New Russian Sanctions Law: A US Warning Of Things To Come

By Mike Eckel

(RFE/RL) — Legislation signed into law this week by a reluctant U.S. President Donald Trump hits hard at Russia, cementing existing sanctions and adding on a few more for good measure to punish Moscow for its actions in Ukraine, Syria, and allegedly cyberspace.

Buried in the bill’s dry legislative language, however, is arguably something more important: a road map, and a signal, for what might follow if Moscow doesn’t change its behavior more toward Washington’s liking.

“I think you could call this a threat,” said Peter Harrell, who worked on Russia and Iran sanctions while at the State Department between 2012 and 2014.

One section focuses on Russian sovereign debt, which the Kremlin has used to stabilize strategically important companies since sanctions were first imposed by the United States and European Union in 2014, following Russia’s annexation of Ukraine’s Crimean Peninsula.

The measure, which received overwhelming support in Congress calls on the Treasury and State Departments, along with intelligence officials, to analyze the “potential effects of expanding sanctions…to include sovereign debt and the full range of derivative products.”

“This would be a significant escalation of economic pressure on Russia and would be a significant statement about the toughness of U.S. sanctions on Russia,” Harrell told RFE/RL.

Though the measure only orders a report on the issue, Harrell said it signals that U.S. sanctions officials and congressional leaders might close off a Russian workaround to the 2014 sanctions.

Those sanctions cut off from the international credit markets several major companies either controlled by, or closely linked to, the Russian government.

The Kremlin was forced to bail out those companies to the tune of tens of billions of dollars since they were unable to roll over existing debt, Harrell said, and ended up drawing down some of its rainy-day investment funds.

But the U.S. and EU sanctions didn’t prevent the Russian government from raising capital on its own. Last year, it sold around $3 billion in new Eurobonds.

“If the Russian sovereign government can keep borrowing on international markets, it kind of becomes a workaround for theses sanctions against the big Russian state-owned companies,” Harrell said. “Because while Sberbank and Rosneft can’t borrow on international markets, the Russian sovereign can, and then they can turn around and simply relend the money to Rosneft and Sberbank.”

The Russian government holds a controlling stake in Rosneft, the country’s largest oil company. Sberbank, Russia’s largest bank, is also state controlled.

“Congress is signaling to the Russians and U.S. allies and the Trump administration that sovereign-debt sanctions may be coming down the pike,” Harrell said.

Daniel Fried, a veteran diplomat who was the State Department’s sanctions coordinator in 2014, said the law was smartly crafted because it hints at the direction Congress will go in the event of an escalation.

“For example, in response to the Russians giving us an August surprise, as they did in 2008,” he said, pointing to Russia’s invasion of Georgia that year.

Fried said the reports mandated by the new legislation will also help the administration and Congress focus on punitive measures that can actually be implemented without causing other problems.

“It does no good, and it is in fact a fool’s game, to start bellowing and shouting and bragging and you’re going to do this, that, and the other thing that you will actually never do because you haven’t actually thought through the consequences,” he said.

Another key section could pack a similar punch. It orders administration agencies to identify “the most significant senior foreign political figures and oligarchs in the Russian Federation, as determined by their closeness to the Russian regime and their net worth.”

The report should also focus on “the estimated net worth and known sources of income of those individuals and their family members (including spouses, children, parents, and siblings), including assets, investments, other business interests, and relevant beneficial ownership information.”

What this indicates, said Ilya Zaslavskiy, a Russian-born activist who has investigated Russian business tycoons and their investments and lobbying, is that U.S. officials have a more sophisticated read on how Russia’s politics and business sectors are intertwined.

“It shows that now there is a much better understanding of what is going on in Russia,” said Zaslavskiy, who is now affiliated with the U.S.-based Free Russia Foundation. “They understand that it’s both political figures and oligarchs, that it’s not only their network but their closeness to the regime that matters more.”

Earlier sanctions targeted a small group of well-connected businessmen and oligarchs. That included Gennady Timchenko, who allegedly ran an oil-trading business holding exclusive exports contracts that netted billions over many years; Arkady and Boris Rotenberg, construction magnates who have built massive state-funded projects such as the Kerch Strait bridge to Crimea; and Yury Kovalchuk, whose Bank Rossia has lasting ties to Putin’s hometown of St. Petersburg.

Expanding the sanctions to target relatives of individuals with close ties to the Kremlin or government power centers — for example, keeping the daughter of a government minister from studying at a U.S. university — would be a clear escalation, Fried said.

“That would be an escalation, but quite frankly, what do you expect?” he said. “[If] you buy into that sort of government, you enrich yourselves with that kind of government, you’re asking for trouble.”

In contrast to Congress’s strong support for the sanctions, Trump’s position has been lukewarm at best. In signing the bill into law on August 2, he called it flawed but said he was doing it “for the sake of national unity.”

Trump’s first seven months in office have been dogged by questions about interactions between Trump associates and Russian officials, along with the U.S. intelligence community’s conclusion that Russia sought to influence the 2016 presidential election.

Multiple investigations have been launched in Congress into alleged Russian meddling, and the Justice Department in May appointed former FBI chief Robert Mueller as special counsel to probe whether Moscow attempted to interfere in the U.S. voting and whether Trump associates colluded with Russians.

Trump has called accusations of improper ties to Russia a “hoax” aimed at undermining his presidency.

On the eve of the sanctions bill becoming law, Moscow ordered the U.S. diplomatic mission in Russia to sharply cut its staffing.