March 11, 2021

Too big for sanctions? Why U.S. didn’t hit Ukrainian tycoon Kolomoisky with economic penalties


When President Joe Biden’s administration declared tycoon Ihor Kolomoisky persona non grata, formally barring him from entering the United States over corruption concerns, the decision was generally cheered by people pushing for economic and political reforms in Ukraine.

Somewhat obscured was the fact that the United States chose not to impose financial sanctions on Ukraine’s eighth-richest businessman – a footnote to some, but to others a sign that the administration’s move against a magnate seen as holding powerful political influence in his home country was largely symbolic. It also raised a question: Why not?
Experts said the decision may have been dictated in part by concerns that sanctions against Mr. Kolomoisky – who owns stakes in dozens of companies in Ukraine, ranging from airlines and media to energy producers and metals firms – could harm the country’s fragile economy and have unforeseeable consequences.

The lessons learned from sanctions imposed on Russian tycoon Oleg Deripaska and his aluminum company Rusal, which unsettled the global metals industry three years ago, may have guided the U.S. decision, analysts and observers say.

Washington was “spooked by the sanctions leveled on Mr. Deripaska and what that did to the aluminum market,” John Herbst, a former U.S. ambassador to Ukraine who is the director of the Eurasia Center at the Atlantic Council, a Washington think tank, told RFE/RL. “So, there’s a certain reluctance to use it. I think that may be the principal factor. But that doesn’t mean that it couldn’t happen in the future.”

The United States imposed sanctions on Mr. Deripaska and Rusal along with several other Russian businessmen, officials and entities in April 2018 as punishment for what Washington called the Kremlin’s “malign” activities around the world, including its aggression against Ukraine.

Global aluminum prices surged to a seven-year high as the punitive measures affected companies around the world that use the metal in their production. The United States later withdrew the sanctions tied to Rusal after Mr. Deripaska agreed to give up control of the company.

Array of assets
Were the United States to hit Mr. Kolomoisky with financial sanctions, they would apply to any company in which he owns a stake of 50 percent or more. The United States could also apply them to companies in which he owns less than 50 percent but exercises de facto control, said Brian O’Toole, a fellow at the Atlantic Council and a former senior adviser at the U.S. Treasury Department.

Financial sanctions would prevent U.S. individuals and companies, such as banks and tech firms, from conducting business with Mr. Kolomoisky and the companies he controls.

According to an article published by the news outlet Hromadske in 2019, Mr. Kolomoisky owned stakes in dozens of Ukrainian companies employing thousands of people, including oil and gas producers, an oil refinery, alloy smelters, a chemical company and more.

He also owns stakes in three airlines – Ukraine International Airlines, WindRose and Dniproaero. Depending on his level of control, that could prevent Boeing and other leading U.S. aerospace industry companies from doing business with them.

Airline industry sanctions are a “huge problem” because navigation systems and airplane parts often come from U.S. companies or are considered U.S.-controlled goods, said Mr. O’Toole, pointing to the impact of U.S. sanctions on Iran’s airline industry.

U.S. financial sanctions against Mr. Kolomoisky could also impact another Washington-friendly country in the region. The tycoon owns one of Georgia’s largest manganese mines, a smelter, and the hydropower plant that supplies energy to the operations. Some of the metal is exported to the United States.

Like Ukraine, Georgia has been targeted by Moscow in military actions – Russian forces drove deep into the country in a five-day war in 2008 and remained afterward in two breakaway regions – and has a fragile economy.

Though Mr. O’Toole said the U.S. government might have been concerned about the economic ramifications of placing sanctions on Mr. Kolomoisky, he did not think tycoons were off-limits. “I don’t like the concept that there’s anybody too big to sanction because…then you’re essentially granting impunity to anybody with a certain level of wealth. But you have to know what kind of disruption you’re going to have and whether those kinds of knock-on effects can be dealt with effectively,” Mr. O’Toole said.

Impact in court
Daria Kalenyuk, executive director of the Kyiv-based Anticorruption Action Center, told RFE/RL that financial sanctions could have an impact on crucial civil cases against Mr. Kolomoisky in international courts and might explain why Washington refrained from using that blunter tool.

Mr. Kolomoisky is embroiled in legal battles in Britain and the United States, where he has made substantial investments over the years.

The FBI is investigating him in connection with the $5.5 billion bailout of PrivatBank, once Ukraine’s largest lender; Mr. Kolomoisky and a business partner are accused of embezzling billions of dollars from the bank they owned through fraudulent loans and using some of the proceeds to buy assets in the United States, including real estate and metals plants.

The United States is seeking the seizure of three commercial real-estate properties owned by the two tycoons and allegedly purchased with the embezzled funds. They deny it.
Separately, PrivatBank is suing the pair in civil cases in the United States and Britain to recoup the money it claims they stole. A British judge has frozen billions of dollars in assets as that case proceeds in London.

“The U.S. government probably didn’t want to harm these proceedings” by potentially enabling Mr. Kolomoisky to claim in court that he is being politically persecuted, Ms. Kalenyuk said.

U.S. financial sanctions could also backfire if they damaged Mr. Kolomoisky’s assets and thus hurt PrivatBank’s chances of recouping its losses should the state-owned lender win any of its cases against the tycoon, Serhiy Fursa, an analyst at Kyiv-based Dragon Capital, told RFE/RL.

Ms. Kalenyuk and Mr. Fursa said the State Department’s move to blacklist Mr. Kolomoisky was really about sending a signal to the Ukrainian government and the magnate’s associates that the U.S. is serious about fighting graft in the country.

Political pull
Reform advocates in Ukraine and the West have been complaining for years that Mr. Kolomoisky has been using his loyalists in parliament, government and the judiciary to block some of the tough reforms necessary to put Ukraine on a path toward integration with the European Union.

Mr. Kolomoisky’s close ties to President Volodymyr Zelenskyy, a former comic and TV personality, have also long caused concern among Ukrainians and Western officials who worry that the magnate has undue influence. The tycoon owns the television channel that broadcast Mr. Zelenskyy’s popular sitcom before his election in 2019.

Western officials have been alarmed by Mr. Kolomoisky’s persistent legal attempts to regain control over PrivatBank, which the government nationalized amid the bailout.
In the March 5 announcement of the decision to ban Mr. Kolomoisky and his immediate family from entering the United States, Secretary of State Antony Blinken accused the tycoon of “involvement in significant corruption” during his tenure as governor of the Dnipropetrovsk region in 2014-2015.

Mr. Kolomoisky “was involved in corrupt acts that undermined rule of law and the Ukrainian public’s faith in their government’s democratic institutions and public processes, including using his political influence and official power for his personal benefit,” Mr. Blinken said in a statement. “I also want to express concern about [Mr. Kolomoisky’s] current and ongoing efforts to undermine Ukraine’s democratic processes and institutions, which pose a serious threat to its future.”

Mr. Blinken blacklisted Mr. Kolomoisky under Section 7031(c) of the Department of State, Foreign Operations, and Related Programs Appropriations Act, which allows the United States to ban issuing visas to foreign officials involved in “significant corruption” or a “gross violation of human rights.”

Unlike the Global Magnitsky Act, which can be applied to foreign officials involved in “serious human rights abuses” or “corruption,” Section 7031(c) does not also incorporate economic sanctions.

However, of the 77 individuals publicly blacklisted in connection with Section 7031(c) as of April 2020, nearly half had also been targeted for financial sanctions, mainly under the Global Magnitsky Act, according to Congressional records.

While it was not made public, Mr. Kolomoisky had already been barred from traveling to the United States, a former State Department official familiar with the situation told RFE/RL last year.

In a sign of the difficulties Mr. Kolomoisky had entering the United States in the past, he hired legal consultancy and lobbying firm Arent Fox in 2017 for $50,000 to help him get an E-2 investor visa, according to filings.

There is no indication the lobbying helped Mr. Kolomoisky get one. Arent Fox declined to comment.

The State Department did not respond directly to a question on why it did not choose to apply Global Magnitsky sanctions, saying that it “will continue to use this authority [7301(c)] and all available tools to combat corruption globally.”

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