By Swann Bigot, legal expert and author – Eurasia Business News, February 16, 2018

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The “Kremlin report”, which was required by a U.S. law voted last summer, mandated the Trump administration to compile a list of Russian officials and wealthy businessmen close to the President Vladimir Putin. The list was released by the U.S. Treasury on January 29. Photo credit : S. Bigot, February 2012. 

The U.S. Treasury Department released on January 29 the highly anticipated “Kremlin Report”, as required under Section 241 of the Countering America’s Adversaries Through Sanctions Act (CAATSA), a law voted by the U.S. Congress last summer with an overwhelming bipartisan support and reluctantly signed by President Donald Trump on August 2.

This law was voted in order to increase pressure on Russia in response to Moscow’s alleged interference in the 2016 U.S. presidential election, its alleged role in the Ukrainian crisis, and other actions that have caused U.S. concern.

More precisely, the CAATSA Section 241, named “Report on oligarchs and parastatal entities of the Russian Federation”, mandated the U.S. Treasury Department, in consultation with the Director of National Intelligence and the Secretary of State, to submit to appropriated congressional committees a detailed report on :

(1) the Senior foreign political figures and oligarchs in the Russian Federation,

(2) the Russian parastatal entities engaged in the national economy,

(3) 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,

(4) the likely effects of imposing debt and equity restrictions on Russian parastatal entities, as well as the anticipated effects of adding Russian parastatal entities to the list of specially designated nationals and blocked persons maintained by the Office of Foreign Assets Control of the Department of the Treasury.

(5) The potential impacts of imposing secondary sanctions with respect to Russian oligarchs, Russian state-owned enterprises, and Russian parastatal entities, 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.

Submitting the “Kremlin report” on January 29, the U.S. Treasury fulfilled its obligation under Section 241 (1) and (2) of the CAATSA. The institution also sent to relevant congressional committees a report required by the Section 242 related to sanctions on Russian sovereign debt (cf. below).

The publicly available part of the document required by Section 241 (1) is a list naming 114 Russian senior officials and 96 oligarchs, who U.S. authorities say have gained wealth or power through association with the President Vladimir Putin, who is expected to secure six more years in the Kremlin in the presidential election on March 18 and April 8.

Read also : New US Sanctions against Russia over Ukrainian conflict

Among the named individuals are 43 of Presidential aides and advisers including Kremlin spokesman Dmitry Peskov, 31 federal ministers including the Prime Minister Dmitry Medvedev and Foreign Minister Sergey Lavrov, senior lawmakers, top officials in Russia’s intelligence and security agencies, the Mayor of Moscow, the Governor of Saint Petersburg and oligarchs such as the Chelsea football club owner Roman Abramovich, the aluminum tycoon Oleg Deripaska, the steel magnate Alexey Mordashov or Leonid Mikhelson, the owner of the Russian private gas producer Novatek which implements LNG projects in the Arctic.

The U.S. Treasury Department disclosed its methodology for including :

  • Senior political figures:  Individuals who are: i) senior members of the Russian Presidential Administration; ii) members of the Russian Cabinet, Cabinet-rank ministers, and heads of other major executive agencies; iii) other senior political leaders, including the leadership of the State Duma and Federation Council, other members of the Russian Security Council, and senior executives at state-owned enterprises.
  • Oligarchs:  Russian individuals with an estimated net worth of $1 billion or more.
  • Parastatals:   Entities that are at least 25% owned by the Government of Russia and that had about $2 billion or more in revenues in 2016. 

Note that authors of the list did not name the former Finance Minister Alexei Kudrin and Anatoly Chubais, the head of the Russian state-owned nanotechnology company, Rusnano. Both are often described as members of the “liberal” elite asking for major reforms, opposed to the conservative groups.

The report is not a sanctions list. The inclusion of individuals or entities in the Kremlin report does not impose sanctions on them. Nor does it create any other restrictions, prohibitions, or limitations on dealings with such persons by either U.S. or foreign persons, as explained the U.S. Treasury, which revealed that it used publicly available sources (websites, government documents, public records, and news stories) and worked closely with the Secretary of State and the U.S. intelligence community in drafting this list.

The CAATSA law only required U.S. Treasury to submit these reports, not to sanction the individuals and entities named in them. However, information contained in the documentation will be then used to base future targeted sanctions.

A copy-and-paste of Forbes 2017 ranking ?

The unclassified list published on January 29 was broader and less targeted than expected. It appears that it is just a copy-and-paste of the Forbes 2017 ranking of Russian wealthiest businessmen and of the telephone directory of the Kremlin website.

Donald Trump may have ordered such a broad list in order to gain time against a fresh round of U.S. sanctions. Indeed, naming the whole Russian government, the presidential administration and all Russian oligarchs as potential targets undermines the credibility of any further threats. The absence of new sanctions also gives time to the interested individuals to get prepared.

In addition, several wealthy Russians included in the unclassified list of the U.S. Treasury are not seen as having close ties to the Kremlin, such as banker Oleg Tinkov and grocery tycoon Sergey Galitsky, making commentators further denouncing the used methodology.

Finally, Yevgeny Kaspersky, the founder of the cybersecurity company Kaspersky Lab and also named in the list, criticized the copy-and-paste of the Forbes 2017 ranking of Russian wealthiest businessmen and claimed no ties with the Russian Government.

Money is back home

Now that everyone in the Russian elite class is on the list, there is no difference among anybody and a block of defiance towards the U.S. can form among oligarchs, reinforcing the position of the Kremlin.

The list may also make oligarchs repatriate their wealth to Russia in order to avoid any freeze of financial assets in foreign jurisdictions. Remember, some Russian tycoons scared of new U.S. sanctions had already asked the Federal Government in December to help them repatriate foreign assets through a preferential regime, such as Eurobonds. The potential amount described in press sources was up to $ 3 billion.

Following this request, the Russian President Vladimir Putin met with the wealthiest businessmen of the country in the Kremlin palace on December 21 to discuss this issue.

In addition, the Kremlin received in early February a list of Russian exiled oligarchs who would be ready to return to Russia in exchange of amnesty. Boris Titov, the Kremlin’s ombudsman for entrepreneurs’ rights, held a private meeting in London with interested parties and said that 16 oligarchs living in Britain already asked the Presidential administration for safe repatriation. Boris Titov said that other oligarchs living in Cyprus, Austria and Ukraine also expressed their will to receive amnesty and return to their country. The Russian President’s spokesman Dmitry Peskov confirmed to have received the list and added that “each case must be considered separately” with law enforcement.

Classified Annexes of the Kremlin report

After a wave of critics over the large scope of the list, the U.S. Treasury Department stated in a press release dated February 1, that it was also submitting to Congress classified annexes, in order to avoid potential asset flight from the named individuals and entities, as well as to prevent disclosure of sensitive information. The document also includes Russian officials and businessmen of lower rank and wealth.

This classified analysis included links to alleged corruption, and international business affiliations of the named Russian officials and oligarchs. Treasury Secretary Mnuchin noted on January 30 when testifying before the Senate Banking and Finance Committee of the Congress, that the classified annex to the report entails an “extremely thorough analysis.” He then added that the U.S. Treasury is using the “Kremlin report” to inform future targeted sanctions, and “there will be sanctions that come out of this.”

The institution revealed that if the unclassified report was built with publicly available sources, the unreleased annexes were derived from classified materials and methods. Taken together, the report and the annexes provide U.S. Congressmen with thorough details as required on relevant individuals and entities named in the list, in compliance with the CAATSA Section 241.

Will Russia respond to the Kremlin report ?

While he was attending a meeting for the presidential election campaign, the Russian President Vladimir Putin called the report an “unfriendly act” that would “complicate the already grave situation of the Russian-American relations and inflict damage without any doubt on international relations.” However, Vladimir Putin also said that Russia would refrain from implementing serious countermeasures it has prepared :

“We were prepared to undertake retaliatory steps, and quite serious ones too, which would cut our relations to zero. But we will refrain from such steps for the time being. […] We want and intend to patiently build relations to whatever degree the other side — the American side — is ready.”

Vladimir Putin, January 30, 2018

The Prime Minister Dmitry Medvedev added that the “Kremlin Report” would “poison” ties for a long time to come while the President Press Secretary Dmitry Peskov told journalists that he believes the list may damage the reputation of Russian politicians and businessmen, but that officials were analyzing the document before deciding on retaliatory measures. Dmitry Peskov also accused the Trump administration of using the measure to try to influence the March 18 presidential election.

Finally, the head of the constitutional law commission of the upper house of the Russian Parliament, Andrey Klishas, told journalists of RBC that “the Council of the Federation will not prepare retaliatory measures to the “Kremlin report”, since it does not enact new sanctions.”

New U.S. sanctions to come ?

U.S. Treasury Secretary Steven Mnuchin said during a Senate Committee hearing on January 30 that “there will be sanctions that come out of this” and “in the near future, you’ll likely see additional sanctions.” He added that such sanctions could come “in the next several months, maybe a month.”

Such a statement is significant taking into account that the Russian presidential election will take place next March and April and major reforms are expected in the coming months to boost the national economy, after a slow economic growth of 1.5 per cent in 2017, succeeding recession 2.8 per cent in 2015 and 0.2 per cent in 2016.

Secretary Mnuchin has made clear that Treasury is the Kremlin report to inform future targeted sanctions. In 2017, U.S. Treasury imposed 58 targeted restrictive measures related to Russia and Ukraine.

Risks for image and reputation

There is an evident reputational risk for those included in the unclassified part of the “Kremlin report”. Being listed as potential targets of future U.S. sanctions will damage their image and reputation. Of course, these individuals won’t face any liability or penalty for being listed but there may be investors, banks or financial institutions in the U.S. or Europe that will be deterred from doing business with them.

Indeed, they may think twice before dealing with individuals mentioned in the list, since they are now considered as potential targets of U.S. sanctions. Being targeted by sanctions directly impact the capacity to conduct financial transactions in U.S. dollars or to make business with U.S. citizens and entities. Since the Russian economy is open and the business elite is well integrated in the global market, the use of sanctions can be harmful.

Moreover, the list included names of persons already under U.S. and EU sanctions such as Arkady Rotenberg or Gennady Timchenko (identified with an asterisk *), formally putting the others at the same level of scrutiny. Enhanced due diligence of Russian business partners will be required in order to reduce any risks of violation of sanctions and penalty or heavy fines, causing delay to business projects with targeted parties or even end of partnerships.

To illustrate this idea, Dmitry Trenin, Director of the Carnegie Moscow Center, wrote in Twitter : “The power of U.S. sanctions is not in the specifics of people or companies blacklisted but in a simple message: those who want to do deals with Russians might have to deal with the United States.”

Honestly, it is hard to believe that all the Russian top officials and oligarchs and wealthy businessmen included in the Kremlin report will face sanctions. The list is too large. Nevertheless, apprehension remains about the consequences of being named and the expectation of future U.S. sanctions. In the past months, the highly anticipated “Kremlin report” has fueled concerns among Russian oligarchs, fearing harming consequences for their business with Western companies, investors and financial institutions.

Moreover, this threat of new sanctions targeting Russian oligarchs comes while the British authorities announced the launch of a tough anti-corruption campaign against wealthy Russian businessmen established in the UK, in an effort to unveil what lucrative assets and lavish lifestyles are linked to criminal schemes. Unexplained wealth orders (UWOs), tools introduced by the British Criminal Finance Act voted in 2017, will be used to force wealthy people suspected of corruption and criminal profit to explain the origin of their assets. London is well-known to be a haven for the richest businessmen and their families coming from Russia, Ukraine or Kazakhstan.

Lastly, oligarchs named in the unclassified list due to their close ties to the Russian President may fall under regulation related to “Politically Exposed Persons” and be targeted by enhanced due diligence and greater scrutiny on financial transactions and business deals as required by regulations aiming at preventing money laundering, corruption, favoritism or fraud.

Who is a Politically Exposed Person ?

A politically exposed person is defined as an individual who is entrusted with prominent public functions, including heads of States, members of legislative bodies, government ministers, judges, ambassadors, chargés d’affaires, high ranking members of the armed forces, senior officials of state-owned enterprises and directors, deputy directors and board members of an international organization (Directive (EU) 2015/849).

Family members or persons known to be close associates of politically exposed persons also fall under scrutiny and risk-based procedures, according to the Directive (EU) 2015/849.

Note that “persons known to be close associates” means :

  • natural persons who are known to have joint beneficial ownership of legal entities or legal arrangements, or any other close business relations, with a politically exposed person;
  • natural persons who have sole beneficial ownership of a legal entity or legal arrangement which is known to have been set up for the de facto benefit of a politically exposed person.

This regime means applying enhanced due diligence to listed oligarchs, their family members and close associates, in order to check their reputation and unveil their source of wealth and the origin of their assets. (See also United Nations Convention Against Corruption of 2004, article 52 (1) and article 2)

Why such a scrutiny on Politically Exposed Persons ? The main reason is that these individuals pose higher risk of involvement in bribery or corruption due to their position and influence in political and economic spheres. They can potentially be involved in corruption and fraud scheme.

After the vote of the CAATSA last summer, some Russian businessmen had started consulting lawyers in order to find solutions to protect their assets and business activities or had begun to switch money transfers to euros from dollars. Others had divested some vulnerable assets, such as Alisher Usmanov who sold in early January his majority stake in his media holding to the oligarch Ivan Tavrin. Mr. Usmanov is named in the list released on January 29, making him and his properties a potential target of future U.S. sanctions.

No secondary sanctions under Section 231 of CAATSA

U.S. President Donald Trump’s administration earlier notified Congress that it will not impose sanctions against companies and foreign countries doing “significant” business with blacklisted Russian defense and intelligence entities, a consideration required by Section 231 of CAASTA.

After more than three weeks of delay, the U.S. State Department issued public guidance on October 27, 2017 listing 39 entities considered as part of, or operating for or on behalf of the Defense and intelligence sectors of the Russian Federation.

The Section 231 of CAATSA mandated the Trump administration to take secondary sanctions against persons who have knowingly engaged in a significant transaction on or after August 2, 2017 with any of these 39 identified organizations.

This section raised questions over the situation of NATO allies in Eastern Europe and countries such as India who have Russian military equipment and need to buy spare parts from Russian defence manufacturers.

New restrictive measures against Russian defense and intelligence entities were expected on or after January 29. However, Trump administration decided to reject this option for now.

Indeed, the U.S. State Department told Congress that provisions of Section 231 are having a deterrent effect on Western companies, and that “sanctions on specific entities or individuals will not need to be imposed.”

The State Department spokeswoman Heather Nauert said that “We estimate that foreign governments have abandoned planned or announced purchases of several billion dollars in Russian defense acquisitions.

Finally, an anonym source of the U.S. newspaper The Washington Post would have told journalists that “future sanctions would fall on foreign governments and business entities that buy from Russia, not the Russian firms.

What impact of U.S. sanctions on Russian sovereign debt ?

The Section 242 of the CAATSA focuses on effects of expanding sanctions to Russian sovereign debt and the full range of derivative products. This kind of sanctions would be particularly harmful, since Moscow has used its sovereign debt to financially strengthen strategically important companies after that the United States and the European Union imposed sanctions in 2014 following the Ukrainian crisis.

The Russian sovereign debt and derivatives market is one of the largest among emerging markets and continues to attract international investors, as stressed the U.S. Treasury in the unclassified report under Section 242. The total stock of sovereign bonds issued by the Russian Federation at the end of the third quarter of 2017 (3Q2017) was equivalent to $ 160 billion, of which domestic debt was $ 122 billion and Eurobonds were $ 38 billion. Foreign investors take part in the internal and external bonds market and hold about one third of the outstanding bonds in each market.

Therefore, markets had been waiting for the “Kremlin report”, expecting possible sanctions on Russian sovereign debt.

However, the U.S. Treasury said in its report submitted to Congress on January 29, that expanding sanctions on Russia’s sovereign debt would have “negative spillover effects into global financial markets and businesses, given the country’s large economy and deep connections to world markets, reported Bloomberg.

Given the size of Russia’s economy, its interconnectedness and prevalence in global assets market, and the likely over-compliance by global firms to U.S. sanctions, the magnitude and scope of consequences from expanding sanctions to sovereign debt and derivatives is uncertain and the effect could be borne by both the Russian Federation and U.S. investors and businesses.”, according to the unclassified report required by the Section 242.

A Treasury spokesman explained that “expanding the debt sanctions even more would hurt Russia but could also hinder U.S. business in both the financial sector and real economy and potentially disrupt global markets.”

New measures against Russian sovereign debt could slow the country’s recovering economic growth, increase the pressure on the national banking sector and “lead to Russian retaliation against U.S. interests” and could affect the “competitiveness of large U.S. asset managers.” according to Reuters.


After this development about the Kremlin report and the U.S. sanctions, we must not forget that the main source of income of named oligarchs is in Russia and even if they become isolated from global finance due to U.S. sanctions, opportunities still remain. Major economic partners in Asia or in the Middle East can continue to make business with them while many countries are not considering breaking economic ties with Russia, even within the European Union.

In addition, U.S. restrictive measures, described as “fighting corruption”, can be seen as helping Russia to limit the illegal flight abroad of financial assets, bringing capital necessary to investments in the national economy and the build-up of welfare for Russian citizens. Fighting corruption is in the interests of all countries.

Furthermore, even if the Russia’s economy has been in recession in 2015 and 2016, it was mainly due to its overwhelming dependency on the oil prices and other structural factors, more than because of U.S. sanctions. Effective economic reforms with long term goals, if rightly implemented, can overcome the current problems of the country.

Lire aussi : Les Etats face à l’espionnage dans le cyberespace

Finally, the main risks generated by future U.S. sanctions will be borne by Western investors willing to make business with Russian companies and individuals. They will have to conduct enhanced due diligence procedures and greater scrutiny or even break business partnerships to avoid heavy penalties, losing income and leaving market shares to foreign competitors.

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© Copyright 2018 –  Swann Bigot, legal expert and author.