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Sunday 15 September 2019

Aughinish on the front line of global push to lift US sanctions

Officials complained to Steve Mnuchin about threat to Aughinish
Officials complained to Steve Mnuchin about threat to Aughinish

Dmitry Zhdannikov, Richard Lough and Lesley Wroughton

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 Ireland, 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 cars 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 Co-ordinator 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".

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.

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 15pc. 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 think tank 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. 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. Trimet declined to comment.

The suspension of alumina deliveries risked halting Rio Tinto and Trimet's aluminum 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.

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 10pc. Aluminium prices CMAL3 now stand at $2,300 a 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." (Reuters)

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