Valdai Club

A lawsuit is being heard by a district court in the United States, with Russian businessman Oleg Deripaska suing the US Treasury Department to lift the sanctions imposed on him. His legal complaint, filed in March 2019, named Treasury Secretary Steven Mnuchin and OFAC Director Andrea Gacki as defendants and challenged the OFAC (US Treasury’s Office of Foreign Assets Control) decision of April 6, 2018 that put Oleg Deripaska on the so-called SDN list – the list of designated persons, writes Valdai Club Programme Director Ivan Timofeev.

The Treasury and the OFAC are the most important institutions in the American sanctions policy. According to US law, the ‘designated’ individuals and legal entities cannot enter into economic transactions with US citizens or organisations. In reality, however, the vast majority of large banks and companies even outside America refuse to work with the listed individuals fearing US secondary extraterritorial sanctions or even criminal prosecution for breaking US law. On June 6, 2020, there was some progress in the Deripaska v. Mnuchin and Gacki case. Oleg Deripaska’s lawyer updated the Plaintiff’s case based on the arguments presented earlier by the Treasury.

In the winter of 2018, Oleg Deripaska, along with a number of other major Russian business leaders, public and political figures, was listed in the so-called “Kremlin Report” (or Report Regarding Senior Foreign Political Figures and Oligarchs in the Russian Federation and Russian Parastatal Entities) the US Treasury was to prepare in collaboration with other departments pursuant to Section 241 of the Countering America’s Adversaries Through Sanctions Act of 2017 (PL-115-44 CAATSA). Although the report itself did not imply any sanctions, it still could serve as the unofficial basis for expanding the sanctions lists. Oleg Deripaska was included in the SDN list on April 6, 2018, along with a number of large Russian companies where he held large blocks of shares. Later, three companies – Rusal, En + and Eurosibenergo – were removed from sanctions under the so-called Barker plan, which included restructuring their ownership and reducing Oleg Deripaska’s stakes. However, Deripaska himself remained blacklisted. On March 15, 2019, he filed a lawsuit with the US District Court for the District of Columbia. Along with the lawsuit, he made an attempt to have his name delisted through an administrative procedure by filing with the OFAC to disclose any records related to him that were used as grounds to label and specify him. The US agency declined his request.

Deripaska’s lawsuit has warranted the close attention of the legal community on both sides of the Atlantic. There are very few successful cases of easing US sanctions by court order. The courts mostly support the federal authorities.

However, in addition to the legal side, there are a number of important political implications in this case. They are related to the legitimacy of the decisions made, the strategies used by Russian citizens and organisations affected by the sanctions, as well as the use of the sovereignty concept in the modern globalised world. This lawsuit is extremely important in terms of making a systematic case for a Russian national affected by the US sanctions from the Ukraine-related package (the US President’s Executive Orders 13661 and 13662 were applied in Deripaska’s case even though he had nothing to do with the events in and around Ukraine). The OFAC subsequently explained that the Executive Order 13661 was applicable in his case because he acted in “support of Russian President Vladimir Putin’s projects.” And Executive Order 13662 had to do with Oleg Deripaska operating in the Russian energy sector. Oleg Deripaska’s lawyer Erich Ferrari makes the following argument in favour of the Russian businessman:

1. Executive Orders 13661 and 13662 were issued under the authority of the International Emergency Economic Powers Act (IEEPA) in response to “the actions and policies of the Government of the Russian Federation with respect to Ukraine.” However, the OFAC in its news release on April 6, 2018 cited Russia’s “malign activities around the globe,” which is not what the aforementioned executive orders say. To be lawful, the OFAC’s specifying of Deripaska had to be tailored to the scope of the national emergency that the executive orders were to address, and that was not the case.

2. E.O. 13661 authorises the Treasury to specify persons acting on behalf of “a senior official of the Government of the Russian Federation.” This cannot apply to Oleg Deripaska because the OFAC never said he acted or purported to act as Putin’s agent — i.e., for or on behalf of Putin. Instead, the OFAC concluded that he acted in “support of Russian President Vladimir Putin’s projects.” Moreover, these allegations originate from open-source reporting (mainly newspaper articles) from the unclassified summaries of OFAC documents, which themselves raise doubts. In addition, even if we accept the allegations about “support of Vladimir Putin’s projects” even before the Ukrainian crisis, those actions occurred and ceased prior to the issuance of E.O. 13661, making the claims irrelevant, as they were not sanctionable at the time which they purportedly occurred.

3. In support of the legal grounds for the designation – that Deripaska “operates in the energy sector of the Russian Federation economy” – the OFAC said he is involved in World Economic Forum-related projects related to energy. Moreover, the OFAC has never before interpreted the term “energy sector” to capture parties solely engaged in the production of electricity. Or do they mean oil and gas? 

4. The OFAC also stated that Deripaska “continues to operate in the energy sector of the Russian Federation economy through his ownership stake of En+,” and that Deripaska “still owns a sufficiently significant stake such that circumstances have not sufficiently changed to warrant removal.” However, En+ was delisted after Oleg Deripaska reduced his stake; the company no longer operates on his behalf. Lifting the sanctions on the company due to a change in the extent of Oleg Deripaska’s control runs counter to keeping him on the SDN list because he continues to co-own it.

5. The OFAC failed to provide Oleg Deripaska with adequate notice of the reasons for his designation. At least, its unclassified summaries do not provide any such reasons, which precluded Deripaska from understanding the allegations against him and meaningfully responding to his designations in violation of his due process rights under the Fifth Amendment. The OFAC argues he is a “foreign national with no substantial connection to the United States” and as such is not covered by the Fifth Amendment. But in fact, Oleg Deripaska did have substantial connection with the United States, which undermines the OFAC’s arguments. He visited the United States and did business there.

6. The OFAC also acted unlawfully by identifying Deripaska as an “oligarch” after defining the term in a capricious manner. Defendants publicly identified Deripaska as an “oligarch” and included his name in the Section 241 Report. This means that specifying him in the Kremlin Report is also questionable. Although the report did not imply actual sanctions, the mere fact of its existence resulted in reputational and material damage.

From a legal point of view, I may have failed to explain the case thoroughly and in sufficient detail. However, the above is enough to draw a few conclusions that are important for political expertise.

Conclusion 1. US authorities sometimes interpret the reasons and explanations for specifying an individual quite arbitrarily. This situation can be simply ignored, as can be the sanctions, unless they cause material or reputational damage (for example, blocking sanctions have practically no effect on representatives of law enforcement agencies who have no foreign accounts and are not allowed to travel abroad anyway). However, in case of vigorous international activity or when doing business, sanctions can cause significant damage. Arbitrary and unfair decisions can and must be challenged by any legal means available.

Conclusion 2. Oleg Deripaska’s lawsuit is an exception rather than the rule. Obviously, a lawsuit implies financial costs. It is also obvious that in many cases where sanctions are imposed, challenging them from the standpoint of American law is unpromising. However, litigation on the clearly controversial and non-obvious application of sanctions (and there are many) should become routine. For example, putting Russians who promote human rights issues on the Kremlin Report is egregious in terms of both law and morality. Although the report itself does not imply the use of sanctions, it can influence such decisions or cause harm.

Conclusion 3. The Russian parliament and executive bodies need to consider working out a systematic policy of protecting Russian citizens and organisations from the effects of foreign sanctions. This effort is already underway. However, it needs to be systematised and subsequently reflected in the practices of the Russian judicial system. The big question is how to do this. It requires a detailed study at the level of experts in law and international relations. A Russian citizen can hardly count on a foreign court protecting his interests, and the OFAC’s claim that Deripaska is not entitled to Fifth Amendment rights is proof of that. At the same time, the mechanisms for protecting Russian citizens’ interests should also take into account a wider context, including risks to the investment climate.

Conclusion 4. The sanctions raise the question of the real sovereignty of modern states, including Russia. Deripaska’s lawsuit is a vivid illustration of the problem. Russian citizens and companies suffer financial losses due to sanctions imposed by a foreign authority. Moreover, the sanctions are introduced for reasons that run counter to the principle of sovereign equality. A citizen’s contact with government officials is normal for any state. And sanctioning an individual simply for working in the energy sector or any other sector of the economy is not logical if the individual’s activities are legal. In fact, anyone could be sanctioned for any legal involvement in any area – even just for being a Russian citizen. 

Conclusion 5. The problem of sanctions cannot be eliminated without fundamental changes to the global financial system that currently enables the United States to broadly interpret its jurisdiction and impose its political will on foreign businesses. Sanctions are becoming an increasingly significant global risk. Any mechanisms for reducing and controlling them would remain relevant for decades to come.