* Sanctions caused market turmoil, hit supply chains
* Ireland, France, Germany lobbied to soften measures
* Rio Tinto, U.S. aluminium body appealed to authorities
* U.S. Treasury eased Rusal restrictions after 17 days
By Dmitry Zhdannikov, Richard Lough and Lesley Wroughton
LONDON/PARIS/WASHINGTON, May 16 (Reuters) - They were supposed to be the toughest sanctions the United States had ever imposed on a Russian oligarch. Seventeen days later, Washington watered them down.
On April 23, the U.S. Treasury eased restrictions on billionaire Oleg Deripaska's aluminium company Rusal. Instead of barring Rusal from international markets, which is what the United States originally intended to do, the Treasury suggested it might lift the sanctions altogether.
Washington's change of course says a lot about the leverage held by the supply chain of a widely-used commodity such as aluminium. It also suggests the Trump administration is hard-pressed as it juggles international economic battles it has opened on various fronts, including with China and Iran.
Several European governments, including Germany and France, lobbied Washington to back down, according to more than a dozen U.S. and EU officials and industry sources who spoke to Reuters.
Multinationals Rio Tinto and Boeing also appealed to the U.S. Treasury, seeking a softening of the terms on Rusal.
All made the same argument, the sources said: a squeeze on the largest producer of aluminium outside China would hit businesses around the world, disrupting production of myriad goods from car and planes to cans and foil, and putting jobs at risk.
Unlike previous cases of sanctions on Russia, European countries did not have a chance to consult with Washington on punitive moves that would have ripple effects in the European economy, the sources said. One reason for the lack of dialogue: the U.S. State Department no longer has a Sanctions Policy Coordinator to liaise with other governments, according to three U.S. sources familiar with the matter and one European source.
The former coordinator, Daniel Fried, retired last year and has not been replaced because of a hiring freeze ordered by the Trump administration at the department.
Rusal, Rio Tinto and Boeing declined to comment.
The U.S. Treasury, whose Office of Foreign Assets Control (OFAC) imposed the measures, said it worked to mitigate the sanctions' impact on allies and industries that faced "undesired collateral consequences". It did not comment on lobbying efforts.
When asked if the lack of a sanctions coordinator had hindered international consultation, the State Department said it had held several discussions with European countries over the past year about sanctions and maintained a dialogue with them. It did not specify if it had discussed Russian sanctions.
The sanctions were the toughest the United States has imposed on a listed Russian company since Moscow's 2014 annexation of Crimea. The notice on April 6 gave buyers a deadline of 30 days to receive supplies from Rusal before dealings in dollars were prohibited.
Any individual or company that failed to comply would themselves face being shut out of the financial system, while the Treasury could seize any dollars paid to Rusal.
The effect was immediate. Prices for aluminium surged 15 percent as Rusal stopped supplying customers. As well as producing aluminium, the company produces alumina, a raw material needed to make aluminium.
"They (the Treasury) destabilised the global aluminium industry. This is unprecedented and a massive over-reach," said Anders Aslund, senior fellow at U.S. think-tank Atlantic Council.
Rusal told metals and mining conglomerate Rio Tinto that it was suspending deliveries of alumina from its Irish plant in Aughinish to Rio's Dunkirk aluminium smelter in France, Europe's biggest aluminium production facility, according to the industry sources. The Russian company feared any payment it received would be seized by U.S. authorities, the sources said.
Rusal also informed Trimet Aluminium it was halting alumina deliveries to the German firm's smelter in the French Alps and three factories in Germany, in Essen, Hamburg and Voerde.
Trimet declined to comment.
The suspension of alumina deliveries risked halting Rio Tinto and Trimet's aluminium smelting operations and hitting businesses throughout the metal's supply chain.
The market ructions set off a different kind of activity.
In the days following the sanctions notice, French, German, Irish and Italian officials lobbied against the restrictions, according to the EU sources.
Many were worried the measures could lead to the closure of those plants and businesses in their countries that relied on Rusal supplies, and the potential loss of thousands of jobs.
Ireland's foreign ministry complained to U.S. Treasury Secretary Steven Mnuchin after Dublin officials met Aughinish management on April 13 and were told the plant could shut down, threatening hundreds of jobs, an Irish government spokesman told Reuters.
French Finance Minister Bruno Le Maire discussed the issue by phone with Mnuchin in the days following the sanctions notice and then in person in the week of April 16, during International Monetary Fund meetings in Washington, according to a French finance ministry official.
"We got in touch with the Americans as soon as it became clear there was an impact on some companies operating in France," the official said. He added that hundreds of jobs were at risk in France. "The Americans were constructive from the start."
An Italian government source said Rome also lobbied Washington to soften the sanctions.
Companies lobbied too.
Rio Tinto contacted the French government and Trimet went to the German government, asking them to intervene with Washington, according to the industry sources. Rio Tinto also complained directly to OFAC, said two U.S. officials familiar with the developments. Trimet makes aluminium products for the auto, construction and packaging industries.
While most of the lobbying came from Europe, according to U.S. officials, there were also concerns in the United States about the sanctions.
After the April 6 notice, planemaker Boeing expressed concern to the U.S. government about rising aluminium prices, according to two industry sources familiar with the matter. Carmakers also complained about the possible impact of the sanctions on their businesses, said the sources, who declined to name the companies.
One of the sources said that, in addition to aluminium, carmakers were worried about a possible disruption to supplies of palladium, used in catalytic converters. Rusal doesn't produce palladium but it supplies soda to Norilsk Nickel, the world's biggest palladium producer.
American trade body the Aluminum Association told Reuters that, shortly after April 6, it shared market data with the Trump administration showing that last year the U.S. industry imported 680,000 metric tons of Russian primary aluminium, or 12 percent of U.S. demand.
The association raised concerns about the Rusal sanctions at meetings with the White House's National Economic Council and the U.S. Trade Representative. It said the measures could constrain supplies for aluminium processors.
On April 23, little more than two weeks after imposing sanctions, OFAC softened the measures. It gave businesses six months instead of 30 days to wind down dealings with Rusal and said it might lift the sanctions altogether if Deripaska ceded control of the company.
The announcement had an immediate market reaction, with aluminium prices falling as much as 10 percent. Aluminium prices now stand at $2,300 per tonne, down from the $2,700 level they rose to following the April 6 sanctions notice, but still above the $2,000 seen before the measures were imposed.
David Mortlock, who designed earlier sanctions against Russia when he was Director for International Economic Affairs at the White House National Security Council in 2013-15, said such measures were not a precise science.
"Don't forget, sanctions can be adjusted if the impact is larger than OFAC wants," added Mortlock, now a partner at legal firm Willkie Farr & Gallagher.
"Every time you do it, you learn from your experience." (Additional reporting by Yara Bayoumy, Mary Milliken, Warren Strobel, Mike Stone and Timothy Gardner in Washington; Polina Devitt, Anastasia Lyrchikova, Dasha Korsunskaya and Katya Golubkova in Moscow; Giselda Vagnoni in Rome; Conor Humphries in Dublin; Clara Denina and Dasha Afanasieva in London; Madeline Chambers in Berlin; Edward Taylor in Frankfurt; Michael Hogan in Hamburg; Writing by Dmitry Zhdannikov; Editing by Pravin Char)