HOW RUSAL ES­CAPED THE NOOSE OF US SANC­TIONS

The Gulf Today - Business - - SPECIAL REPORT -

WASH­ING­TON: They were sup­posed to be the tough­est sanc­tions the United States had ever im­posed on a Rus­sian oli­garch. Seven­teen days later, Wash­ing­ton wa­tered them down.

On April 23, the US Trea­sury eased re­stric­tions on bil­lion­aire Oleg Deri­paska’s alu­minium com­pany Rusal. In­stead of bar­ring Rusal from in­ter­na­tional mar­kets, which is what the United States orig­i­nally in­tended to do, the Trea­sury sug­gested it might lift the sanc­tions al­to­gether.

Wash­ing­ton’s change of course says a lot about the lever­age held by the sup­ply chain of a widely-used com­mod­ity such as alu­minium. It also sug­gests the Trump ad­min­is­tra­tion is hard-pressed as it jug­gles in­ter­na­tional eco­nomic bat­tles it has opened on var­i­ous fronts, in­clud­ing with China and Iran.

Sev­eral Eu­ro­pean gov­ern­ments, in­clud­ing Ger­many and France, lob­bied Wash­ing­ton to back down, ac­cord­ing to more than a dozen US and EU of­fi­cials and in­dus­try sources who spoke to Reuters.

Multi­na­tion­als Rio Tinto and Boe­ing also ap­pealed to the US Trea­sury, seek­ing a soft­en­ing of the terms on Rusal.

All made the same ar­gu­ment, the sources said: a squeeze on the largest pro­ducer of alu­minium out­side China would hit busi­nesses around the world, dis­rupt­ing pro­duc­tion of myr­iad goods from car and planes to cans and foil, and putting jobs at risk.

Un­like pre­vi­ous cases of sanc­tions on Rus­sia, Eu­ro­pean coun­tries did not have a chance to con­sult with Wash­ing­ton on puni­tive moves that would have rip­ple ef­fects in the Eu­ro­pean econ­omy, the sources said. One rea­son for the lack of dia­logue: the US State Depart­ment no longer has a Sanc­tions Pol­icy Co­or­di­na­tor to li­aise with other gov­ern­ments, ac­cord­ing to three US sources fa­mil­iar with the mat­ter and one Eu­ro­pean source.

The for­mer co­or­di­na­tor, Daniel Fried, re­tired last year and has not been re­placed be­cause of a hir­ing freeze or­dered by the Trump ad­min­is­tra­tion at the depart­ment.

Rusal, Rio Tinto and Boe­ing de­clined to com­ment.

The US Trea­sury, whose Of­fice of For­eign As­sets Con­trol (OFAC) im­posed the mea­sures, said it worked to mit­i­gate the sanc­tions’ im­pact on al­lies and in­dus­tries that faced “un­de­sired col­lat­eral con­se­quences”. It did not com­ment on lob­by­ing ef­forts.

When asked if the lack of a sanc­tions co­or­di­na­tor had hin­dered in­ter­na­tional con­sul­ta­tion, the State Depart­ment said it had held sev­eral dis­cus­sions with Eu­ro­pean coun­tries over the past year about sanc­tions and main­tained a dia­logue with them. It did not spec­ify if it had dis­cussed Rus­sian sanc­tions.

The sanc­tions were the tough­est the United States has im­posed on a listed Rus­sian com­pany since Moscow’s 2014 an­nex­a­tion of Crimea. The no­tice on April 6 gave buy­ers a dead­line of 30 days to re­ceive sup­plies from Rusal be­fore deal­ings in dol­lars were pro­hib­ited.

Any in­di­vid­ual or com­pany that failed to com­ply would them­selves face be­ing shut out of the fi­nan­cial sys­tem, while the Trea­sury could seize any dol­lars paid to Rusal.

The ef­fect was im­me­di­ate. Prices for alu­minium surged 15 per cent as Rusal stopped sup­ply­ing cus­tomers. As well as pro­duc­ing alu­minium, the com­pany pro­duces alu­mina, a raw ma­te­rial needed to make alu­minium.

“They (the Trea­sury) desta­bilised the global alu­minium in­dus­try. This is un­prece­dented and a mas­sive over-reach,” said An­ders As­lund, se­nior fel­low at US think­tank At­lantic Coun­cil.

Rusal told met­als and min­ing con­glom­er­ate Rio Tinto that it was sus­pend­ing de­liv­er­ies of alu­mina from its Ir­ish plant in Augh­in­ish to Rio’s Dunkirk alu­minium smelter in France, Europe’s big­gest alu­minium pro­duc­tion fa­cil­ity, ac­cord­ing to the in­dus­try sources. The Rus­sian com­pany feared any pay­ment it re­ceived would be seized by US au­thor­i­ties, the sources said.

Rusal also in­formed Trimet Alu­minium it was halt­ing alu­mina de­liv­er­ies to the Ger­man firm’s smelter in the French Alps and three fac­to­ries in Ger­many, in Essen, Ham­burg and Vo­erde. Trimet de­clined to com­ment. The sus­pen­sion of alu­mina de­liv­er­ies risked halt­ing Rio Tinto and Trimet’s alu­minium smelt­ing op­er­a­tions and hit­ting busi­nesses through­out the metal’s sup­ply chain. The mar­ket ruc­tions set off a dif­fer­ent kind of ac­tiv­ity.

In the days fol­low­ing the sanc­tions no­tice, French, Ger­man, Ir­ish and Ital­ian of­fi­cials lob­bied against the re­stric­tions, ac­cord­ing to the EU sources.

Many were wor­ried the mea­sures could lead to the clo­sure of those plants and busi­nesses in their coun­tries that re­lied on Rusal sup­plies, and the po­ten­tial loss of thou­sands of jobs.

Ire­land’s for­eign min­istry com­plained to US Trea­sury Sec­re­tary Steven Mnuchin af­ter Dublin of­fi­cials met Augh­in­ish man­age­ment on April 13 and were told the plant could shut down, threat­en­ing hun­dreds of jobs, an Ir­ish government spokesman told Reuters.

French Fi­nance Min­is­ter Bruno Le Maire dis­cussed the is­sue by phone with Mnuchin in the days fol­low­ing the sanc­tions no­tice and then in per­son in the week of April 16, dur­ing In­ter­na­tional Mon­e­tary Fund meet­ings in Wash­ing­ton, ac­cord­ing to a French fi­nance min­istry of­fi­cial.

“We got in touch with the Amer­i­cans as soon as it be­came clear there was an im­pact on some com­pa­nies op­er­at­ing in France,” the of­fi­cial said. He added that hun­dreds of jobs were at risk in France. “The Amer­i­cans were con­struc­tive from the start.” An Ital­ian government source said Rome also lob­bied Wash­ing­ton to soften the sanc­tions. Com­pa­nies lob­bied too.

Rio Tinto con­tacted the French government and Trimet went to the Ger­man government, ask­ing them to in­ter­vene with Wash­ing­ton, ac­cord­ing to the in­dus­try sources. Rio Tinto also com­plained di­rectly to OFAC, said two US of­fi­cials fa­mil­iar with the de­vel­op­ments. Trimet makes alu­minium prod­ucts for the auto, con­struc­tion and pack­ag­ing in­dus­tries.

While most of the lob­by­ing came from Europe, ac­cord­ing to US of­fi­cials, there were also con­cerns in the United States about the sanc­tions.

Af­ter the April 6 no­tice, plane­maker Boe­ing ex­pressed con­cern to the US government about ris­ing alu­minium prices, ac­cord­ing to two in­dus­try sources fa­mil­iar with the mat­ter. Car­mak­ers also com­plained about the pos­si­ble im­pact of the sanc­tions on their busi­nesses, said the sources, who de­clined to name the com­pa­nies.

One of the sources said that, in ad­di­tion to alu­minium, car­mak­ers were wor­ried about a pos­si­ble dis­rup­tion to sup­plies of pal­la­dium, used in cat­alytic con­vert­ers. Rusal doesn’t pro­duce pal­la­dium but it sup­plies soda to No­rilsk Nickel, the world’s big­gest pal­la­dium pro­ducer.

Amer­i­can trade body the Alu­minum As­so­ci­a­tion told Reuters that, shortly af­ter April 6, it shared mar­ket data with the Trump ad­min­is­tra­tion show­ing that last year the US in­dus­try im­ported 680,000 met­ric tonnes of Rus­sian pri­mary alu­minium, or 12 per cent of US de­mand.

The as­so­ci­a­tion raised con­cerns about the Rusal sanc­tions at meet­ings with the White House’s National Eco­nomic Coun­cil and the US Trade Rep­re­sen­ta­tive. It said the mea­sures could con­strain sup­plies for alu­minium pro­ces­sors.

On April 23, lit­tle more than two weeks af­ter im­pos­ing sanc­tions, OFAC soft­ened the mea­sures. It gave busi­nesses six months in­stead of 30 days to wind down deal­ings with Rusal and said it might lift the sanc­tions al­to­gether if Deri­paska ceded con­trol of the com­pany.

The an­nounce­ment had an im­me­di­ate mar­ket re­ac­tion, with alu­minium prices fall­ing as much as 10 per cent. Alu­minium prices now stand at $2,300 per tonne, down from the $2,700 level they rose to fol­low­ing the April 6 sanc­tions no­tice, but still above the $2,000 seen be­fore the mea­sures were im­posed.

David Mort­lock, who de­signed ear­lier sanc­tions against Rus­sia when he was Direc­tor for In­ter­na­tional Eco­nomic Af­fairs at the White House National Se­cu­rity Coun­cil in 2013-15, said such mea­sures were not a pre­cise sci­ence.

“Don’t for­get, sanc­tions can be ad­justed if the im­pact is larger than OFAC wants,” added Mort­lock, now a part­ner at le­gal firm Wil­lkie Farr & Gal­lagher.

“Ev­ery time you do it, you learn from your ex­pe­ri­ence.”

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