How a sanctioned Russian bank wooed Washington
Participants attend a session of the VTB Capital Investment Forum “Russia Calling!” in Moscow, Russia, on Nov. 28, 2018. VTB is a state-owned Russian bank that has been operating under sanctions since 2014.
Editor’s note: This story was originally published by the Center for Public Integrity on May 31, 2018. In June 2018, VTB ended its relationship with Manatos & Manatos, according to disclosure filings. Reporter Carrie Levine has continued to publish documents as she receives them on her Twitter account.
Less than two months before a 2016 presidential election marked by Russian interference, senior State Department official Daniel Fried received an invitation to a private gala featuring an exclusive performance by the Bolshoi Ballet and a post-event reception.
“Clearly your last meeting with Andrey Kostin made an impression!” said the email, sent by a former State Department official who now heads a trade association dedicated to business ties between the US and Russia. “Please see attached a special invitation from him” for Fried and a guest to attend a VTB-sponsored gala at The John F. Kennedy Center for the Performing Arts in Washington, DC.
Who is Kostin? The chairman of VTB, a state-owned Russian bank operating under US sanctions limiting its activities since 2014. VTB’s well-connected Washington lobbyists had previously brokered a meeting between the two men to discuss the sanctions.
Fried, the State Department’s sanctions policy coordinator, declined.
“I won’t be attending,” he replied to the trade association head. “We’re not interested in advancing their corporate reputation.”
The previously unreported invitation, obtained by the Center for Public Integrity via a Freedom of Information Act lawsuit, was a striking overture in a discreet image-burnishing campaign by VTB that spanned the Obama and Trump administrations.
Foreign campaigns to influence American officials are supposed to be transparent under the Foreign Agents Registration Act, a law requiring detailed disclosure of foreign influence efforts. But few believe FARA — passed in 1938 to combat Nazi propaganda — has been working well. It is riddled with exemptions. Enforcement is weak. Criminal penalties apply only to willful violations. And lobbyists’ filings are frequently late with few consequences, making available information less valuable to the public. For years, not many cared. But now, with accusations of foreign meddling gripping the nation’s capital, FARA is drawing intense scrutiny.
VTB provides an illuminating example of what Americans learn — or don’t — under FARA. The bank’s hired lobbyists failed to disclose a series of June 2016 meetings with government officials on behalf of the sanctioned bank until months after US law required them to. One firm, Sidley Austin, which boasts more than 2,000 lawyers worldwide, made the disclosure last year only after being contacted by the Center for Public Integrity about the meetings. And FARA administrators, citing a technical glitch, failed for three years to publicly release a document disclosing VTB had hired the US Treasury Department’s former general counsel to advocate on its behalf.
Such disclosure holes are “a glaring example” of “a broader pattern of noncompliance with FARA and underenforcement of FARA,” said Ben Freeman, director of the Foreign Influence Transparency Initiative at the Center for International Policy, a think tank, and author of a book on foreign influence.
VTB said its work with lobbyists is “structured in a completely transparent way.” A spokeswoman for Sidley Austin said omitting the meetings was inadvertent and “promptly corrected when discovered.”
Sidley Austin’s advocacy team includes a former Democratic congressman from Virginia, Rick Boucher. Also on VTB’s payroll: lobbyist Mike Manatos of Manatos & Manatos, who raised tens of thousands of dollars for the presidential campaign of Democratic nominee Hillary Clinton.
VTB has so far paid Sidley Austin and lobbying firm Manatos & Manatos a combined $1.2 million since 2015 for lobbying on sanctions, according to disclosures filed with the Department of Justice. The US Treasury Department nevertheless announced new sanctions against Kostin himself in April.
VTB’s effort — a reaction to economic sanctions imposed on the bank by US officials — coincided with escalating scrutiny of Russian attempts to influence the 2016 presidential election. The election interference in part prompted some members of Congress to propose legislation last Halloween to overhaul FARA.
The Department of Justice has signaled a toughening approach to FARA, and in May, trumpeted a new guilty plea by an agent working for Pakistan. Congressional scrutiny of FARA has intensified. And last year, in what amounts to the highest-profile FARA prosecution in decades, Special Counsel Robert Mueller charged President Donald Trump’s former campaign manager, Paul Manafort, with FARA violations in connection with Manafort’s work in Ukraine.
“Individuals who avoid disclosure undermine the purpose of the law,” Sen. Chuck Grassley, R-Iowa, said at a Senate Judiciary hearing last year on FARA oversight and attempts to influence US elections. Rep. Mike Johnson, R-La., has called the frequency of FARA violations and lobbyists who fail to register at all one of the “worst kept secrets” in Washington.
VTB’s fight begins
The United States put VTB and other Russian companies under sanctions in 2014 in response to Russia’s annexation of Crimea, a peninsula claimed by Ukraine. The sanctions on Russian banks, including VTB, effectively limited access to capital and Western markets, though dealings with the bank aren’t totally barred.
Crafting the sanctions proved complicated. Russia is a major world economy and there was a chance of collateral damage to non-Russian investors if they were too broad, said Adam Smith, a lawyer with the firm Gibson, Dunn & Crutcher and a former official in the US Treasury Department’s Office of Foreign Assets Control, which deals with sanctions.
The Russian government owns a controlling interest in VTB — 61 percent of the voting shares. VTB has a reputation of working closely with the Kremlin, though earlier this year, in an interview with The Independent, a British newspaper, Kostin called that “bullshit.”
“There has never been a single case when Mr. Putin called me and says ‘give a loan,’” he said. “Even if he asked, I could find 100 reasons why it shouldn’t be done.”
Kostin, who reportedly once dressed as Joseph Stalin at a party for bank investors, has given frequent interviews in English to Western media outlets about the sanctions and their impact.
“Markets for capital and borrowing are closed for me, there should be no illusions about this,” Kostin told the Wall Street Journal in January 2015 for a story on the impact of the sanctions. “My only creditors now are central bank, the population and my Russian clients.”
The Russian government gave VTB a $2.6 billion bailout in late 2014 and 2015, after Western nations hit the bank with sanctions. The bank has since rebounded, recently reporting record profits.
But in April, the US Treasury Department announced a new round of Russian sanctions. Included on the list: Kostin himself.
To K Street
US sanctions sent VTB, like so many before it, to K Street.
Some firms avoid lobbying for sanctioned foreign companies. It’s work that may draw unwanted attention and carries risk of backlash. For example, the now-defunct Podesta Group’s work for another sanctioned Russian bank, Sberbank, prompted the lobbying firm’s own bank to seek to sever ties, the Wall Street Journal reported.
Initially, public lobbying filings by the sanctioned banks’ lobbyists drew some media notice. Despite the documents saying the lobbyists were hired to work on sanctions, VTB issued statements insisting the objective of the lobbying “is to promote VTB Group’s business interests in the United States. Our work with them is not related to sanctions.”
VTB’s press office, in a statement responding to questions from the Center for Public Integrity, said working with lobbyists is “a general business practice among major international companies.”
“Our engagement with the lobbyists is structured in a completely transparent way” under “standard contracts that fully adhere to all the legal guidelines applicable to such agreements,” the VTB statement said. “Our focus is to educate US policymakers and lawmakers about VTB, its scope of business and operations. We made a conscious decision not to ‘lobby’ for anything and our objective is to better inform decision-makers in the US.”
Upon VTB engaging Manatos & Manatos, the firm listed VTB’s New York City office address and registered effective April 2015 under the Lobbying Disclosure Act — a domestic lobbying disclosure regime that requires far less disclosure than FARA. Manatos & Manatos said it would lobby on government actions “that affect the imposition of US sanctions on Russian-affiliated banks.”
Manatos & Manatos didn’t respond to requests for comment. “I’ll have to check and get back to you. Thank you,” Manatos said when a Center for Public Integrity reporter called, before hanging up. He did not call back or respond to subsequent emails.
The Podesta Group drew criticism for registering under the Lobbying Disclosure Act with regards to Sberbank rather than the more stringent foreign lobbying law. Other firms representing Sberbank also registered under the Lobbying Disclosure Act. Some of the emails the State Department released to the Center for Public Integrity via its Freedom of Information Act lawsuit show lobbyists representing Sberbank also requested and received meetings at the State Department.
Unlike the firms representing Sberbank, Manatos & Manatos subsequently registered under FARA on behalf of VTB in May 2016.
Sidley Austin registered under FARA from the beginning of its work with VTB. Lobbyists registering under FARA must file a series of documents within 10 days of agreeing to represent a new foreign principal, according to the law and Department of Justice regulations.
For example, Boucher, who now heads the government strategies practice at Sidley Austin, and Michael Borden, a government strategies partner who was previously a senior counsel to the House Financial Services Committee, properly filed paperwork in June 2015 showing they would be representing VTB.
The firm also filed a disclosure at the same time for lawyer George Madison, the former general counsel of the US Treasury Department. But Sidley’s filing on behalf of Madison wasn’t made public by the FARA office until April 2018, when the firm wrote to the Department of Justice to flag the mistake, according to documents Sidley Austin provided to the Center for Public Integrity. Department of Justice spokesman Ian Prior said that because of a technical error with the department’s filing system, the form “never reached the FARA Unit for processing” and the situation “has been remedied.”
Sidley Austin was also required to file documents disclosing a copy of its agreement with VTB within 10 days, according to the FARA statute and Department of Justice regulations. But it did so in October 2015, months later. The contract was signed by Kostin.
The Center for Public Integrity asked why Sidley Austin did not make that filing within 10 days, as it did the filings listing the individual lobbyists. Sidley Austin spokeswoman Kellie Mullins said the filing with the engagement letter attached was “timely under Department of Justice rules.” Asked to cite the specific rule she was referring to, Mullins said the firm believes the filing “was appropriate, and it was done without any objection by the Department of Justice.”
Federal law also requires lobbyists for foreign clients to report all activities broadly defined as “political activities,” a mandate that often results in detailed contact logs chronicling emails, phone calls and meetings. Sidley Austin initially disclosed no such political activity on the bank’s behalf in reports covering the period through Sept. 30, 2016. It told the Department of Justice that it only provided legal advice to VTB.
But there had been political activity.
A flurry of it.
‘Manatos may regret having set up by the time I’m through with VTB.’
Documents obtained by the Center for Public Integrity paint a detailed picture of VTB’s charm offensive — starring Kostin, the bank’s chairman — that played out in bursts when he personally traveled to Washington.
In June 2016, Manatos emailed Fried — the State Department veteran and sanctions policy coordinator — about meeting with Kostin that month.
“Good to be interacting with you again, after so many years, in your new capacity,” Manatos wrote, before requesting a meeting “to introduce to you the President and Chairman of VTB Bank, Andrey Kostin.”
Manatos continued: “He is happy to answer any questions you might have about VTB, including the state’s role in its operations, the efficacy of the sanctions on VTB, and VTB’s record in Ukraine. Simply, he would like to begin a constructive dialogue so that when sanctions are eventually lifted, VTB can become a trusted institution in the United States. I think you will find him interesting and engaging. His insights and perspectives might be unexpected.”
Fried immediately forwarded the request to colleagues at the State Department who worked on Russia. After some back and forth, he offered the meeting, writing colleagues, “Manatos may regret having set up by the time I’m through with VTB.”
Fried has since left the State Department and is now a distinguished fellow with the Atlantic Council, a think tank that specializes in international affairs.
“I was sort of the bad guy and they were interested in sizing up the adversary, I suppose,” Fried said of the meeting during a recent interview with the Center for Public Integrity.
Fried said he told Kostin and the lobbyists accompanying him — Manatos and Sidley Austin’s Borden — that the sanctions would stay in place until the Ukraine situation was resolved in accordance with what is known as the Minsk accords, a negotiated roadmap for resolving the conflict.
“We can’t move the goalposts,” Fried said.
“I was perfectly civil with Kostin, but I was going to tell him what I think he was and why. He has a perfect right to know. He may be reporting back to the Kremlin. I assume he was, but good for them to hear directly from the United States,” he added.
Kostin and Paul Swigart, the head of VTB’s US operations, also met with staff members of the House Foreign Affairs Committee.
A Democratic congressional aide to the House Foreign Affairs Committee, who wasn’t authorized to speak on the record about the meeting, said, “It’s safe to say that was not a meeting that ended on a friendly note.”
Nonetheless, Kostin and his lobbyists also scored meetings with Rep. Eliot Engel of New York, a Democrat who is the ranking member of the committee, and Rep. Jeb Hensarling of Texas, the Republican chairman of the House Financial Services Committee.
According to the aide, Engel was unimpressed. Engel subsequently sponsored legislation calling for stiffer sanctions on Russia. Hensarling’s office did not respond to requests for comment.
Manatos & Manatos filed disclosures with the Department of Justice covering June 2016 to November 2016 and replied “no” to a question asking whether the firm had engaged in political activity. The firm did disclose it had “helped arrange for meetings with select US policymakers.” It didn’t identify them.
But in June 2017, six months after the initial disclosure was filed, Manatos & Manatos moved to correct the record. The firm filed a new report disclosing all the contacts and meetings constituting political activity, providing copies of emails and thank you notes from Kostin.
Sidley Austin, for its part, amended its report in August 2017 to disclose its “political activity” in June 2016.
“The following should be added,” the firm wrote, adding that Borden had actually met with “staff members from the Senate Foreign Relations Committee, the House Foreign Affairs Committee, State Department Coordinator for Sanctions Policy Dan Fried, Rep. Eliot Engel and Rep. Jeb Hensarling to discuss the impact of US sanctions on Russia institutions.”
Sidley Austin’s Mullins confirmed the amended report was prompted by a call from the Center for Public Integrity last summer.
Mullins said the retroactive filing was one of “two minor oversights” in the firm’s FARA filings. The other: the firm said it would also amend its disclosures, in response to questions from the Center for Public Integrity, to reflect a $2,700 campaign contribution Madison made in 2016 to Clinton. Lobbyists are required to publicly disclose campaign contributions on FARA filings.
‘A reasonable supposition’
By September 2016, Russian interference was a major issue in the presidential election.
At the same time, VTB was preparing to host the October gala at the Kennedy Center in Washington, DC, “on the margins” of World Bank and International Monetary Fund meetings in the city.
And Daniel Russell, the former State Department official who now heads the US-Russia Business Council, which includes VTB among its members, was wooing Fried to the gala.
Fried said he’s known Russell for years, but there was no chance he was going to accept the invite.
He called it a “reasonable supposition” to assume he was on the guest list because of his official position. “I was not interested. Like, seriously?” Fried said.
Fried said that sort of approach is designed to find officials who “looked like they could be courted or flattered or something. I don’t believe anyone in the US government is susceptible to that kind of thing, but the Russians were going to keep pushing.”
Fried wasn’t the only invitee. At least one other State Department official received an invitation.
The US-Russia Business Council is registered to lobby on its own behalf, regarding sanctions, under laws governing domestic lobbyists, not FARA.
FARA — for all its exemptions and loopholes — contains extremely broad triggers, the law firm Covington & Burling wrote in a client advisory.
The Center for Public Integrity asked Russell whether the US-Russia Business Council had sought legal advice regarding any obligation to register under FARA in connection with the invitations, since they involved contacting government officials at Kostin’s request.
Russell did not specifically address the question of legal advice. But in an emailed response, he stressed the trade association’s long history of supporting educational and cultural events in Russia and the US.
“The performance was sponsored by VTB, which made available invitations for the US-Russia Business Council,” he said. “The Council forwarded invitations to private and public sector individuals of its choice; the cover message for the invitations stated that VTB was the sponsor and that RSVPs should be directed to VTB directly.”
Russell also said the trade association “conducts policy advocacy activities solely on behalf of US companies.”
Russell did not respond to follow-up questions about the emails and VTB did not directly respond to a question from the Center for Public Integrity asking whether Russell and the trade association extended the gala invitations to Fried and others at Kostin’s request.
The bank did say it would “be delighted” to continue hosting the events at the Kennedy Center, which it described as “popular among the American audience.”
“However, since the US has recently imposed sanctions against Mr. Kostin, we doubt this would be feasible any longer,” the VTB statement said.
The event was a showcase for the sanctioned bank. Kostin spoke, and VTB’s logo was projected onto the curtain of the highest-profile theater venue in the nation’s capital.
Among the guests who eventually turned up for the 2016 gala and reception: Alex Ovechkin, the Washington Capitals hockey star from Russia whose relationship with the Kremlin has drawn attention.
Fried said he doesn’t believe anyone from the State Department would have seriously considered attending. A brief report in Politico said congressional aides were there but didn’t name them.
Michael Carpenter, a former US National Security Council director for Russia who has also worked in the White House, the Pentagon and the State Department, said he met with companies regarding sanctions while a government official, but such “soft lobbying” on behalf of Russian interests “makes me nauseous.”
“If I did receive an invitation like that I would have never gone,” Carpenter, who is now senior director of the Penn Biden Center for Diplomacy and Global Engagement, said of the gala.
The invitations to American officials on behalf of VTB show the weakness of the law governing foreign lobbyists, he said.
Under FARA, “the information is poorly disseminated and the enforcement of failure to register or failure to disclose is very lax,” Carpenter said.
Indeed, a 2016 audit of enforcement and administration of FARA by the US Department of Justice’s Office of the Inspector General found high percentages of late disclosure filings. Officials with the Department of Justice’s National Security Division, who are responsible for enforcing the law, need to improve “controls and oversight of FARA registrations” and better enforce “the complete and timely submission of required documentation,” the auditors wrote.
The Department of Justice did not make someone available for an interview about FARA enforcement for this story. But in testimony before the Senate Judiciary Committee in July 2017, Department of Justice Deputy Assistant Attorney General Adam Hickey said “the high burden of proving willfulness, difficulties in proving ‘direction or control’ by a foreign principal, and exemptions available under the statute make criminal prosecution for FARA violations challenging.”
‘There are no changes on the horizon for our sanctions policy’
In early October 2016, Kostin was back in town, hosting the Bolshoi gala — and meeting officials at the State Department.
This time, the requests came from Sidley Austin’s Borden, who had emailed the State Department officials in September and October to set up meetings for Kostin.
Borden’s emails used language echoing Manatos’ request from the spring. “I think that Mr. Keller will find him really interesting and engaging,” Borden wrote, requesting a meeting with Andrew Keller, then deputy assistant secretary in the Bureau of Economic and Business Affairs at the State Department, whose job included dealing with economic sanctions.
State Department talking points prepared for Sandra Oudkirk, the director of the office of sanctions policy and implementation at the State Department — labeled “sensitive but unclassified” — once again stress the need for implementation of the Minsk agreements. “There are no changes on the horizon for our sanctions policy,” read the talking points, which were created for a meeting with Kostin, possibly for the meeting that took place on Oct. 6, 2016.
Later in October, Kostin was back in Russia, sitting on a stage next to Russian President Vladimir Putin.
The occasion was an annual investment forum hosted by VTB. Putin, the keynote speaker, also took questions from the crowd, with Kostin moderating. After Putin took a question on the role of state-controlled banks in Russia, Kostin had something to add, after a quick exchange with Putin.
“May I add a few words?” Kostin asked, according to a transcript of the event translated into English and posted on the Kremlin’s website.
“Of course,” Putin answered. “You are the boss.”
“No,” Kostin responded. “You are the boss, Mr. President.”
Kostin called the issue of Russian bank ownership “very important for us because the Western press … keeps making the claim that a state bank is a bank chaired by the Kremlin or even you personally. As if you call up and give instructions. No matter how many times I tell them this is not right.”
They moved to the next question — which, as it turns out, was from Boucher, the Sidley Austin lobbyist.
Identifying himself as a former congressman and a partner at Sidley Austin, Boucher stood up in the front row and addressed Putin.
“I’m concerned about the apparently deteriorating quality of the relationship between the United States and Russia,” Boucher began, calling it a “leading issue in our presidential campaign.”
He went on to ask about the Minsk accords, the agreement mentioned in Oudkirk’s talking points for the recent State Department meeting.
“What barriers do you see to the implementation of the Minsk accords and when do you think the Minsk accords will be fully implemented?” Boucher asked.
“We are not the ones who are sabotaging the Minsk agreements,” Putin said, pointing to actions others, such as Ukrainian officials, would have to take. In addition, Putin said, the Obama administration was “very difficult to hold dialogue with.”
“And now I will answer the main question. What should be done to normalize the situation?” he said. “The parties should act as partners and take into account each other’s interests. We are ready for this.”
More sanctions, more lobbying
After the election, as reporters and investigators increasingly focused on any interaction between Trump and Russia, the New York Times reported that in a 2015 email, Trump associate Felix Sater said Kostin and VTB had agreed to finance a Trump project in Moscow. The project was never built.
In October 2017, Kostin told the New York Times that the bank had no dealings with Sater and had never agreed to finance the project, calling it “wrong information” and “fake news.”
Around the same time, FARA filings and State Department emails released to the Center for Public Integrity show Kostin, Swigart, Boucher, Borden, Madison and Manatos had another meeting at the State Department, again with Oudkirk.
Then, in April, the Treasury Department released new sanctions on a list of Russian officials in response to Russian government actions in Ukraine and Syria, as well as “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,” US Treasury Secretary Steven T. Mnuchin said in announcing the new sanctions.
Kostin’s name was on the list.
The sanctions against him mean no American can engage in financial dealings with him or provide services to him, lawyers with expertise in sanctions said.
US lobbyists may continue to represent the bank, though not under Kostin’s direction.
“VTB Group continues to work with the lobbyists solely to meet our business objectives in the region,” VTB’s statement to the Center for Public Integrity said.
“If Kostin is going to be on conference calls and providing input with discussions between members of VTB bank and the US lobbying firm, that’s prohibited,” says Erich Ferrari, a lawyer specializing in sanctions.
Sidley Austin’s Mullins said the firm “immediately took steps to comply with its legal obligations once Mr. Kostin was added to the sanctions list.” Manatos did not respond to a query about that firm’s response to the new sanctions against Kostin.
As for Kostin himself, in an interview with CNN Money shortly after the sanctions were announced, he said he is “punished because American administration considers that the Russian government conducting the wrong policy and that’s very unfortunate.”
Asked whether there was a chance other countries would also target him, Kostin said he isn’t doing anything wrong.
“It’s not up to me,” he said, “to influence this process.”
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