On the face of it, Western sanctions against Russia in the wake of the annexation of the Crimea look weak, ridiculous and possibly illegal.
President Barack Obama, who has supposedly taken the toughest line in condemning Russian President Vladimir Putin’s “aggression,” has merely declared banking sanctions on a dozen Russian businessmen personally close to Putin. The European Union’s list of sanctioned Russian officials has been shorter still, prompting an outcry against Europe’s—and particularly Britain’s—feeble response.
“London is Russia’s tawdry bitch,” tweeted British-born Columbia University history professor Simon Schama, furious at British politicians kowtowing to London financial district lawyers and bankers grown fat on Russian money.
But in truth, there’s some deep thinking behind Washington’s sanctions regime, and they could ultimately prove deadly to Putin’s future.
The key to the sanctions strategy is to drive a wedge between Putin’s shrinking inner circle and the wider Russian elite. That intimate circle is composed mostly of former KGB cronies “willing to sacrifice Russia’s newfound economic prosperity on the altar of imperial ambition,” says Brian Whitmore, author of The Power Vertical blog.
But most Russian businessmen are not. They have reaped the benefits of Russia’s engagement with the world economy over the past decade and are not ready to follow their leaders into economic isolation.
“People aren’t ready to sacrifice their holidays in the Alps and in Antalya for the sake of an idea of a Great State,” says Nina Khrushcheva, a historian at New York City’s New School and a granddaughter of Nikita Khrushchev, the Soviet leader who ceded Crimea to Ukraine in 1954. “That was fine in Stalin’s time, but it’s not fine in Putin’s time.”
In other words, the sanctions are smart because they so precisely target Kremlin insiders and personal friends of Putin—men such as such as billionaire Gennady Timchenko, whose Gunvor company trades most of Russia’s oil and who has major interests in gas pipe-building companies, and Arkady Rotenberg, Putin’s former judo partner, whose construction company hugely benefited from the $50 billion Sochi Olympics. The share prices of companies associated with the sanctioned billionaires have been badly hit, and Visa and Mastercard suspended operations with two banks linked to those on Washington’s list.
That’s Washington’s stick. The carrot is that—so far, at least—the vast majority of Russian businesspeople and oligarchs haven’t been directly touched. The message is: Stay away from Putin if you want to keep your money.
“We are not interested in collective punishment of all Russians who want to keep their money in the West,” says one senior British government adviser, who was not authorized to speak on the record. “The point is to punish those directly responsible for this attack on Ukraine’s territorial integrity.”
The strategy of trying to peel Russia’s business class away from Putin has its roots in a decisive and recent shift in the way he rules Russia. For the past 14 years, the political stability Putin brought worked in the interests of Russia’s business and bureaucratic class—so long as Russia’s oligarchs followed the Kremlin’s rules.
Now, for the first time, Putin has put a confused feel-good imperialism above Russia’s economic interests. An ideological regime is defined by such a move: pursuing a course of action in pursuit of an idea, even though it may be against the pragmatic interests of the state.
In other words, Putin has become a liability for Russia’s rich—and they’re getting nervous.
“Putin is going to find [himself] in stark contrast to the mass of the elite, which is on the whole integrated into the world economy,” Mark Galeotti, a professor at New York University, told Radio Free Europe last week. “It’s all very well for a small group [around Putin] to say, ‘We’re all right. We don’t have apartments in Prague or bank accounts in the West.’ But the people on whom they depend to run the country will say, ‘Hang on. We do want to [continue being connected to the world economy].’ It’s potentially a very dangerous and divisive step.”
Moreover, according to reports from the Kremlin’s official press pool, the people who were party to Putin’s snap decision to send troops into Crimea numbered no more than six. This new inner Politburo included KGB veteran Sergei Ivanov; current and former Federal Security Service chiefs Nikolai Patrushev and Alexander Bortnikov; the billionaire head of Russian Railways, Vladimir Yakunin; and probably Kremlin spin doctor Vladislav Surkov.
What they all have in common, says Galeotti, is that they all “have a very narrow view of what Russia is nowadays…and the consequence is deeply stupid policymaking not based on gathering of facts and a cost-benefit analysis, but based on a conspiratorial, zero-sum view of world and a Soviet, nationalistic perspective.”
The order to seize Crimea, according to Alexei Malashenko of the Carnegie Moscow Center, “surprised the sober-minded part of [Putin’s] inner circle.… In the ruling class, many people are perplexed by his action, and this is contributing to irritation with the leader.”
The most moneyed part of that ruling class has been noticeably silent on Putin’s Crimean adventure. Russia’s oligarchs “make their money in Russia; they spend it and bank it in the West,” says a close aide to one of Russia’s leading businessmen, who requested anonymity.
It’s easy to see why Putin’s moves worry them. Even without direct personal sanctions, all of Russia’s businesspeople will pay a price for the Crimea annexation in the form of steeply higher borrowing costs. Most international ratings agencies have downgraded Russia’s outlook from stable to negative. The ruble has slid further; capital is fleeing Russia fast.
Putin’s response to sanctions only served to emphasize just how reliant Russia is on the world’s financial system—and how powerless Russia is to fight back. He banned a handful of U.S. senators from visiting Russia—“I guess this means my spring break in Siberia is off, Gazprom stock is lost & secret bank account in Moscow is frozen,” tweeted Sen. John McCain, R-Ariz., one of the banned—opened a personal bank account at one of the banks affected by the sanctions, and initiated a working group to create a Russian-only credit card payment processing system, bypassing Visa and Mastercard.
In large part, the message Putin delivered in a passionate speech on March 18 justifying the annexation of Crimea was that Russia’s doesn’t need the West and refuses to play by its hypocritical rules. Except that Russia does very much need Western finance, Western banking systems and, above all, the trust and confidence of Western investors.
Now that’s evaporating. Canadian aviation company Bombardier has canceled a $100 million factory joint venture planned for Russia—the project’s financing suddenly became prohibitively expensive. And Putin has promised “adequate” responses to Western sanctions, which could be directed at U.S. companies, like McDonald’s and Ford, both of whom have huge Russia-based operations.
Obama’s sanctions are unlikely to bring Putin crashing down any time soon. But overnight they have made it expensive and dangerous to be a chum of Putin. And though all Russian business will suffer, it’s those closest to the throne who will suffer the most.
Washington has taken a leaf from investor Bill Browder’s book on his relentless pursuit of the police and officials responsible for the 2009 murder of his lawyer, Sergei Magnitsky: Follow the money and you’ll find and hurt your quarry.
“Tactically, Putin has won. He has for a time bolstered his charisma,” says Malashenko. “But strategically he has lost.”
One of the hallmarks of Putin’s rule has been the subordination of business, and the so-called oligarchs, to Kremlin rule. That remains the case today. But it doesn’t mean Russian business is powerless or voiceless.
Putin may be at the peak of his popularity today. But because he has abandoned all his moneyed backers to face the economic fallout of his petulant ambition, he is no longer the great arbiter of all of Russia’s clans. Thanks to Western sanctions, Russia’s oligarchs now have a strong financial motive to look beyond Putin and envision a Russia without him.