Ellington

WASHINGTON (AP) — As President Barack Obama warns of stepped-up economic punishments against Russia for its military incursions inside Ukraine, U.S. sanctions have so far avoided one prominent financial institution: the $10 billion Russian Direct Investment Fund, which has partnered with brand-name American companies and whose advisers include top U.S. and European private equity executives.

Despite its ties to Russian state businesses and officials, the Russian Direct Investment Fund has managed to operate unaffected by the sanctions imposed by the U.S. and EU in response to Russian President Vladimir Putin's military actions in Ukraine. The Ukrainian government said Russian troops invaded southeastern Ukraine on Thursday with two columns of tanks and military vehicles.

The fund has been working to help replace Western investors in Russia with money from Asia and the Middle East. In one recent deal, the fund and its partners paid $700 million to a Russian petrochemical company that is partially owned by a sanctioned Russian businessman. The fund's head, Kirill Dmitriev, told the Associated Press that the company with which it did the deal, Sibur, has not been targeted by sanctions but otherwise declined to discuss fund investments.

Along with its team of Russian managers, the fund's international advisory board includes private equity executives Stephen Schwarzman of The Blackstone Group LP, Leon Black of Apollo Global Management LLC and David Bonderman of TPG Capital LP.

The fund has so far escaped the effects from sanctions because it has not been explicitly targeted. The situation illustrates the Obama administration's struggle to achieve conflicting goals — punishing Putin's circle without damaging American companies doing business in Russia.

"We can't have a situation where a business entity is immune from (sanctions) designation because it does some good things and some bad things," said Jimmy Gurule, a senior Treasury Department enforcement official in the Bush administration and law professor at Notre Dame University.

Obama said Thursday that he expects U.S. and European allies to take additional steps to respond to the Russian military's apparent invasion of Ukraine. "Capital is fleeing. Investors are increasingly staying out," Obama said.

A Republican-backed bill in the Senate would extend sanctions to executives, companies and investment funds, including the $10 billion Russian fund, and penalize Americans who work with them, according to congressional staffers.

Within the Obama administration, Treasury lawyers and investigators have been consulting intelligence and law enforcement officials in recent weeks to identify targets for new sanctions, according to three federal officials who spoke on condition of anonymity because they were not authorized to comment on the confidential discussions. The White House and Treasury Department declined to say whether the Russian fund might be a target.

Under presidential action, Treasury's Office of Foreign Assets Control has the authority to freeze a foreign target's financial assets in the U.S. and block its transactions with Americans. The targets can be businesses or individuals and have included terrorists, criminals and state entities. Treasury can also limit the effect of its sanctions, and some of the targeted Russian banks are only restricted from accessing U.S. capital markets, not blocked entirely.

Some Westerners have already cut ties with the fund. Former Chicago Mayor Richard M. Daley, a longtime Obama political intimate who was listed on corporate documents as a fund adviser as recently as April, has now severed ties with the fund. Harvard Professor Josh Lerner stepped down from the fund's supervisory board. And last week, references to Kurt Bjorklund, a leader of European investment firm Permira, quietly disappeared from the fund's website.

Others, including all three American private equity executives, have stayed put. Bonderman appeared in photographs and on the attendee list in April at the St. Petersburg Economic Forum, an annual event favored by Putin that the Obama administration urged many top American business leaders to skip.

All the current and former board members either declined to comment or did not respond to phone calls and emails from the AP.

"Businesses are caught in the middle, because while they want to be loyal to the government, they have major investments here," said Laura Brank, the head of the Russia practice at Dechert LLP, a major international law firm.

The Russian fund in May partnered with two unidentified international investors and Gazprombank, the sanctioned finance arm of Gazprom, the Russian-controlled energy conglomerate, to buy a liquefied gas terminal. The seller was OAO Sibur Holding, which is partially owned by Gennady Timchenko, a Russian billionaire on the U.S. sanctions list. Under the deal, as described by the Russian fund, Sibur sold the facility to the investors for $700 million — and simultaneously struck a deal to lease it back from them.

"The precision of U.S. sanctions is limited because you've got creative people on the other side trying to get around them," said Timothy Frye, a political science professor at Columbia University who has also received a three-year Russian government grant through the Higher Economics School in Moscow.

Investors in the fund include BlackRock Inc. and General Electric Co., which partnered with the fund to build small power plants for industrial users across Russia. JPMorgan Chase & Co.'s One Equity Partners joined an Illinois tire company to buy a manufacturer of agricultural and industrial tires. European investors took stakes in telecommunications firms, information technology consultants and health care companies. In total, more than $6 billion from blue-chip foreign companies have flowed in.

The Senate bill, sponsored by Sen. Bob Corker, R-Tenn., would extend sanctions against the fund by targeting banks such as Russia's Vnesheconombank, which was restricted in limited sanctions by the Treasury Department in July from access to U.S. capital markets. VEB's chairman, Vladimir A. Dimitriev, is a fund supervisor, and the bank is the primary source for the fund's capital.

But even that might backfire. The Russian newspaper Kommersant reported this month that the Russian government is considering transferring the fund from VEB to the state-owned Bank of Russia to sidestep any expansion of Western sanctions.