OFAC Tries the Carrot and the Stick Approach with Russian Aluminum Giant

In case you missed the flurry of Russian sanctions news over the past few weeks, you may have missed an addition to the sanctions that could impact your business, especially if you’re in the aluminum market. On April 6, 2018, the Treasury Department’s Office of Foreign Assets Control (OFAC) added a number of prominent Russian individuals and entities, including Russian government officials, to its Specially Designated Nationals and Blocked Persons List (SDN List). Among those was the designation of Russian oligarch, Oleg Deripaska. If the name doesn’t sound familiar to you, the aluminum magnate is tied up in allegations regarding interactions with former Trump campaign chairman, Paul Manafort, related to the 2016 presidential election.

Mr. Deripaska was one of seven Russian oligarchs designated by OFAC pursuant to Executive Order 13661 for having acted or purported to act for or on behalf of a senior official of the Russian government as well as pursuant to Executive Order 13662 for operating in the energy sector of the Russian economy.  Also caught in OFAC’s snare were the following companies in which he maintained ownership or control:  Basic Element Limited, EN+ Group PLC, EuroSibEnergo, United Company RUSAL PLC (RUSAL), Russian Machines, GAZ Group, and Agroholding Kuban. All were designated based on Deripaska’s ownership or control. Over a month prior to Mr. Deripaska’s designation, the company had moved to distance itself from him by re-designating him from serving as the president of the company to serving as a non-executive director to the company effective March 15, 2018. However, that did not appear to be enough to prevent OFAC’s designation of RUSAL.

At that time, OFAC published two general licenses authorizing the following:

• General License No. 12, which provided a brief two month reprieve for companies to take actions ordinarily incident and necessary to the maintenance or wind down of operations, contracts, or other agreements with the designated entities including payments to blocked persons within a blocked, interest-bearing account in the U.S. until June 5, 2018; and

• General License No. 13, which authorized all transactions and activities ordinarily incident and necessary to divest or transfer debt, equity, or other holdings in EN+Group PLC, GAZ Group, and RUSAL to a non-U.S. person, or to facilitate the transfer of debt, equity, or other holdings in these entities by a non-U.S. person to another non-U.S. person until May 7, 2018.

Further, FAQ #568 went as far as to state that further employment by U.S. person employees with one of these companies or participation on a designated company’s board would require a specific license from OFAC.  Yikes!

As the world’s second-largest aluminum producer and with the U.S. serving as its third largest foreign export market, it’s not surprising that RUSAL was quick to move to lessen the blow. The company petitioned OFAC to be removed from the SDN List. Recognizing the potential impact to the U.S. domestic industry and the time it could take for a company to walk back its business dealings and wind down any transactions, today OFAC has issued General License No. 14, published amended General License No. 12A, and made some updates to its FAQs. In a statement issued by Treasury Secretary Steven Mnuchin, the company had petitioned to be removed and given the impact to U.S. partners and allies, it made sense for OFAC to publish General License No. 14 and amend General License No. 12A to extend the maintenance and wind-down period while the agency considered the company’s petition.

Under General License No. 14, companies get an extra four months from the prior deadline to take actions ordinarily incident and necessary to the maintenance or wind down of operations, contracts or other agreements with RUSAL, including importing goods, services, or technology into the U.S. Further, exports during this time are permitted so long as it is within the scope of the general license and compliant with export control regulations. Funds previously blocked before today are still blocked but the General License authorizes companies to use this money for the maintenance and wind down activities. Keep in mind that this applies not only to RUSAL or its subsidiaries but also any other entity in which RUSAL owns a 50% or greater interest in, directly or indirectly.

General License No. 12A was revised to allow for payments authorized under General License 14. Specifically, payments to or for the direct benefit of RUSAL and entities owned, directly or indirectly, by RUSAL are not required to make payments in a blocked, interest-bearing account in the U.S. for activities ordinarily incident and necessary to the maintenance or wind down of operations or existing contracts with these entities that were in effect prior to April 6, 2018. For any company that may have had an import shipment coming previously, you’re able to accept the goods as long as it is within the scope of the general license. Payments to RUSAL and those owned, directly or indirectly, at a 50% or greater interest by RUSAL, that are within the scope of the general license  are not required to be deposited in a blocked account at a U.S. financial institution. For payments to all other blocked entities listed in (a) of General License No. 12A, they must still be deposited in a blocked account at a U.S. financial institution. Lastly, for any unlucky employees or those working at an office of an entity designated on April 6, OFAC has issued further clarification to its stance under General License 12A. The good news is that the payment of salaries, pension payments, and other benefits by blocked entities and working for the blocked entity is within the scope of General License 12A and viewed as transactions ordinarily incident to the continuity of operations or to facilitate a wind down. The bad news: General License 12A is only valid until the clock strikes 12:01 am EST on June 5, 2018  and October 23, 2018 for RUSAL and RUSAL-owned or controlled entities until further notice. U.S. employees are urged to review the OFAC regulations and consider the applicability of the general license to employee activities and contact OFAC.

The most interesting tidbit from today’s announcement was OFAC’s position in FAQ #576. In no uncertain terms, OFAC makes clear to RUSAL that the path for further sanctions relief is through the divestment and relinquishment of control of the company by Mr. Deripaska. According to RUSAL’s corporate announcement back in February re-designating him out from his President title, Mr. Deripaska held approximately 48.14% of total issued shares of the company.  With OFAC’s power move today, we shall see whether RUSAL and Mr. Deripaska take the carrot or opt for the stick.