Putin and his Oligarchs, Part II

By Dimitry Filippov, Fellow: Eastern Europe Program

Note to Readers: With this piece, we are trying out the first piece of a new format, one which we hope will put critical analysis and argument more prominently in the piece, and allow the reader to jump in quickly or probe deeply, as preferred at the moment, and by the reader. Please let us know what you think of this new format and its usefulness to you

Bottom Line Up Front:

Targeted personal sanctions introduced hitherto by the US and the EU have had very little impact on Russian foreign policy, and are unlikely to do so even if continued and intensified

BECAUSE

Sanctioned oligarchs share too close a personal connection with the regime and benefit from it more than it does from them for them to exert any significant influence on policy-making. They are too dependent on the regime to make meaningful defection threats against it

THEREFORE

If the US intends to continue its current sanctions regime, Washington should consider ratcheting up existing economic sectoral sanctions or introducing new ones aimed at crippling Russia’s hydrocarbon and banking industries, where the pain will be felt more acutely and meaningfully

 

Executive Viewpoint:

The structure and intensity of Putin’s relationship network with the dominant oligarchs in Russia  makes individual, targeted sanctions ineffective at achieving US and EU policy goals. If the US wants to maintain any possibility of leverage through its sanctions regime, it is necessary to introduce further aggregate sanctions or ramp up existing sectoral sanctions with an aim to further cripple the Russian economy, rather than targeting individuals within Putin’s inner circle, members of Russian Duma or military figures, as has been a popular approach by the US and EU thus far

 

By contrast, when in 2015, the EU examined the possibility of disconnecting Russia from the SWIFT system, essentially cutting it off from global banking, the Kremlin immediately raised the alarm to call it tantamount to military action, suggesting what the Russian leadership expected of its actual efficacy. Further, the leadership has also regularly complained about the existing sanctions, calling on the EU to remove them, despite boasting publicly and initially that the sanctions will only make Russia stronger by giving an impetus to diversifying its economy.

 

As often happens with these kinds of sanctions, it is broader population, rather than the elites whose livelihood has been affected by sanctions the most through decreasing wages, increasing prices, and rising inflation. The Kremlin in general, and Putin in particular, have gone to great lengths to shield sanctioned oligarchs from losing their wealth in response to targeted sanctions, to and thus ensure their loyalty – in 2014, the Russian Duma passed the so-called “Rotenberg law”, sanctioning federal budget reimbursements to individuals whose foreign assets have been seized by Western courts.

 

Targeted sanctions, while diplomatically simple to put in place and morally satisfying for a Western political sensibility, have not been and will not be sufficiently punitive to the broader economy to compel action. The history, structure and nature of Putin and the oligarch network ensures this.

BACKGROUND:

As examined in the first part of the piece, the Russian oligarchs came to possess both huge material wealth and significant political leverage through government-promoted privatisation and close ties with the government. While the oligarchs’ achieved unprecedented influence during the Yeltsin administration, the balance of power shifted heavily from the very outset of the presidency of former security services officer Vladimir Putin.

Endorsed by Yeltsin, Putin easily won the 2000 election on the back of his promise to “equally remove the oligarchs from power” and wasted no time making good on the pledge. In a matter of just a few years, big business leaders in Russia became completely subordinate to the regime. Its political influence was neutralised, a far cry from the clout the oligarchs wielded under Yeltsin. Their fortunes, however, did not diminish equivalently  – according to 2014 data, the 111 richest people in Russia control 19 percent of household wealth in the country, while the top 1 percent of Russians currently possess 74 percent of national wealth. That said, the oligarchs have lost all levers of pressure to autonomously exert any influence on Russian politics that goes against the interests of the government and Putin’s inner circle, to which some of the most prominent oligarchs belong to begin with.

There are different hypotheses as to how Putin managed to rein in the oligarchs in the wake of the lawless 1990s. Some journalists, including prominent 1990s media figure Evgeny Kiselyov, have suggested () that the president and the oligarchs struck an informal deal, whereby the former guaranteed to protect the latter’s assets as long as they kept out of politics. However, as Russian Forbes has pointed out, there is no compelling evidence to support this theory. What is more likely is that both parties tacitly agreed to keep out of each other’s way, but that the Kremlin has since sought unilaterally to change the rules of the relationship. It did so by actively persecuting those oligarchs that were deemed uncooperative, using show-trials and criminal cases to seize their assets and neutralise their influence.

Among those fallen from grace were Vladimir Gusinsky, the NTV channel owner accused of large-scale fraud, who then fled the country, and is currently residing in Spain; Boris Berezovsky, Yeltsin’s close confidant and originally Putin’s patron who left Russia and lived in the UK until his apparent suicide in 2013; and, perhaps most famously, Mikhail Khodorkovsky, former owner of the YUKOS oil giant. In 2003, Khodorkovsky was arrested and jailed on charges of embezzlement and tax dodging, despite YUKOS arguably being the most transparent Russian corporation at the time. He was granted clemency by Putin in 2013 and currently lives in Switzerland. One of the suggested reasons Khodorkovsky drew the Kremlin’s ire was his financial contribution to Russia’s Communist Party, at the time a viable opposition party  to Putin’s government. Among other notable circumstances of the YUKOS case was that when its assets were sold in 2004, the controlling stake was purchased by an obscure company called Baikal Finance Group.  Three days later, this company was in turn bought by Rosneft, the state-owned oil giant headed by Igor Sechin, Putin’s friend and reportedly the second most powerful figure in Russia after Putin himself.

To say, however, that Putin has managed to eradicate completely the oligarchs’ influence on the Russian economy would be a misrepresentation. While some Yeltsin-era oligarchs continued to  steer clear of politics and in return were left alone by the government, a new type of oligarch also arose in the country during Putin’s reign. The single most common characteristic of these new figures was that they were all, through either personal friendship, past work history, or residency in “Ozero”, the president’s dacha housing cooperative, indelibly tied to Putin. In short, this new class of oligarchs enjoyed a closer relationship with Putin, were more explicitly dependent on him and thus more loyal to the regime.

Among them: the aforementioned Igor Sechin, Putin’s friend from university times, now executive chair of the formally state-owned Rosneft, earning $13 million annually; Gennady Timchenko, energy and infrastructure investor who has known Putin since the 1990s when the latter worked as an aide to Saint Petersburg’s mayor; and Arkady Rotenberg, who took judo lessons with Putin in the 1960s and currently owns stocks in a multitude of companies. Both Timchenko and Rotenberg regularly win government construction contracts, which Russian Forbes refers to as part of the regime’s micromanagement of Russian economy. The resulting kleptocratic, crony capitalist system, whereby Putin loyalist oligarchs virtually monopolise key sectors of Russian economy, has led to their’ personal enrichment and stifling of competition at the expense of smaller companies which do not enjoy the same connections with the government.

It is difficult to assess the extent to which and ways in which Western sanctions aimed at Putin’s oligarch allies affected Russian foreign policy, in particular in Ukraine, given Russia’s  opaque and insular political process. While one of the chief goals of introducing sanctions was to thwart the oligarchs’ from doing business and even physically being in the West with the hope that they would then pressure Putin into backing down, there are precious few signs that this has come to pass. Even if cracks have started to emerge between Putin and his inner circle, no clear evidence of Putin being swayed has thus far seeped into the public sphere, and the façade of that relationship appears decidedly intact. The clue as to why this has been the case lies in  the personal – as opposed to simply business-related – ties that the oligarchs share with Putin. Their connection with the president is not merely one of personal enrichment, but of long-term friendship. Therefore, their loyalty to him and his regime rests not only on purely financial benefits but close personal history as well. Consequently, their likely exasperation over not being able to stash their money in Swiss banks, buy property in London, or even vacation in Amsterdam will hardly outweigh their support of the Kremlin. And even if some oligarchs do try to sway Putin’s foreign policy, such influence is unlikely to have any effect. A strong hawkish faction known as “siloviki” exists in the Kremlin consisting mostly of military and security services figures which is not weighed down by Western assets and thus has little to lose from sanctions.

RECAP:

Ultimately, the new class of oligarchs that appeared during Putin’s rule benefits from the regime demonstrably more than the regime benefits from them. Moreover, the most prominent of these people share close personal ties with Putin which ensures their loyalty and endurance of Western sanctions. Thus, sanctions targeting specific oligarchs are almost certainly doomed to fail. However, broader sanctions against gas and oil sectors companies, further deliberations on disconnecting Russia from SWIFT, and, in the longer term, minimising dependence on Russian hydrocarbons is likely to have a stronger effect on Russian economy and, thus, hinder the ability of the regime to conduct inflammatory foreign policy.