United States: Different Sides Of The Same Coin: OFAC Lifts Some Sanctions Against Russia And Tightens Sanctions Against Venezuela

This week the US Department of the Treasury's Office of Foreign Assets Control ("OFAC") announced two significant changes to US sanctions with consequences for the global aluminum and oil markets. On January 27, 2019, under the terms of a negotiated deal, OFAC lifted sanctions on UC Rusal plc ("Rusal"), the world's second largest aluminum producer; its parent, En+ Group plc ("EN+"); and another subsidiary of EN+, JSC EuroSibEnergo ("ESE"). In delisting the companies, OFAC provided an extraordinary level of detail regarding its agreement with the sanctioned parties. This not only sheds light on some of the ongoing conditions for the removal but also highlights the Treasury Department's explicit threat to reimpose sanctions if the parties "fail to comply" with these conditions. Upon the release of the news, global aluminum prices declined and purchasers of aluminum were able to enter new supply contracts with Rusal. The following day, OFAC expanded sanctions against Venezuela's state-owned oil company, Petroleos de Venezuela ("PdVSA"), as part of the Trump administration's efforts to put pressure on Venezuelan President Nicolas Maduro to leave office. In a press release, the Department of the Treasury announced that the new sanctions are "intended to change behavior" and could be lifted if PdVSA takes actions to support democracy and fight corruption in Venezuela. Below we discuss both of these actions and the implications they have for business.

US companies should carefully evaluate their potential dealings with both parties in order to manage the associated sanctions risks.

OFAC Terminates Sanctions on EN+, Rusal and ESE

On January 27, 2019, OFAC terminated US sanctions imposed on EN+, Rusal and ESE after congressional efforts to prevent such action failed.1 The termination process started on December 19, 2018, when OFAC submitted notification to Congress of its intention to terminate the sanctions in 30 days ("Notification Letter"). The Notification Letter indicated that the three companies had agreed to undertake significant restructuring and corporate governance changes to address the circumstances that led to their designation and inclusion on OFAC's list of Specially Designated Nationals and Blocked Persons ("SDN List") this year. These changes focus on restructuring and compliance measures to ensure that Oleg Deripaska, a Russian oligarch who remains a US-sanctioned party, relinquishes control over the companies on a long-term basis. The Notification Letter took special note of the "unprecedented transparency" required from the three global companies through extensive auditing, certification and reporting requirements.

NOTIFICATION PROCESS

The Notification Letter was sent to Congress pursuant to a provision in the Countering America's Adversaries Through Sanctions Act ("CAATSA") that requires the president to provide a report to congressional committees and leadership of any proposed action to lift certain Russian-related sanctions. Under CAATSA, Congress had 30 days to review the Notification Letter and hold hearings and briefings and "otherwise obtain information" to fully review the Notification Letter. During the 30-day review period, the Trump administration was barred from terminating the sanctions against EN+, Rusal and ESE unless Congress enacted a joint resolution of approval. Congress could have prevented the sanctions termination past the 30-day period if both houses of Congress passed a joint resolution of disapproval during this period. If Congress had passed such a joint resolution of disapproval, the president could have exercised his veto power, which Congress in turn could have tried to override with a 2/3 supermajority vote. If a joint resolution of disapproval had been enacted either by the president signing the joint resolution or by Congress overriding a presidential veto, the president would have been barred from terminating the sanctions against the three companies.

However, Congress failed to pass a joint resolution of disapproval. On January 16, 2019, the Senate resolution of disapproval, which required 60 votes to proceed, failed by three votes.2 For its part, the House passed its companion resolution with overwhelming support the next day.3 As a result, the Trump administration has lifted the sanctions as proposed in the Notification Letter.

TERMS OF REMOVAL

The de-listing of EN+ and its affiliates is conditioned on what Treasury officials described as a commitment to complete a "significant restructuring and governance changes that sever Deripaska's control" of these companies. In testimony before Congress, Secretary Steven Mnuchin emphasized that Treasury would be "vigilant in ensuring that EN+ and Rusal meet these commitments" and noted that they would be exposed to re-imposition of sanctions if they fail to do so.

EN+, Rusal and ESE were placed on the SDN List on April 6, 2018,4 because they were owned and controlled by Oleg Deripaska either directly or indirectly.5 Deripaska was designated as an SDN for his actions in support of senior Russian government officials and for operating in the Russian energy sector.6 The sanctions imposed on Rusal were particularly impactful as Rusal is the world's second largest producer of aluminum. The price of aluminum soared in the weeks following Rusal's designation. To prevent disruption to the global aluminum market, OFAC provided temporary sanctions relief through general licenses that authorized continued dealings with the three companies. Upon their designation in April, the three companies petitioned OFAC to be removed from the SDN List. After eight months of negotiations, OFAC and the companies reached what the Notification Letter describes as a binding agreement specifying the terms of the companies' removal from the SDN List, referred to as the "Terms of Removal."

The Notification Letter emphasized that the objectives of the sanctions against EN+, Rusal and ESE were "to reduce Deripaska's ownership in and sever his control of these entities,"7 which the Terms of Removal aim to achieve. Secretary Mnuchin has also highlighted that the companies were designated not due to their own conduct but because of Deripaska's ownership and control over them. As described in the Notification Letter, the Terms of Removal will sever Deripaska's control over the three companies, thereby extricating and insulating them from what the Notification Letter dubs "the controlling influence of a Kremlin insider." Specifically, the three companies have agreed to implement the following measures in exchange for the removal:

  • Reduce Deripaska's direct and indirect ownership interest to below 50 percent;8
  • Limit Deripaska's and his affiliates' voting rights in EN+;
  • Require EN+, which will own and control Rusal and ESE, to isolate Deripaska from its two subsidiaries;
  • Overhaul the composition of the companies' boards of directors to ensure majority-control by directors having no ties to Deripaska;
  • Take restrictive steps related to the companies' corporate governance; and
  • Consent to unprecedented transparency by fulfilling extensive, ongoing auditing, certification and reporting requirements.

Notably, half of EN+'s restructured board of directors will be composed of US or UK nationals, and Rusal's current board chairman was required to step down. In addition, Deripaska will not receive any cash from the divestment of his shares or from future dividends from the three companies. Some of Deripaska's shares in EN+ will be allocated to VTB Bank, a Russian state-owned bank, as collateral for previous obligations of companies controlled by Deripaska while other shares will be allocated to the Swiss company Glencore in a swap of Glencore's shares in Rusal for shares in EN+. Deripaska will also donate some EN+ shares to a charitable foundation. Although the Notification Letter does not specify the exact allocation of shares among these entities, there have been press reports that the Terms of Removal itself, which OFAC has not publicly released, provide this information and other details about the corporate restructuring and ownership stakes that will result from the deal.9

Although the three companies will no longer be on the SDN List, Deripaska will remain sanctioned by the United States. All of Deripaska's property and interests in property, including entities in which he owns a 50 percent or greater interest, will remain blocked. US persons will continue to be prohibited from transacting with Deripaska, and foreign persons will continue to be subject to secondary sanctions should they knowingly facilitate a significant transaction for or on behalf of Deripaska. Furthermore, OFAC has indicated that it will continue to enforce its sanctions on Deripaska aggressively, including by closely monitoring the three companies' compliance with the Terms of Removal. OFAC has indicated that it could re-designate any or all of these companies should they violate the Terms of Removal.

TAKEAWAYS

Sunday's removal paves the way for companies to resume dealings with EN+, Rusal and ESE. However, companies should be mindful of the risk of re-designation of these entities in the event of a determination that they have not complied with the Terms of Removal. Companies engaged in dealings with these three companies should consider including appropriate contractual termination provisions in the event of a re-imposition of sanctions. In addition, Deripaska remains subject to sanctions and continues to have some role in these companies, which could raise sanctions compliance issues under certain circumstances. Parties involved in transactions with the delisted entities should take steps to ensure that they have adequate compliance measures in place to avoid prohibited dealings with Deripaska and other sanctioned Russian entities, including conducting due diligence on the ownership of counterparties in order to identify and address potential risk exposure.

Footnotes

1 CNN, Senate Democrats' Effort to Block Trump Move on Russia Sanctions Fails (Jan. 16, 2019), https://www.cnn.com/2019/01/16/politics/senate-democratssanctions-russia/index.html.

2 Id.

3 CNN, House Republicans Join Democrats to Rebuke Trump on Russia Moves (Jan. 17, 2019), https://www.cnn.com/2019/01/17/politics/house-russia-sanctions-rebuke/index.html.

4 Mayer Brown Legal Update, New US Sanctions Against Russia raise New Legal Risks for US and Foreign Companies, https://www.mayerbrown.com/New-US-Sanctions-Against-Russia-Raise-New-Legal-Risks-for-US-and-Foreign-Companies-04-06-2018.

5 Notification Letter at 2.

6 See US Department of Treasury Press Release at https://home.treasury.gov/news/press-releases/sm0338.

7 Notification Letter at 2.

8 Specifically, Deripaska's direct interest in EN+ will fall from approximately 70 percent to 44.95 percent and will be further reduced through corporate restructuring transactions agreed to in the Terms of Removal. Deripaska's stake in EN+ cannot be increased in the future. Deripaska's direct shareholding interest in Rusal and ESE will be reduced to 0.01 percent and zero, respectively. EN+ will, in turn, own and control Rusal and ESE and has agreed to restrictions isolating Deripaska from the two companies. Id. at 4.

9 https://www.nytimes.com/2019/01/21/us/politics/oleg-deripaska-russian-sanctions.html.

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