As Russia scales the heights of brutality in its war against Ukraine, sanctions against its wealthy freebooters are an easy step in international lawfare. But such idealism can founder against the wall of worldwide corporate (mis)governance, writes Kurt Johnson.
On March 18 the Australian government added Viktor Vekselberg and Oleg Deripaska to the Department of Foreign Affairs and Trade’s Consolidated List of individuals facing targeted sanctions. That the federal government waited so long led some to claim the Russian oligarchs’ interest in Australia’s resource industry had shielded them from swifter justice. Indeed, in the sanctions game, where Australia follows closely behind its allies, it was strange both Vekselberg and Deripaska, who had been on the US sanctions list since 2018 for “a range of malign activity around the globe”, continued to operate in Australia with impunity.
“Our current government, in my view, it’s not particularly leading the pack. It’s doing what it believes the UK and US want them to do,” explains Robert Wyld, a consultant at Johnson, Winter and Slattery, who specialises in commercial crime including sanctions. “Hard to know what actions, if any, will occur from these sanctions.”
While the government and the opposition stand shoulder to shoulder on the sanctions, DFAT remains tightlipped on exactly what this means for Vekselberg and Deripaska, with a DFAT spokesperson stating only that “DFAT does not comment on specific sanctions compliance matters”.
More generally, the scope of sanctions seems cut and dried on the surface, with DFAT’s explaining the consequences of appearing on its Consolidated List. “Targeted financial sanctions prohibit: directly or indirectly making an asset available to (or for the benefit of) a designated person or entity; and an asset-holder using or dealing with an asset that is owned or controlled by a designated person or entity. As these assets cannot be used or dealt with, they are referred to as ‘frozen’.”
More difficult than it seems
However, freezing assets might be more difficult than it seems. “If an entity has a series of intervening holding companies and things of that nature – that diffuse your interest or mean you do not have an asset as we define it in our laws then it may not be a sanctionable asset in any event,” Wyld says.
One needs only to follow the matryoshka dolls of ownership through parent and holding companies between oligarchs such as Vekselberg and Deripaska and their interests to realise that this is the case.
Take Vekselberg: his three Beetaloo Subbasin exploration permits EP76, EP98 & EP117 are diffused through a chain of entities: Falcon Oil and Gas Australia directly owns 22.5% of the permits but is a subsidiary of Falcon Oil and Gas Limited with a head office in Ireland. Vekselberg’s ownership of 16% of Falcon is through Lamesa, a holdings company registered in Cyprus, a well-known tax haven.
Fighting the old structures
Byzantine structures used to minimise tax once upon a time, can now be employed to circumvent sanctions. “There is a relationship between tax avoidance and avoidance of financial sanctions because you’re intentionally trying to be opaque and hide your funds.” states ANU’s National Security Expert, Dr Dirk van der Kley.
From his head office in Ireland, Falcon Oil and Gas’ CEO failed to comment directly but through his executive in Australia, referred to a statement released on March 23 which asserted since April 2018 Vekselberg has not benefited from dividends or share sales by Falcon or Falcon Australia, and cannot vote at any shareholder meetings. Yet such restrictions are easy to circumvent, especially the latter, whereby influence can be exerted indirectly. Vekselberg, for example, was represented on the board of Falcon by Maxim Mayorets, who only resigned on March 1.
Then there is a matter of partners. Both Deripaska and Vekselberg own substantial minority stakes in Rusal International PJSC through subsidiaries. Rusal is a 20% minority partner with Rio Tinto in the joint venture Queensland Alumina. The case against Deripaska and Vekselberg’s Queensland Alumina has more teeth because it is paired with an export ban. Russia relies on Australia for 20% of its aluminium, a key ingredient in missiles.
Something is happening behind the scenes. On April 8, Rio Tinto released the following statement: “As a result of the Australian Government’s sanction measures, Rio Tinto has taken on 100% of the capacity and governance of Queensland Alumina Limited (QAL) until further notice.”
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Certainly still concerned about a lack of transparency that still might shield the enrichment of sanctioned investors Dan Gocher of Australasian Centre for Corporate Responsibility (ACCR) responded that: “Until Rio Tinto provides further details we remain concerned that Deripaska and Vekselberg may still financially benefit from Queensland Alumina.”
It raises the issue that sanctions are meaningful mostly where operations are being performed but they have borders across which money can flow. Origin Energy is the 77.5% majority owner of those exploration permits and also the operator, meaning that it is in charge of all the work to explore, it owns the equipment and pays the staff, with Falcon simply holding onto a minority share of the permit.
“In terms of enforcement – it’s incredibly rare they have ever been enforced in Australia,” Wyld explains, citing last year’s case of Chan Han Choi who was sentenced to three years in prison after selling missile parts to North Korea as the only case in which sanctions have resulted in a successful prosecution.
Which sanctions are the real stick?
Both van Der Kley and Wyld agree that US sanctions are far more powerful and well resourced than Australia and co-ordination into a united front strengthens their effectiveness as there are fewer places to hide. “US secondary sanctions are the real stick,’’ Wyld explains, ‘‘as opposed to primary sanctions that just apply to US persons. They can apply to anybody anywhere in the world, and then there’s quite a framework trying to analyse what is a percentage which is a permissible interest that somebody may have that if that’s over 50% then there’s a general rule that that other entity that is not the sanctioned person is itself sanctioned.”
This hard rule can be outmanoeuvred. In December 2018 a deal was made with the US Treasury to lift sanctions on EN+ Group and Rusal in exchange for Deripaska reducing his stake below half and appointing independent directors.
Wyld’s final comments caution against the Western-centric nature of the measures: “Sanctions – people get around them. The thing is they’re very Western orientated. If you look at India, if you look at China, if you look at the UAE, if you look at the Middle East, if you look at South America – they have very different views towards the West and towards the Western attitudes towards Russia. Leaving aside, ‘Oh well its very sad to bomb people,’ they don’t often don’t have a high degree of support for Western historical patterns of colonialism and behaviour and telling people what to do.”
Kurt Johnson is a writer and critic working with climate, conservation and the post-Soviet sphere. He has written one book on the continuing influence of the Soviet Union, entitled The Red Wake.