When it comes to creating the maximum amount of pressure on Russia over its annexation of Crimea, the U.S. Treasury has found that ambiguity has its virtues.
Treasury officials have been tight-lipped in their guidance to U.S. companies about how to deal with Russian firms that, while not directly targeted by U.S. sanctions, have links to individuals or institutions that are.
The result is that companies are erring on the side of caution, amplifying the impact of sanctions that so far apply to just one company, OAO Bank Rossiya, and 31 individuals. JPMorgan Chase & Co., for example, temporarily suspended a payment of less than $5,000 to a Russian firm that isn’t even on the blacklist. Organizers of a Miley Cyrus concert in a Helsinki hall owned by sanctioned individuals are checking to see if it can go ahead.
“There is strategic advantage to the ambiguity,” said Juan Zarate, senior adviser at the Center for Strategic and International Studies in Washington and a deputy national security adviser under President George W. Bush. “Putting the onus on the private sector” to decide whether sanctions apply “is a principal strategy of the U.S. Treasury.”
In a conference call with about 70 sanctions lawyers on March 25, Treasury officials declined to specify how to treat companies such as OAO Sogaz Insurance Group, in which Bank Rossiya has a stake, according to David R. Johnson, a partner at Vinson & Elkins LLP in Washington.
“Banks have to take the position: if there is any doubt, you block first and ask questions later,” said Douglas N. Jacobson, a sanctions lawyer at Jacobson Burton PLLC in Washington. U.S. banks and exporters must be “extremely cautious” to avoid running afoul of the sanctions, he said.
Live Nation Entertainment Inc., the world’s largest concert promoter, is checking with lawyers to see whether it can go ahead with Justin Timberlake and Miley Cyrus concerts in Helsinki, according to Nina Castren, the head of the Finnish unit of Live Nation. She said tickets are still being sold pending a decision. The arena’s owners include sanctioned allies of Russian President Vladimir Putin: Gennady Timchenko, Arkady Rotenberg and Boris Rotenberg.
“The biggest nightmare is being in violation of the sanctions and not knowing that you were,” said Evan Freely, global credit and political risk practice leader at New York-based Marsh & McLennan Cos., the largest insurance broker by market value.
U.S. companies are advised to act with caution and make their own risk assessments when a sanctioned individual or company holds a significant stake of less than 50 percent in a business or controls it by other means, said a Treasury official who asked not to be identified because of department policy. The official declined to comment on ownership of Sogaz, the company that was the recipient of the payment suspended by JPMorgan.
The sanctions forbid U.S. firms or individuals to do business with Bank Rossiya. The lender has about $10 billion in assets, “numerous correspondent relationships” with banks in the U.S. and Europe, and was targeted because its owners are close associates of Putin, the Treasury said.
Individuals subject to sanctions include Timchenko, a billionaire whose activities in the energy industry have been directly linked to Putin; Yury Kovalchuk, the largest shareholder of Bank Rossiya and personal banker for senior Russian officials; and brothers Arkady and Boris Rotenberg, whose companies received about $7 billion in contracts for the Sochi Winter Olympics.
JPMorgan yesterday said it will unfreeze a money transfer from the Russian embassy in Kazakhstan to Sogaz after checking with regulators. Other companies have also reversed decisions on sanctions.
Visa Inc. and MasterCard Inc. stopped processing cards for Bank Rossiya as well as SMP Bank, co-owned by the Rotenberg brothers. The two biggest card networks later resumed services to SMP Bank.
“Based on clarifications provided to Visa by the U.S. government, Visa has determined that we are not required to block SMP Bank’s access to our network,” said Paul Cohen, a spokesman for Foster City, California-based Visa.
There are good reasons for the Treasury’s reticence, said Daveed Gartenstein-Ross, senior fellow at the Foundation for Defense of Democracies in Washington.
“These sanctions were put together very, very quickly,” he said. “It really is complex to get it right. And you are not going to sanction any entity lightly.”
Zarate, the former deputy national security adviser, said the Treasury doesn’t have a complete picture of the financial ties that link the subjects of sanctions with other companies or people, and it’s counting on U.S. firms to do their own research.
“In the next three to four weeks we are likely to see more examples of U.S. companies blocking transactions,” said Johnson at Vinson & Elkins. “People are in the process of doing their due diligence on various entities.”