The Treasury Department late last night issued several reports to Congress pursuant to mandates in the Countering America’s Adversaries Through Sanctions Act (CAATSA), including under CAATSA Sections 241 (Report on Senior Foreign Political Figures and Oligarchs in the Russian Federation) and 242 (Report on Effects of Expanding Sanctions to Include Sovereign Debt and Derivative Products).  While the headlines on the Section 241 report on Russian oligarchs, senior government officials, and parastatal entities blare “no sanctions imposed,” the details are less reassuring.

In response to a question from Senator Robert Menendez (D-NJ) in testimony before the Senate Banking Committee today, Treasury Secretary Mnuchin stated “There will be sanctions that come out of this,” seemingly referring to the Section 241 report.  Secretary Mnuchin went on later, in response to a separate question from Senator Brian Schatz (D-HI), to describe that intelligence work that went into this report and stated “And now, we will take the basis of that report and look at kind of – as we do in the normal course, where it’s appropriate to put sanctions. . . . So this should in no way be interpreted as we’re not putting sanctions on any of the people in that report.”  While the Secretary’s statements were not entirely clear, they suggest the possibility of sanctions on at least some of the individuals or entities on the Section 241 list as Treasury rolls out additional Russia sanctions going forward.

The unclassified version of the Section 241 report has been posted online by media organizations.  It includes a list of Russia’s 1) senior political figures (which includes the senior executives of major state owned enterprises, among others), 2) “oligarchs” (defined for the purpose of this report as individuals with an estimated net worth of $1 billion or more), and 3) parastatal entities (defined for the purpose of this report as companies owned 25% or more by the state with 2016 revenues of approximately $2 billion or more). The names in the list were selected based on “objective criteria” drawn from “reliable public sources,” according to Treasury.  According to Bloomberg, the unclassified Section 241 list matches that published by the Russian edition of Forbes magazine last year. Critics have been quick to point out the fundamental flaws of this unclassified list.  Yet the more relevant information is likely contained in the classified annex.

The Section 241 report states clearly that it “is not a sanctions list,” and that inclusion on the list “does not, in and of itself, imply, give rise to, or create any other restrictions, prohibitions, or limitations on dealings with such persons by either U.S. or foreign persons.” An OFAC Frequently Asked Question says essentially the same thing.

The report also states that inclusion on the list “does not constitute the determination by any agency that any of those individuals or entities meet the criteria for designation under any sanctions program.” However, a side-by-side comparison of the criteria in Section 241 of CAATSA and those in Section 1(a) of Executive Order 13661 shows a possible basis for future sanctions designations against at least some of the individuals and entities in the Section 241 report.  Executive Order 13661 “blocks” the property of any person that the Secretary of the Treasury, in consultation with the Secretary of State, determines to be, among other things, “an official of the Government of the Russian Federation,” or “to be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly,” or “to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of,” a senior official of the Government of the Russian Federation.  Treasury’s decision to include at least some of the individuals and entities on the Section 241 list (for example, the individuals in the list of “senior political figures”) would seem to be a possible basis for a Treasury “determination” that they also meet the broad criteria in Executive Order 13661.  Based on Secretary Mnuchin’s testimony today, that apparent discrepancy may be in the process of being resolved – in the form of more sanctions.

Section 241 mandates the inclusion of additional information that the unclassified report does not contain (but which is presumably contained in the classified annex), such as:

  • Listing oligarchs “as determined by their closeness to the Russian regime” in addition to their net worth, and assessing their relationship with “President Vladimir Putin or other members of the Russian ruling elite.”
  • Identifying the “indices of corruption with respect to” Russia’s senior political figures and oligarchs, and their “estimated net worth and known sources of income,” along with those of “their family members (including spouses, children, parents, and siblings), including assets, investments, other business interests, and relevant beneficial ownership information.” It also requires an “identification of the non-Russian business affiliations of those individuals.”
  • The “beneficial ownership” of Russian “parastatal entities” and “scope of the non-Russian business affiliations of those entities.”
  • “The exposure of key economic sectors of the United States to Russian politically exposed persons and parastatal entities, including, at a minimum, the banking, securities, insurance, and real estate sectors.”
  • The likely effects of imposing additional sanctions on Russian oligarchs, parastatal entities and state-owned enterprises, “including impacts on the entities themselves and on the economy of the Russian Federation, as well as on the economies of the United States and allies of the United States.”

In addition to the possibility of additional sanctions designations, as Secretary Mnuchin hinted at, there are other legal risks on the horizon directly related to the Section 241 report. Bipartisan legislation recently introduced in the House and Senate would require the President, if the Director of National Intelligence determines that Russia interfered in a future U.S. election, to “block” the property of “any senior foreign political figure or oligarch in the Russian Federation described in subsection (a)(1) of section 241 [of CAATSA] and identified in the report required by that section.”  That provision would turn the Section 241 report into a sanctions list.  While those bills’ prospects for passage are uncertain, it is noteworthy that CIA Director Mike Pompeo stated yesterday that he has “every expectation” that Russia “will continue to try” to interfere with the 2018 midterm elections.

The Section 242 report on Russian sovereign debt has not seen much reporting, because the report itself is classified. See our previous discussion of that issue. However, Congress has reportedly requested an unclassified version of the sovereign debt report, as Russian 10-year bonds trade with the lowest yields in five years.  It is surprising that market participants, apparently without any information about what this report actually states, appear to have taken it as a green light for bullish bets.

Separately, the State Department has not imposed any sanctions yet under Section 231 of CAATSA, which mandates sanctions on persons that engage in significant transactions with listed persons that are part of or operate for or on behalf of the Russian defense or intelligence sectors.  State Department spokeswoman Heather Nauert stated that “Sanctions on specific entities or individuals will not need to be imposed because the legislation is, in fact, serving as a deterrent . . . Since the enactment of the CAATSA legislation, we estimate that foreign governments have abandoned planned or announced purchases of several billion dollars in Russian defense acquisitions.”  In the same article, another State Department official is quoted as saying that the administration is “using this legislation as Congress intended to press Russia to address our concerns related to its aggression in Ukraine, interference in other nations’ domestic affairs and abuses of human rights.”  These statements do not diminish the risk of future sanctions under Section 231, which requires the administration to impose sanctions when the statutory criteria are met.