UPDATE 2-U.S. says Exxon under Tillerson violated Russia sanctions in 2014

(Recasts; adds statement from Treasury, expert comment, background; changes dateline, previous WASHINGTON)

WASHINGTON/HOUSTON, July 20 (Reuters) - The United States on Thursday admonished Exxon Mobil Corp for "reckless disregard" of U.S. sanctions in dealings with Russia in 2014 when Secretary of State Rex Tillerson was the global oil company's chief executive, and fined it $2 million.

ExxonMobil said the decision was "fundamentally unfair," and sued the U.S. government in Texas in an effort to overturn the decision. The fine came after a U.S. review of deals Exxon signed with top Russian oil producer Rosneft weeks after Washington imposed sanctions on Moscow for annexing Ukraine's Crimea region.

Between May 14 and May 23, 2014, top U.S.-based ExxonMobil executives signed eight documents with Igor Sechin, the head of state-run Rosneft, the U.S. Treasury's Office of Foreign Assets Control (OFAC) said in a statement on its website.

ExxonMobil had "demonstrated reckless disregard for U.S. sanctions requirements" by signing the deals with Sechin just weeks after the United States blacklisted him, OFAC said in an unusually lengthy three-page statement laying out its reasoning. (For the Treasury statement, see: http://bit.ly/2vnvQf2)

The Treasury announced sanctions on Sechin in April 2014 as part of measures to pressure Russia over its intervention in Ukraine, saying Sechin had shown "utter loyalty" to Russia's President Vladimir Putin.

The sanctions prohibit U.S. citizens or those located in the United States from dealing with those on the blacklist, such as Sechin. Rosneft itself is subject to narrower U.S. sanctions that still allow Americans to deal with the company on some transactions.

Tillerson left ExxonMobil to become secretary of state after 10 years at the helm of the global energy power. He is now responsible for U.S. foreign policy, which includes helping to make sanctions decisions.

The State Department referred questions about the fine to ExxonMobil and the Treasury. State Department spokeswoman Heather Nauert told reporters on Thursday that the agency was alerted to the fine on Wednesday.

Though the State Department plays a part in formulating broad sanctions policy, former U.S. officials and sanctions experts said it was unlikely the agency had a role in deciding the fine announced on Thursday.

ExxonMobil had fully complied with guidance from Democratic former President Barack Obama's administration that ongoing oil and gas business activities with Rosneft were permitted, Exxon spokesman Alan Jeffers said in a statement.

The Treasury Department "is trying to retroactively enforce a new interpretation of an executive order" inconsistent with its prior guidance, Jeffers said.

"OFAC's action is fundamentally unfair," he said.

Sechin signed the documents on behalf of Rosneft, Jeffers said.

ExxonMobil also cited a Treasury Department representative's comments in May 2014 that BP Plc Chief Executive Bob Dudley - an American citizen - could continue to participate in Rosneft board meetings so long as they related only to Rosneft's business.

In its statement explaining the fine, OFAC said that the Treasury representative's comments did not address ExxonMobil's conduct.

No White House or Treasury statements asserted "an exception or carve-out for the professional conduct of designated or blocked persons, nor did any materials suggest that U.S. persons could continue to conduct or engage in business with such individuals," OFAC said.

Publicly available guidance on Treasury's website at the time of Exxon's dealings with Sechin said Americans should ensure they do not enter into contracts signed by sanctioned individuals, OFAC said.

By dealing with Sechin, the company "caused significant harm" to U.S. sanctions on Russia, the Treasury said.

Because Rosneft itself is not off-limits to Americans, another company executive could have signed the contract with no sanctions risk to ExxonMobil, said David Mortlock, who was a State Department and White House sanctions official during the Obama administration.

"You could have Sechin standing over the guy's shoulder," said Mortlock, now an attorney at Willkie Farr & Gallagher LLP in Washington. "But the problem here is that it was signed by Sechin himself."

The fine is minor to ExxonMobil, which made $7.84 billion in profit in 2016.

The company has long opposed sanctions on Russia. Tillerson said in 2014 that the company did not support sanctions because they are not effective "unless they are very well implemented."

Nevertheless, in May 2014 Tillerson chose not to attend an oil industry forum in Moscow, instead sending top lieutenant Neil Duffin, who signed an agreement with Sechin to explore for oil in the Arctic Ocean.

The deal came at a time when other oil companies, including BP and Total SA, were clamoring to enter Russia, aiming to tap its vast oil and natural gas reserves.

As the United States and others tightened Russian sanctions, ExxonMobil's ability to operate there dwindled. The company was allowed to finish drilling a well in the Russian Arctic in the fall of 2014 but could not produce oil.

ExxonMobil has since sought permission to operate in Russia. Earlier this year, the Trump administration said it would not let any U.S. company, including ExxonMobil, drill in areas prohibited by U.S. sanctions on Russia.

(Reporting by Yeganeh Torbati and Ernest Scheyder; editing by Simon Webb and)