they need to do substantial market research before announcing sanctions that do as much or more damage to the sender as to the target.
- Coordinated with relevant partners. Failing to work with Europe before announcing sanctions that could cripple key parts of the continent’s manufacturing economy gave the Russian target flexibility in choosing how to respond, and left the United States with little option other than to work on a face-saving offer to change ownership structures rather than force real changes in targeted Russian policies.
- Planned to allow their eventual removal. The United States is in a negotiation with Rusal that it clearly did not plan for. The details of the sanctions designations, and the awkward timing of the announced wind-down periods, made it harder for the United States to come to a deal. Building sanctions from the beginning in a manner that allows their removal (negotiated or otherwise) makes it more likely that the sanctions will achieve reasonable objectives.