Germany considers U.S. extraterritorial sanctions illegal

Published: 8 January 2020 Authors: Rohan Sinha and Stefan Talmon

On 6 April 2018, the United States announced sanctions against Russian oligarch Oleg Deripaska and companies owned or controlled, directly or indirectly, by him, including United Company Rusal Plc (Rusal). Rusal is the world’s second largest supplier of aluminium and alumina (an essential ingredient in processing aluminium), providing about 6% of the global supply of alumina and aluminium. Announcing the sanctions, U.S. Treasury Secretary Steven T. Mnuchin declared:

“The Russian government operates for the disproportionate benefit of oligarchs and government elites. The Russian government engages in a range of malign activity around the globe, including continuing to occupy Crimea and instigate violence in eastern Ukraine, supplying the Assad regime with material and weaponry as they bomb their own civilians, attempting to subvert Western democracies, and malicious cyber activities. Russian oligarchs and elites who profit from this corrupt system will no longer be insulated from the consequences of their government’s destabilizing activities.”

The sanctions against Rusal were based on two Executive Orders which had been issued in March 2014 in response to Russia’s annexation of the Ukrainian peninsula of Crimea. The Orders authorized the U.S. Treasury to determine which persons should be subjected to sanctions as a result of their political connection with the Russian Government. These Orders were codified on 2 August 2017 in the section dealing with sanctions and other measures with respect to the Russian Federation in the Countering America’s Adversaries Through Sanctions Act (CAATSA).

Under the sanctions provisions all of Rusal’s property and interests in property that were in the United States or that came within the possession or control of any United States person (including any foreign branch) were blocked and were not to be transferred, paid, exported, withdrawn, or otherwise dealt in. Any United States person was prohibited from making any contribution or providing funds, goods, or services by, to, or for the benefit of Rusal, and was prohibited from receiving any contribution or provision of funds, goods, or services from Rusal. The term “United States person” meant any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.

The CAATSA also provided for the imposition of “secondary sanctions” on any “foreign person” that, inter alia, facilitated “a significant transaction or transactions” for or on behalf of a person subject to primary sanctions imposed by the United States with respect to the Russian Federation, such as Rusal. The term “foreign person” means any citizen or national of a foreign State (including any such individual who is also a citizen or national of the United States), or any entity not organized solely under the laws of the United States or existing solely in the United States, but does not include a foreign State. The CAATSA also provided for the imposition of sanctions on any “foreign financial institution” which knowingly facilitated a “significant financial transaction on behalf of any Russian person” subject to sanctions under the relevant Executive Orders, such a Rusal. The term “foreign financial institution” includes any foreign bank, broker or dealer in securities, futures commission merchant, mutual fund, dealer in foreign exchange and money transmitter.

The sanctioning of Rusal thus also affected German companies and banks engaged in business or financial transactions with Rusal. The imposition of sanctions against Rusal had a wide-ranging deterrent effect on commercial activity with the aluminium giant. With regard to Germany the consequences of the sanctions were described as follows:

“Rusal and its subsidiaries are of decisive importance for Germany’s supply of aluminium oxide (alumina) to four aluminium smelters in Essen, Hamburg, Neuss and Voerde that support over 1,000 jobs. Rusal accounts for one-third of Germany’s alumina imports and 30% of Germany’s aluminium imports. The sanctions have led to considerable shifts in the German market, disrupting the supply of aluminium oxide and threatening to do the same with the supply of raw aluminium. In addition, the price of alumina has skyrocketed over 60% per ton since January 2, 2018 so that it is no longer economically profitable, causing the German aluminium industry to reduce their production by up to 20 percent, losing more than 1,000 direct jobs. This situation poses a threat to the existence of the entire aluminium and processing industry and could cause lasting damage to downstream industries such as automotive, aviation, and construction. Due to the uncertain environment, the aluminium industry could not promise sufficient supplies to its customer base beyond December 2018. […].”

Against the background of such effects of secondary sanctions on the German economy, the Federal Government voiced its opposition to the CAATSA. On 31 July 2017, on the eve of the adoption of the Act, the Federal Minister for Economic Affairs and Technology Brigitte Zypries stated:

“We regard [sanctions against German companies] as contrary to international law, plain and simple. The Americans cannot fine German companies for doing business in another country.

Of course, we do not want a trade war. This is why we have lobbied repeatedly and at different levels that the Americans do not abandon the line of joint sanctions. Unfortunately, they have done so. That is why it is right for the EU Commission to examine now the question of countermeasures.”

When asked to explain what exactly was illegal about the U.S. sanctions, the spokesperson for the Federal Ministry for Economic Affairs and Technology replied:

“We are concerned with so-called extraterritorial sanctions or sanctions affecting third parties. The Minister was referring to the effect on third parties, that actions of German or European companies that maintain contacts with Russia or do business there have negative consequences in the United States. We reject this effect of sanctions on third parties, which is also referred to as extra-territorial sanctions, and regard it as contrary to international law.”

On 2 August 2017, a spokesperson for the Economic Affairs Ministry provided some more detail on the German position on CAATSA:

“The law concerning the sanctions on Russia provides for so-called extraterritorial sanctions. Extraterritorial sanctions attach effects to the actions of foreign nationals/ companies carried out outside U.S. territory which have no link to U.S. jurisdiction  (so-called ‘secondary sanctions’). Such extraterritorial sanctions may also affect energy companies in Germany and Europe. In our opinion, extraterritorial sanctions are contrary to international law. We therefore reject them. The law gives the U.S. president certain discretion. The law also provides that prior to the imposition of sanctions the allies of the United States, in particular the EU, shall be consulted. We are ready to engage in dialogue at any time. It is a good sign that Secretary of State Tillerson has announced that he will speak with the European partners. If the United States actually imposes extraterritorial sanctions, it will be up to the European Union to consider what appropriate responses to take. We are constantly exchanging views with the EU Commission. The extent to which German companies will be affected will depend on the specific measures the United States is taking. We cannot predict that.”

The Russian Federation and Rusal were not the first or only cases in which the United States used secondary sanctions. However, since President Trump assumed office in January 2017 the U.S. Government has employed secondary sanctions as a foreign policy tool of first choice, notably against Russia and Iran. In February 2019, Minister of State at the Federal Foreign Office Niels Annen told a conference on U.S. Foreign Policy under the Trump Administration:

“This endeavour [of circumventing U.S. Iran sanctions] relates to the question of how to deal with the increasing use of secondary sanctions by the U.S. in general, which is another issue of concern on which we don’t agree with the United States. Germany subscribes to the use of sanctions as a foreign policy tool and has been pivotal in implementing comprehensive sanction regimes against Iran, North Korea and Syria. But secondary sanctions against close allies are not acceptable and will harm the transatlantic relationship in the long run. For us, this is also a matter of sovereignty. In our view, sanctions are a political instrument for the purpose of achieving change – for example, with regard to Russia’s behaviour. In the case of Russia, sanctions should remain closely tied to implementation of the Minsk agreements. If it is unclear what precisely is expected from the Russian side, sanctions can no longer incentivize a change in behaviour. This is very unfortunate, because we have discussed and reached agreement in the past with the U.S. administration about sanctions against Russia.”

In light of the potentially significant effects of the Rusal sanctions for German companies doing business with the aluminium conglomerate, the Federal Government entered into a dialogue with the Trump administration “in order to minimise the impact of U.S. sanctions on the German economy.” On 23 April 2018, the U.S. Government granted a six-month wind-down period for transactions with Rusal that was repeatedly extended, which allowed German and other companies to continue doing business with Rusal.

On 19 December 2018, the U.S. Treasury Department finally announced that an agreement on eliminating Oleg Deripaska’s control of Rusal had been reached and, accordingly, notified the U.S. Congress that it intended to terminate sanctions on Rusal in 30 days’ time. Pursuant to CAATSA, Congress had authority to review this action and to prevent its implementation, if it passed a joint resolution of disapproval by a veto-proof majority. When Congressional Democrats tried to block the termination of sanctions against Rusal, the German Ambassador to the United States, together with his colleagues from Austria, France, Ireland, Italy, Sweden, the United Kingdom, and the European Union wrote on 4 January 2019 the following letter to the Democratic Minority Leader of the U.S. Senate:

“As Ambassadors to the United States representing Austria, France, Germany, Ireland, Italy, Sweden, the United Kingdom, and the European Union, we welcome the recent action by the US Department of Treasury in submitting to Congress its report on the proposed delisting of RUSAL and EN+.

The European Union and its Member States are committed to maintaining a robust transatlantic economic sanctions regime against Russia. We continue to stand with the US in enforcing sanctions related to Russia’s aggression in Eastern Ukraine and the illegal annexation of Crimea. We believe that close cooperation and coordination with the United States has been and remains the central pillar in achieving a change in Russia’s behavior.

Since Russia’s actions in Ukraine in 2014, the European Union has prolonged its sanctions every six months and reacted to violations with further designations.  Moreover, the EU has continued to act in order to build up resilience, including expelling Russian diplomatic personnel after the Salisbury attack and agreeing in October 2018 to a new sanctions regime against chemical weapons attacks.  More recently, the European Union issued a declaration of concern over the escalating tensions in the Azov Sea.

Within this context, we understand the rationale under which Russian oligarchs had been designated on April 6, 2018 on the basis of CAATSA.  Regarding the most prominent case of Mr. Oleg Deripaska and companies linked to him, we note Treasury Secretary Mnuchin’s remarks that the sanctions were never intended “to target the hardworking people who depend on RUSAL and its subsidiaries.”  Nevertheless, it is crucial that the sanctions avoid unintended consequences for European companies and the delisting of RUSAL and EN+ is an important step in mitigating such consequences.

Since the sanctions were imposed, alumina and aluminium plants in Austria, France, Germany, Ireland, Italy, Sweden, and the United Kingdom have faced increased prices and significant challenges in maintaining their daily operations, securing new sales contracts and renewing existing contracts with longtime customers (see attached Annex).  The delisting of RUSAL and EN+ will safeguard these plants and the livelihoods of 75,000 workers across the European Union (2,600 in four EU alumina refineries, 13,000 in aluminium smelters and 60,000 in related manufacturing facilities).  Moreover, by preventing serious damage to the European aluminium industry, the delisting will help to preserve existing supply chains which would otherwise likely be rerouted to China, further strengthening its global market position in the industry.

We are grateful for the engagement of US officials on this matter, and in particular the issuance of short term licenses (and license extensions) that have enabled these plants to remain operational over the last six months.  We believe the changes in ownership and governance of RUSAL and EN+ which the US has secured will significantly reduce Mr. Deripaska’s control of both firms, eliminate his financial gain and ultimately strengthen and secure the European aluminium industry.    

Finally, as Congress undertakes its review, we would like to offer you our assistance in providing any additional information you may need.  Please do not hesitate to contact any one of us if we can be of assistance in your deliberations.     

Thank you for your continued openness and readiness to discuss these issues with European partners and allies.”

Attempts by Congressional Democrats to keep the sanctions in place failed and on 27 January 2019 the U.S. Government lifted the sanctions against aluminum giant Rusal.

While in this case German companies and financial institutions were not actually affected by U.S. secondary sanctions, the question of the legality of such sanctions under international law remains. While primary sanctions directly target a State, company or individual which is engaged in an objectionable activity or relationship, secondary sanctions target third parties which are engaged with the State, company or individual that is subject to the primary sanctions. Germany based its assessment of the illegality of secondary sanctions on their supposed extraterritoriality. However, this assessment seems to be based on a misconception of the working of secondary sanctions. The United States does not exercise or pretend to exercise prescriptive or enforcement jurisdiction in the territory of any other State and, in particular, not in Germany. The secondary sanctions under the CAASTA with respect to foreign persons concern the blocking or prohibition of all transactions in property and interests in property “if such property and interests in property are in the United States, come within the United States, or are or come within the possession or control of a United States person.” The secondary sanctions with regard to foreign financial institutions are “a prohibition on the opening, and a prohibition or the imposition of strict conditions on the maintaining, in the United States of a correspondent account or a payable-through account.” In implementing these secondary sanctions the powers of the U.S. President are limited to persons and property “subject to the jurisdiction of the United States.” In all these situations, there is a clear jurisdictional basis for this sanctions legislation in the territoriality principle and in the active personality principle. States are, in principle, free to legislate for property and property interests situated within their territory and to regulate the economic activities of their nationals and companies, as well as the use of their currency or financial services industry. States may do so even if such regulations have adverse economic consequences for other States and their nationals and companies.

U.S. secondary sanctions may have serious economic and political effects in and for other States but they do not amount to an exercise of extraterritorial jurisdiction. Legislation having extraterritorial effects is not the same as extraterritorial legislation. The United States is not prescribing by law German companies not to do business with certain countries or companies; it merely attaches certain negative consequences to such business dealings inside the United States or with regard to U.S. persons. The addressees of the secondary sanctions legislation are not the German companies or financial institutions but U.S. citizens, companies and government departments. U.S. secondary sanctions therefore infringe neither on the territorial nor the personal sovereignty of Germany. While secondary sanctions may have serious negative effects in and for Germany and thus may be considered an unfriendly act, they are not illegal under international law.