Putin, or the world? Sanc­tions may force oli­garchs to choose

Sunday Trust - - FOREIGN FEATURE - Source:www.ny­times.com

Com­pared to the sunny, palm-lined off­shore tax havens where Rus­sians typ­i­cally stash their for­tunes think the Bri­tish Vir­gin Is­lands or Cyprus - two chilly, windswept Rus­sian is­lands would seem to of­fer lit­tle.

Yet Oc­to­ber Is­land, a glo­ri­fied swamp in Rus­sia’s Euro­pean ex­clave of Kalin­ingrad, and Rus­sian Is­land, a for­mer cow pas­ture fac­ing the far eastern port of Vladi­vos­tok, were high­lighted by Moscow as po­ten­tial al­ter­na­tives.

Wash­ing­ton’s im­po­si­tion of un­ex­pect­edly tough sanc­tions against sev­eral lead­ing oli­garchs is in many re­spects a game changer for Rus­sia, with reper­cus­sions that are only slowly com­ing into view. Es­tab­lish­ing tax havens within the coun­try was just one re­ac­tion by the Krem­lin, seem­ingly caught off guard as af­ter­shocks rip­pled through cur­rency and fi­nan­cial mar­kets.

“Rus­sia has no strat­egy on how to re­act to this sit­u­a­tion, to these new eco­nomic cir­cum­stances,” Evgeny Gont­makher, a prom­i­nent op­po­si­tion econ­o­mist, said.

The most im­me­di­ate ef­fect is be­ing felt by Oleg V. De­ri­paska and his alu­minum giant, Rusal, which has lost about one-third of its value on the Moscow stock ex­change. “This is a new stage,” Mr. Gont­makher said. “This is tar­get­ing for iso­la­tion a very big, ex­port-ori­ented com­pany. That is very painful.”

The ram­i­fi­ca­tions could also be felt by wealthy Rus­sians in Lon­don, as Wash­ing­ton warned Bri­tish banks on Tues­day that they could face se­vere penal­ties if they con­tin­ued deal­ings with any of 24 Rus­sians named in the sanc­tions, in­clud­ing seven oli­garchs.

Para­dox­i­cally, the sanc­tions could help Pres­i­dent Vladimir V. Putin to ac­com­plish a longheld goal of putting more of the econ­omy un­der state con­trol and pres­sur­ing bil­lion­aires to bring their money home.

Yet the sanc­tions might also work against Mr. Putin’s in­ter­ests, forc­ing some of the wealth­i­est Rus­sians to de­cide just how closely they want to be iden­ti­fied with the Krem­lin by fi­nanc­ing mili­tias, po­lit­i­cal or­ga­ni­za­tions or other ad­ven­tures abroad. “Any­one who wants to help the Krem­lin out­side will think twice,” said Kon­stantin Gaaze, an an­a­lyst and fre­quent con­trib­u­tor to the Moscow Carnegie Cen­ter web­site.

Para­dox­i­cally, the sanc­tions could help Pres­i­dent Vladimir V. Putin ac­com­plish long-held goals: putting more of the econ­omy un­der state con­trol and per­suad­ing bil­lion­aires to bring their money home.

In a larger sense, the sanc­tions are ex­pected to have a lim­ited over­all ef­fect af­ter the ini­tial shock wears off, be­cause they ul­ti­mately tar­geted just a hand­ful of com­pa­nies. But the vir­tual se­ques­ter­ing of a crit­i­cal Rus­sian com­mod­ity pro­ducer has in­tro­duced a strong el­e­ment of un­cer­tainty into deal­ings with all Rus­sian raw ma­te­ri­als, the tap­root of the coun­try’s in­come, which is likely to fur­ther iso­late Rus­sia from the world.

The ini­tial gov­ern­ment re­sponse was muted, with Dmitri S. Peskov, the spokesman for Mr. Putin, telling re­porters that “it would be wrong to make hasty de­ci­sions” and pre­dict­ing that the value of the ru­ble and the Rus­sian stock mar­ket would bounce back once emo­tions set­tled down.

Given the tiny size of the Rus­sian econ­omy - around 2 per­cent of global G.D.P. - and its lim­ited trade with the United States, there was lit­tle ex­pec­ta­tion of eco­nomic re­tal­i­a­tion. Any Rus­sian re­sponse was likely to come in places like Syria or Ukraine, an­a­lysts said, where the Krem­lin might ratchet up tensions in or­der to lever­age any so­lu­tion on end­ing the sanc­tions.

With an Amer­i­can strike in Syria pos­si­ble at any mo­ment, in re­sponse to what was sus­pected to be a chem­i­cal weapons at­tack by the forces of Pres­i­dent Bashar al-As­sad, an oc­ca­sion for that sce­nario might ma­te­ri­al­ize quickly.

Rus­sia had been lulled into think­ing no sig­nif­i­cant sanc­tions were com­ing. In Jan­uary, in re­sponse to a new United States law last sum­mer de­mand­ing tougher ac­tion against Moscow, the Trump ad­min­is­tra­tion did noth­ing more than pub­lish a list culled from the pages of Forbes Mag­a­zine of ev­ery bil­lion­aire in the coun­try along with the Krem­lin’s in­ter­nal tele­phone direc­tory.

“Peo­ple thought this was a joke, but now it is clear that the sit­u­a­tion is se­ri­ous,” said Vladislav S. Zhukovsky, an econ­o­mist and in­vest­ment con­sul­tant. “This is more se­ri­ous than the pre­vi­ous sanc­tions.”

The two most prom­i­nent in­dus­tri­al­ists tar­geted were Mr. De­ri­paska, whose Rusal com­pany em­ploys an es­ti­mated 60,000 in Rus­sia, and Vik­tor F. Vek­sel­berg, one of the rich­est men in Rus­sia, whose projects in­clude try­ing to de­velop the coun­try’s tech sec­tor.

Over­all, the sanc­tions were im­posed on seven Rus­sian oli­garchs, 12 com­pa­nies they con­trol and 17 se­nior gov­ern­ment of­fi­cials who the United States Trea­sury said prof­ited from the Rus­sian state’s “ma­lign ac­tiv­i­ties” around the world.

“It is not clear what are the key sins that got peo­ple trans­ferred from the big list to the small list,” said Kir­ill Ro­gov, an in­de­pen­dent po­lit­i­cal and eco­nomic an­a­lyst. “The logic is not clear, which in­creases the risk for all oth­ers.”

The tow­ers of the Ca­nary Wharf busi­ness district in Lon­don. Wash­ing­ton warned Bri­tish banks on Tues­day that they could face se­vere penal­ties if they have deal­ings with any of 24 Rus­sians named in the sanc­tions.

More pos­si­ble sanc­tions are al­ready in the pipe­line, fol­low­ing the poi­son­ing in Britain last month of a Rus­sian for­mer spy, Sergei V. Skri­pal, and his daugh­ter, Yu­lia. A draft law in Congress would ban Amer­i­cans from any deal­ings with new Rus­sian sovereign debt.

In the end, the most im­por­tant ram­i­fi­ca­tions of this round of sanc­tions is the un­cer­tainty they in­tro­duce to all of Rus­sia’s deal­ings with the West. “There is a big pos­si­bil­ity that this is only the be­gin­ning of the cam­paign,” Mr. Gont­makher said.

The gov­ern­ment said it would ad­dress that un­cer­tainty by pro­vid­ing what­ever sup­port was needed to keep the tar­geted com­pa­nies func­tion­ing and their em­ploy­ees in jobs. “The main thing now is to min­i­mize un­cer­tainty while se­cur­ing the sta­ble func­tion­ing of the com­pa­nies, where hun­dreds of thou­sands of peo­ple work,” Arkady V. Dvorkovich, a Rus­sian deputy prime min­is­ter, told an eco­nomic con­fer­ence on Tues­day.

Most an­a­lysts sug­gested that the Krem­lin was likely to buy Rusal, for ex­am­ple, and try to re­brand it to avoid it be­ing stig­ma­tized on the world mar­ket and to sell the alu­minum at rock­bot­tom prices just to keep Rus­sians em­ployed. This might well pro­vide a multi­bil­lion-dol­lar pay­day for Mr. De­ri­paska.

To the dis­may of lib­eral economists, Mr. Putin has pushed state own­er­ship of the econ­omy from about 35 per­cent to be­tween 50 and 70 per­cent, and tak­ing over Rusal would fur­ther ex­pand gov­ern­ment con­trol.

Rus­sia weath­ered a round of sanc­tions over the an­nex­a­tion of Crimea in 2014, which lim­ited its ac­cess to West­ern cap­i­tal mar­kets, cut off arms sales and lim­ited tech­nol­ogy trans­fer. The lat­est are nar­rower, but more in­tense, an­a­lysts said, since they ef­fec­tively shut out a giant com­mod­ity pro­ducer from West­ern mar­kets.

The Krem­lin has been try­ing to force rich Rus­sians to bring their money home and the sanc­tions might help. “As one of our clients said, when sanc­tions were in­tro­duced it was the wrong way to de­stroy Rus­sia,” said Oleg Kouzmin, chief econ­o­mist at Re­nais­sance Cap­i­tal, a Moscow in­vest­ment bank. To re­ally wreak eco­nomic havoc in Rus­sia, he joked, the West should roll out the red car­pet for as­sets from the oli­garchs, ef­fec­tively stalling the Rus­sian econ­omy.

Ha­bit­u­ally, ty­coons have feared fall­ing afoul of the Krem­lin and hav­ing their as­sets in Rus­sia seized, but any oli­garch cut off com­pletely from in­ter­na­tional fi­nan­cial mar­kets might be more amenable to shift­ing funds home. Still, it would be only a short­term fix, noted sev­eral an­a­lysts, be­cause Rus­sia is not a big enough or at­trac­tive enough mar­ket for sig­nif­i­cant, sus­tained in­vest­ment.

“We have to un­der­stand that we are en­ter­ing a new re­al­ity - Rus­sia is be­ing turned into a toxic as­set,” said Mr. Zhukovsky, the econ­o­mist.

Para­dox­i­cally, the sanc­tions could help Pres­i­dent Vladimir V. Putin ac­com­plish long-held goals: putting more of the econ­omy un­der state con­trol and per­suad­ing bil­lion­aires to bring their money home. Alexan­der Zem­lianichenko

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