FPRI BEAR MARKET BRIEF: CAATSA in the Rye: Will Trump’s sanctions implementation prove phony?

FPRI BEAR MARKET BRIEF: CAATSA in the Rye: Will Trump’s sanctions implementation prove phony?
Will Trump’s sanctions implementation prove phony?
By Maximilian Hess in London January 25, 2018

A look ahead at what the next round of sanctions may mean: 29 January will prove a significant day for the Russian economy and Russian-American relations. On that date, provisions of the Countering America’s Adversaries through Sanctions Act (CAATSA) will come into effect.

It is not yet known how many of the 12 sanctions measures CAATSA authorizes will be enacted, or to what extent the Trump White House will choose to enforce them – particularly given the bill was effectively forced upon the administration. It appears unlikely that all 12 measures will be enacted, and the White House will maintain significant discretion over how enacted measures are enforced. Nevertheless, the bill requires that five of the measures at a minimum be imposed.

In order to understand the impact of the bill, one must look at the 12 potential forms of sanctions. While it is impossible from the outside to know for certain, which measures will be applied, a cursory overview allows one to make an educated guess on the majority of the measures. Further, it is quite clear, which will make up the five selected if the White House does go for the minimal approach.

The first measure would be to bar loans from the US Export-Import Bank for sanctioned entities. It is certain this will be one of the measures enacted; it is unfathomable that the bank would loan to a sanctioned entity in the first place. The second measure listed in the bill – the barring of certain arms and nuclear exports – is also likely to be included, as it is already effectively US policy.

Measures three through five all pertain to financial institutions and are where things begin to get interesting. Measure three would see the president bar any US financial institution from providing credit or loans to a sanctioned person or entity totalling more than $10m over a 12-month period.

Separate CAATSA provisions, combined with previous Obama-era sanctions, mean that there is currently a strict 14-day limit on financing or providing loans to entities subject to the US’ sectorial sanctions. This has meant that US financial institutions could still engage in certain commodities swaps, insurance contracts, price guarantees, and derivatives tied to entities targeted by the sectorial sanctions, which include most of Russia’s major state-run businesses. The $10m limit would effectively halt all such business.

Measure four would see the US vote to bar any loan to Russian sanctioned entities from an international financial institution of, which it is a member. At present, the impact of this measure would be limited. The EBRD, of, which the US is a member, continues to maintain a freeze on new Russian loans. Meanwhile, Russia continues to challenge US-led multilateral institutions. Nevertheless, in the event of a major Russian economic crisis, enacting this measure would legally bar the US from approving World Bank loans or an IMF bailout to Russia. Given the US’ voting share within both entities, it wields veto power over all IMF or World Bank loans.

Measure five would prohibit sanctioned Russian banks from acting as a primary dealer or as an agent or repository for US government funds. The effect of this would be very limited – Russian banks would not seriously be considered for either role – as would the impact of measure six, which would bar the US government from procuring services from sanctioned entities. The only sector for, which measure six could prove a significant concern is addressed by the carve out for NASA and related space programs. However Russian propaganda outlets have suggested responding by cutting off cooperation with NASA.

Measures seven through 10 would cut sanctioned Russian entities off from, respectively, US dollar foreign exchange transactions, US banking transactions, US property transactions, and ‘significant’ US equity investments or loans. These would all undoubtedly have wide-ranging effects – measures eight and 10 in particular being in effect more restrictive versions of measure three that would result in an end to nearly all relationships between US financial institutions and sanctioned Russian entities. The Kremlin would be highly likely to respond to these specific measures with its own counter-sanctions. Given the interconnectedness of US and EU financial markets, Russian entities affected by US sanctions would also see their relationships with European financial institutions heavily curtailed.

Finally, measures 11 and 12 respectively would allow the US to bar corporate officers or principals of sanctioned entities from the United States and to impose sanctions on individuals holding such roles in sanctioned entities.

These measures are likely to be amongst the five chosen if only the minimum CAATSA requirements are met, given the White House already effectively has these authorities and their enactment would not affect the status quo unless the White House were to take a hardline position.

To summarize, this author’s point of view is that the most likely measures to be enacted are numbers one, two, five, six, and 11. This would of course meet the minimum requirements imposed on the White House, though a number of these measures could be further tweaked to limit their impact. The imposition of measures nine, 10, and 12, or a combination thereof, would signal a more hardline response. Finally, the imposition of measures three, four, seven, eight and 10 would be likely have the most significant impact on the Russian economy and US-Russian relations.

Lastly, CAATSA also requires that the White House prepare reports for Congress on how to combat ‘illicit finance’ related to Russia, on the potential for sanctioning Russian sovereign debt and derivative products, and on oligarchs tied to the Kremlin. While the former pair will cause headaches for Russia, particularly given the role played by foreign investors in its local currency debt (OFZ) market, it would likely take a further major downturn in US-Russian relations for the US to actually impose restrictions on Russian debt trading along the lines of those imposed earlier this year on Venezuela. Nevertheless, Russian officials will prepare themselves for the worst, as witnessed by the latest attempt to entice oligarchs to repatriate their funds through special bonds that effectively include a free hedge against tax payments on profits resulting from currency fluctuations.

Although it should be treated with a fair amount of scepticism – particularly given previous efforts at ‘de-offshorization’ have largely failed, and even backfired  – the section of the bill that has received the most attention is the publication of the list of oligarchs tied to the Kremlin. While US Ambassador John Huntsman recently emphasized that those named will not be sanctioned, there are widespread fears in Moscow that inclusion on the list will effectively be the same as being included on sanctions lists. After all, the list will effectively serve as a ‘sanctions list in-waiting’, with those included the next logical targets for sanctions under previous executive orders in the event of a further deterioration in US-Russian relations. And why would an investor or a bank do business with such an individual, when there is little prospect for an improvement in the bilateral relationship in the foreseeable future?

Congress has consistently taken a harder line on Russia than the White House and the signing statement Trump affixed to CAATSA claimed it was ‘seriously flawed’ and admitted he was only “signing this bill for the sake of national unity”. We may still see a relatively minimal approach to the bill from the executive branch, although some argue there are signs the White House is moving towards Congress’ more hardline stance. Some parts of the reports to Congress may still be classified, and classifying those on the Kremlin-tied oligarchs list would likely lead many to breathe a sigh of relief. Other portions may not immediately be acted upon – the most prominent example being that while the bill authorizes the sanctioning of those supporting Russian energy export pipelines, immediately moving to do regarding the European energy companies supporting Nord Stream 2 is unlikely. However, the decisions announced on 29 January and the reports prepared for Congress could strongly desensitize their continued support. The White Houses’ choice of, which of the 12 measures to enact will also be a clear bellwether of where its policies regarding Russia are headed.

Opinion

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