The Wider View

Jun 30, 2021

On Sanctioning Russia’s Business Elites

There are serious doubts about not only the effectiveness, but also the rationality for imposing sanctions on the Russian oligarchs.

Bild: Porträt des russischen Aluminium-Magnaten Oleg Deripaska
Die US-Regierung blieb in komplizierten rechtlichen Verfahren hängen, als sie versuchte, den russischen Aluminium-Magnaten Oleg Deripaska zu sanktionieren; viele Maßnahmen mussten zurückgenommen werden.
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Since the first sanctions against Russia were announced in March 2014 after the country annexed Crimea, the Kremlin has been accused of multiple interferences in different countries’ affairs, meddling in elections in the United States and Europe, ordering killings of its opponents at home and abroad, stealing sensitive data, and disrupting governments’ networks, not to mention many acts of disinformation and propaganda. More than 10 “rounds” of sanctions have since been introduced by numerous governments costing the Russian economy up to 1.5 percent of GDP annually and barring hundreds of Russian nationals from the West through travel restrictions.

By mid 2021 Russia appears to be one of the most sanctioned countries in the world with 722 of its citizens on the US personal restrictions list, second only to Iran with 1,599 individuals. Talks about further sanctions, including the disconnection from the SWIFT clearing system or even introducing an oil and gas embargo, continue to this day.

A the same time, sanctions against Russia appear not to be too effective as they have failed to correct Moscow’s political stance. This is partly because the Russian government doesn’t have any long-term strategies for developing the country and seems to be satisfied with slow economic growth as long as it doesn’t provoke any broad popular discontent. Overall, the sanctions regime actually benefits Putin, allowing him to encourage among his subjects a sense of Russia being encircled by enemies and to attribute the economic hardships to foreign actions. It seems that the Western sanctions policy is reaching a dead end as the measures already in place aren’t changing Russia’s foreign policy while the more radical steps that might be needed to achieve this (like a complete ban on trading Russian sovereign debt or the termination of Germany’s beloved Nord Stream 2 pipeline project) would be too damaging to the West’s own economic interests.

Taking all this into account, many experts predict that the focus of sanctions policy will be diverted from sectoral or financial sanctions to personal ones with more Russian subjects banned from traveling to the Western nations and possessing business assets or personal property there. In recent months many Western politicians, as well as Russian opposition activists, have argued in favor of sanctioning those wealthy Russians who presumably benefit from corrupting the Russian political elite while helping it to hide its wealth abroad (the very notion of incredible volumes of Russian capital laundered and invested via offshore jurisdictions makes this idea quite popular). The most recent appeal was from the supporters of the jailed opposition leader and anti-corruption activist, Alexei Navalny, when they petitioned President Biden to sanction dozens of Russian oligarchs, including those almost permanently residing outside the country. Many other Russian opposition groups also provided their own lists containing the names of businesspeople who deserve to be targeted.

A Lack of Rationality

However,  I would have serious doubts about not only the effectiveness but also the rationality for imposing sanctions on the Russian business community, for a number of reasons.

First, it is quite difficult to link Russian businessmen to the government’s illegal activity—except some well-known cases like those of Konstantin Malofeyev, an active supporter of Donetsk and Luhansk self-proclaimed “Peoples’ Republics,” or Yevgeny Prigozhin, the owner of the “Wagner” private military company as well as several disinformation networks. Of course, there are dozens of people among Russia’s wealthy elite who maintain close ties to the current Kremlin rulers (like Victor Vekselberg or Alisher Ousmanov); who long ago held official positions in the Russian government or in regional management (like former deputy Prime Minister Vladimir Potanin or Chukotka Governor Roman Abramovich); or who were instrumental in Putin’s career (like Pyotr Aven, when he was the Minister for Foreign Economic Relations). But these days most of them are not immediately involved in actions that can be associated for certain with Russia’s violation of Ukraine’s sovereignty or with Moscow’s meddling in either the US or European elections.

For example, US officials became bogged down in sophisticated judicial procedures when they took on Oleg Deripaska, a Russian aluminum tycoon, in 2017, eventually being forced to lift many of restrictive measures that had been imposed on his businesses. Moreover, with numerous cases reflecting the Western officials’ continuing contacts with the Russians directly responsible for either aggression against Ukraine (Vladislav Surkov, for example, appeared at many meetings of “Normandy Four” despite being on the EU sanctions list) or for conducting terrorist acts abroad (Serguei Naryshkin, the Chief of Russia’s Foreign Intelligence Service, and Alexander Bortnikov, the FSB Director, both on every imaginable sanctions list, comfortably flew to Washington in 2018 to meet CIA and FBI executives), the sanctions against Deripaska or Abramovich look funny, to say the least.

Second, one needs to have a deep understanding of the nature of the current Russian regime in order to better designate the targets for restrictive moves. Russia isn’t a classic “captured state” where the oligarchs control the government and use the public institutions for their enrichment—rather, it’s a “commercial state” with the ruling elite effectively owning the country and managing it as a family enterprise. In this system, the rich businessmen have less and less of a say over government policies and have very little influence on the ruling bureaucracy. I would argue that in today’s Russia the business elite is able to negotiate with the officials the conditions of its involvement in different government-funded programs, but it cannot outline even the general directions in economic and financial developments, never mind in domestic and foreign policy. The richest Russian entrepreneurs these days can successfully discuss their personal businesses with the government, getting the necessary licenses, tax exemptions, or securing public contracts—but they have no say in political issues.

Yes, many of the Russian oligarchs are not too satisfied with how things are going in the country—but they prefer to build their own exit strategies rather than try to change the political environment. Although Russian billionaires’ wealth is still concentrated in Russia, more than a half of 500 largest private companies are effectively registered in other jurisdictions, and no fewer than 10 oligarchs among the 25 at the top of the Forbes list already possess more business assets abroad that they own in their country. Therefore, those oligarchs who built their fortunes before Putin’s rise to power are more likely to quit doing business in Russia altogether than rebel against the political elite, while those who profit from government connections will remain loyal to Putin.

A United Elite

Third, and most importantly, many analysts argue these days that the Russian political and business elite is not united, and that sanctions against big business may facilitate internal quarrels and splits, which would benefit political change. They are much mistaken.

In 2013 Putin began to introduce an initiative he called “the nationalization of elites” aimed at limiting the presence of persons with dual citizenship, international residence permits, as well as accounts with foreign banks among the Russian political class. Despite the fact that, according to many experts, these rules are imposed only selectively, and there still are dozens of people with foreign passports or foreign assets both in the federal government, State Duma, and the regional authorities, the Kremlin has reinstalled this policy.

This means that a new huge elite group is arising inside the bureaucratic class that might be increasingly immune to any personal sanctions as it gets rid of foreign assets and residencies for purely “internal” reasons. Furthermore, at least 2 million civil servants, military personnel, and high-ranking officials are prohibited from visiting foreign countries. But not only does Putin sanction his loyalists more effectively than Western governments do—there is another aspect that should be taken into account. It seems that the Western public generally accepts that the superrich Russians are those listed in Forbes billionaires list (the most current version mentions 123 individuals with a fortune exceeding $1 billion), owning European castles and mega-yachts. Those lists are somewhat misleading, though. Those billionaires represent only a part of the Russian wealthy—albeit its most “civilized” and law-abiding part. Their fortunes have been made public for years; their businesses are audited by global consultancies; their assets in Russia and abroad are well documented and counted. But in recent years a different group of “superrich Russians” has emerged—who seem to be already “nationalized,” according to Putin’s new policy. They reflect a noticeable change in mood and behavior, expressed primarily in the growing propensity to accumulate assets within Russia.

The fanatical desire to withdraw funds abroad and buy up assets there which was “natural” for the “old oligarchs” has virtually disappeared among the “new” ones; real estate in Europe in recent years has been primarily bought by the Russian “middle class,” while pro-Putin businesspeople and bureaucrats are consolidating their assets at home. One can compare a former Russian agriculture minister, Yelena Skrynnik, who became famous for being investigated by the Swiss authorities as they uncovered 60 million Swiss francs in her personal account with a Zurich-based bank, to her successor as agriculture minister, Alexander Tkachev, who prefers to own more than 650 thousand hectares of fertile land in his native Krasnodarsky Krai valued at around $1 billion and to enjoy Black Sea resorts rather than Côte-d’Azur villas. In recent years corrupt Russian officials have largely terminated their wider international money laundering operations, and have instead massively bought assets in Russia and invested in local businesses—investigative journalists have reported on the regional retail chains, business centers, utility networks, and hundreds of other companies that have been taken over by business-minded bureaucrats, and this process is only accelerating.

Undiminishing Appetite

The trend has already had macroeconomic consequences as well. Russia has been famous for its corrupt officials for decades, and their appetites are not diminishing. The so-called consolidated budget outlays increased by around two thirds  (or by 16.8 trillion rubles a year, the equivalent of $220 billion) in 2020 compared to 2013—but the capital flight from the country for 2017-2020 was around two times (or $125 billion) less than for 2013-2016. Taking into account that the real incomes of average Russians (including public servants) have been in decline since 2013 and less infrastructure has been built in recent years than in mid-2010s these increased budget allocations might be going into bureaucrats’ pockets to be later kept and invested domestically. Meanwhile,  with personal incomes stagnating and the share of credit card and other digital transactions skyrocketing from around 10 percent of all consumer spending in 2012 to almost 75 percent by the end of 2020, the Russian Central Bank has recorded an unprecedented increase in demand for cash, so that it has been forced to increase the amount of ruble notes in circulation by almost 5 trillion rubles, or 4.6 percent of GDP in recent years.  Up to 90 percent of this amount was issued in larger denominations (just to compare, the amount of US dollar-denominated cash that serves not only the United States but the entire world, is now less than 10 percent of America’s GDP altogether with more than a half of this amount circulating outside the US territory).

Furthermore, in 2012 the Russian police and investigative authorities started to uncover enormous amounts of cash at corrupt officials’ houses and apartments—the largest single deposit confiscated so far amounted to 12 billion rubles, or a bit less than $200 million, and these cases are not unique. All this shows that the most corrupt part of Russia’s rich elite can by no means be targeted by the Western sanctions—and those who can be harmed by them represent a much more pro-Western part of the Russian wealthy, which is (at least potentially) much more critical of Putin’s regime.

Thus, in modern Russia the oligarchy is divided into two parts : the first represented by “old money,” being more cosmopolitan and dependent on international business and overseas assets; and the second composed of “new money,” focused on deals and acquisitions within Russia, closely connected to the state apparatus and not too concerned about either the legalization of their fortunes or their withdrawal abroad.

These two groups have different motivations and perspectives, with the second morally and economically reconciled with a model depicting Russia as a “besieged fortress.” It is more conservative, more supportive of the Kremlin, and the most immune to any kind of sanctions against Russia that could be imposed by the West. Even if some of its members were hit by the sanctions, the state is ready to help—this was the case when back in 2017 the famous “Timchenko Law” (named after Gennady Timchenko, a long-time friend of Putin’s) was adopted, stating that the property and assets confiscated from a Russian citizen by foreign authorities should be compensated from the Russian federal budget (Timchenko remains the only person who benefited from this initiative, but many Putin loyalists welcome Russia’s increasing autarky since they fear free competition, are involved into “import substitution” programs, and profit from the growth in domestic investment promoted by the government).

Moreover, as the Russian economy stagnates, consumer demand declines, and the prospects of petrodollars flooding the country become dimmer due to global efforts toward de-carbonization, Russian elites may face a reduction in the total amount of wealth that could be appropriated by elite groups. A natural desire emerges from such a trend—a desire to redistribute the existing assets, and there is little doubt that corrupt bureaucrats and silovikis (members of the security apparatus) are in a good position to lead the process. The influence of the old oligarchy might weaken further, and the sanctions against it will provide a great opportunity to take over their assets as they become cheaper (US sanctions effectively brought Oleg Deripaska’s RUSAL company’s market cap down from $27.5 to $4.2 billion in several years), so similar moves might be enthusiastically welcomed by Putin’s proxies.

In fact, any strike at Russian private business elites from outside the country will benefit the ruling elite. And, again, the notion widespread in the West that the old oligarchy has influence over the Kremlin is purely an illusion: in any internal struggle that might arise in Russia, victory will remain with those who defend (or seek to multiply) the assets owned and legalized within the country, while those who can leave it without significant losses or sell their companies, albeit at a discounted price and transfer the proceeds abroad, will almost certainly do so. Thus, serious sanctions against the oligarchs will become a call for action for government-linked raiders and no effective resistance is to be expected.

Unlike the Soviet Union

Many Western experts believe that discord between the elite groups in Russia is on the rise and consider it one of the factors facilitating the possible destruction of the regime. But while there is undoubtedly a rise in tensions, the story of the past two decades shows that there is little hope of liberal entrepreneurs changing the state of affairs in the country. Even if some of them were to abandon their conformist behavior and rise up, their businesses would inevitably be destroyed and handed over to the state or to Kremlin loyalists. The cases of Mikhail Khodorkovsky, Leonid Nevzlin, Yevgeny Chichvarkin, Pavel Durov, Serguei Petrov, and dozens of lesser-known businessmen prove this. Shifting the focus of the sanctions policy from officials to entrepreneurs—even if they are loyal to the Kremlin, but not directly involved in state-initiated projects and not holding positions in state-controlled companies—will be a clear signal to the state-supported raiders to attack the business community inside Russia. All this will lead to a strengthening of the security lobby, as well as an increase in its assets and incomes. The Kremlin would be able to command these with much more ease than the financial capabilities of the “old money” oligarchs.

The current situation in Russia is often compared to the “stagnation” (or zastoy) of the Brezhnev years. I don’t agree with such a comparison: for me, contemporary Russia has little in common with the Soviet Union, being a completely different society inspired by different goals and governed in different ways. However, one similarity is the fact that the Soviet elites of the early 1980s contained a lot of people who were raised in the relatively free 1950s and 1960s and were marked by significant changes in the Soviet society and as a result had hopes for further change and development. Once part of the system, these people were ready to welcome Gorbachev’s reforms and respond to his call to “make Perestroika irreversible.”

Today, the same role can be played by entrepreneurs who made their fortunes not due to their proximity to Putin’s friends, but well before the current regime came into existence. Even while doing business alongside with “new oligarchs” for decades, they remain involved in global supply chains and are connected to the Western world. When the preconditions for a new wave of change mature in the country, they will undoubtedly appear among its most active supporters. A split inside Russia’s elites will definitely happen—but it will not come as soon as Western policymakers expect, and, it will happen only if the siloviki don’t succeed in eliminating the “old money” influence completely. This is why I believe the calls to attack the “oligarchs” are simply counterproductive.

Therefore, the  West should refrain from any moves that might harm those groups within the Russian elite that once tried to integrate Russia into the global world and that will definitely do so again if the current regime collapses.

Vladislav Inozemtsev currently serves as a Special Advisor to Russian Media Studies Project at MEMRI, a Washington (DC)-based think tank.

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