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“If EU officials think that, because of sanctions, I touch Mr. Putin and tell him to avoid war and that it will work, then I’m afraid we’re all in big trouble. This means that those who make this resolution do not perceive anything about how Russia works. “
Mikhail Fridman, Bloomberg interview, March 2022
Sanctions against Russian oligarchs are a brutal and misused tool. As Russian oligarch Mikhail Fridman puts it, they have little influence over Putin, and while the state is deeply concerned about the estoligars, or state-sponsored oligarchs, it has little to do with the new generation of billionaires who made their fortunes during the boom years since the 2000s, coming from things like supermarkets or e-commerce.
However, many “oligarchs of the real economy” are on the sanctions list, basically because they are famous and rich. However, other stoligarchs acting in the Kremlin’s interests are not, simply because they are not on the Western radar, argues Chris Weafer. founder and chief executive of Macro Advisory and former head of research at several Moscow-based investment banks, in a report explaining why some oligarchs are subject to sanctions and others are not.
Weafer, a veteran of the Russian market, has worked for some oligarchs and met most of them. Below is an abridged edition of the report. The full report can be obtained via a link at the end of the article.
Russian-Style Relationships
The ability of top Russian corporations to influence President Putin and his foreign policy is exaggerated through Western media and politicians. To the extent that corporations can influence policy, this is limited to their vested interests and sector, which demands significant resources. Most entrepreneurs spend their GR (government relations) resources protecting themselves from the government, without influencing it. This is general in most economies around the world. The EU has more than 12,000 entities registered in its Transparency Register, which aims to “influence legislative and policy decisions”. implementation procedure of the EU institutions”. The OECD has described corporate lobbying as a multi-billion dollar global activity that employs a large number of people.
Three types of wonderful entrepreneurs. There are 3 main categories of the richest entrepreneurs in Russia. First, the heads of state-owned enterprises and the owners of oil and fuel companies, who are very close to the government and whose wealth resides in it (the “state tycoons”). ).
Second, there are the public procurement tycoons, who have made money under Putin basically through government contracts. These other people have succeeded in business because of their influence or friendship with Putin, and not the other way around.
Thirdly, there are all the other actors in the personal sector who tend to make money in spite of the state, not because of it. It’s hard to believe that sanctioning those Americans would put real pressure on the Russian president to replace his policy. about Ukraine.
The EU is obliged to profile a prominent entrepreneur. The recent reversal by the European Court of some sanction decisions is a welcome discovery of the truth in the procedure for deciding who deserves to be sanctioned. This has forced the European Union to define more precisely what it means to say, through a ‘leading businessman’. However, we continue to believe that the current technique for imposing sanctions is based on a false impression of business-government relations in Russia.
Appropriate sanctions targets. There are valid targets for sanctions in the Russian business world, and most of them are already on the EU’s list. These are businessmen who gained assets thanks to their proximity to the Yeltsin regime and who still maintain close ties to the state under Vladimir Putin, or Putin-era businessmen who built their wealth because they were close to Putin and who earn the most of their cash through government contracts or with state-owned enterprises (SOEs).
It’s worth noting that not all of them were necessarily categorized as “outstanding entrepreneurs”; the explanation for their previous designation was based on the fact that they provided or obtained advantages for Russian decision-makers and the government of the Russian Federation. or who promoted or implemented movements or policies that undermine Ukraine’s territorial integrity, sovereignty, and independence, which turns out to be a clearer explanation for the designation than simply being a “prominent businessman” operating in Russia. However, the Council of the EU now turns out to be putting all entrepreneurs in the same basket.
A network that is too wide. However, there is an organization beyond that, which has been making money in sectors that have traditionally had no interest in the Russian state, adding cutting-edge, consumer-oriented sectors such as retail or technology, without any state aid. they carry out lobbying activities that would be recognizable in the West and would meet with Putin as part of those efforts, but they have a strictly one-sided relationship with his regime. It’s worth noting that many foreign entrepreneurs have done the same, and some have. Lately, he has met with Putin rather than with Russians under sanctions.
The view is that those Russian businessmen were targeted simply because they are known in Western states because they are on “rich lists” or because their corporations have had IPOs. in the United Kingdom or the United States, or for other reasons not similar to the Russian economy. politics.
Putin trusts the state and the state alone. As the diagram shows, Putin relies on the public sectors (including industries run by state-appointed leaders) for the stability of the economy and the country. Most of his encounters are with this group, especially in recent years. There have been documented cases where President Putin has been blatantly hostile towards personal entrepreneurs who did not stick to his agenda, such as Igor Zyuzin and Oleg Deripaska.
Bottom
Council of the European Union Decision (CFSP) 2022/329 of 25 February 2022 amended the original Council Decision on non-public sanctions 2014/145/CFSP to include the following category in the list of sanctioned persons: “Prominent affected entrepreneurs in economic sectors providing a truly ample source of revenue for the Government of the Russian Federation, guilty of the annexation of Crimea and the destabilization of Ukraine.
On June 5, 2023, this board criterion was specifically replaced to allow for the sanction of any “prominent entrepreneur operating in Russia,” regardless of whether or not he or she is involved in the most successful economic sectors.
The preference to reduce the Russian government’s profits by sanctioning major profit turbines makes sense from the EU’s point of view. However, the Council of the EU subsequently stated in recital four of the preamble to Decision (CFSP) 2023/109 of 5 June 2023. : “The Council considered that there is a mutually supportive relationship between the Government of the Russian Federation and the main businessmen operating in Russia. In particular, the Government of the Russian Federation has systematically enabled prominent Russian businessmen to raise their wealth through the exploitation of herbs and other public resources.
The Council of the EU also stated that, in explaining its resolution to sanction certain Russian businessmen, Russian corporations can exert some influence over the movements of the Russian government. They justify this by alluding to the presence of the businessman in public meetings with President Putin, one of the “in individual or organizational meetings. “If this were true, it would make sense to put pressure on those people, in the hope that they will succeed in convincing President Putin to replace his moves in Ukraine.
However, this approach presents a number of disorders. It misunderstands the position of most prominent businessmen operating in Russia and exaggerates their genuine ability to influence the Russian government. The report will offer a brief history of the entrepreneurs who have emerged since then. The Fall of Communism. It divides Russian entrepreneurs into 3 groups:
Only two categories match the description of the Council of the EU. If we take a look at the list of the hundred richest people in Russia, we find an organization of the oil and fuels sectors, as well as the base metals sector, which have greater assets due to their proximity to Yeltsin’s leadership and, unlike the dispossessed oligarchs of that era, they have maintained this closeness to Putin’s regime.
There is an organization of businessmen close to Putin who have created corporations whose sole or main source of income comes from public procurement or other “favorable treatment” bureaucracy through the Russian state. These other people have succeeded in business because of their influence or friendship with Putin, and not the other way around.
Both teams have a “mutual relationship” with the state and are considered valid targets for sanctions. In simpler terms, in Russia, force can generate wealth, but wealth rarely provides strength.
The rest doesn’t fit. This leaves a giant organization of prominent businessmen who were sanctioned simply because they were known in the Western media or because they were on rich lists, because their corporations had gone public in the UK or the US or for other reasons, without any kind of mutual agreement. dating the Russian government. For example, those who have made money in innovative, consumer-driven industries such as retail or technology.
Businesses: A bad target for reducing federal budget revenues. The Council of the EU has adopted the position that even loss-making enterprises, which do not pay taxes, contribute to the Russian economy with other tactics (as in the case of the e-Ozon trading company, which is a company that does not serve the Russian state or ordinary citizens and SMEs, who pay taxes (such as VAT)). At the same time, the Council of the EU rejects the idea of sanctioning Western companies that remain large contributors in Russia.
Other missed targets. A gigantic number of wealthy Russian businessmen remain inexplicably absent from European sanctions. We are also witnessing the emergence of a new organization of businessmen who are buying up the assets of fleeing Western companies, obviously with the blessing of the Kremlin. Nor are they sanctioned, almost entirely because they are not well known in the West.
Meetings with Putin
The chart shows how prominent businessmen have met with Putin since he took office. This is notable because the Council of the EU alluded to such public meetings as evidence of a given businessman’s closeness to Putin and his ability to influence decision-making at the highest levels. level.
Putin prefers the heads of state-owned enterprises. The cadre is led by Alexei Miller and Igor Sechin, respectively at the head of Gazprom and Rosneft (both also close to Putin since their stay in St. Petersburg). These two leaders, as well as other heads of state-owned enterprises such as Alexei Kostin and German Gref are marked in light green, while entrepreneurs in the personal sector are marked in dark green. The chart shows that heads of state-owned enterprises hold more meetings with the Russian president than their counterparts in the personal sector.
Among private-sector businessmen, Putin’s usual top guest has so far been Vladimir Potanin, who is the real owner of Norilsk Nickel. The other important point to note here is that most of the meetings took place during Putin’s first term as president, when businessmen had much more access to him. These gatherings are now much less common.
Covid has put an end to that. There is no public evidence that Putin has met with an oligarch or personal sector business owner since the Covid outbreak began in early 2020 or since. In fact, their gatherings were scaled back and businessmen were unwilling to take the required two weeks of quarantine before they could simply meet with the president one-on-one. In addition, Putin has been less interested in business-related issues since 2014, when he focused more on foreign policy.
It’s not the best representation. This indicator is only a better indicator of the businessmen’s actual contacts with Putin, as they are only those that are disclosed on the Kremlin’s website. There will be several other contacts and meetings that will not be recorded. For example, there is no mention of the Kovalchuk brothers or Rotenberg on the Kremlin website, but they are known to be close to Putin and meet with him frequently. In any case, the Court of Justice of the EU ruled in its September judgments that participation in such gatherings is not permitted. in itself a decisive factor when it comes to sanctioning employers.
Public Assembly Mechanism. Publicly recorded meetings between Putin and a businessman are often aimed at giving a public signal from Putin for a specific resolution that the businessman is pushing. As such, those meetings likely mark the end point of an ongoing process between the entrepreneur, the presidential leadership, and the government. Once the assembly has been agreed upon and inserted into the president’s agfinisha, it is regularly broadcast on television that evening, with a few minutes of risk-free discussion for the audience before the assembly closes and the real business is discussed.
Dating abroad. President Putin also met with a number of foreign businessmen. For example, he met four times with the CEO of Siemens, not counting organizational meetings with German industry, twice with the CEO of Daimler-Benz and three times with the CEO of BP. To be honest, most of those meetings took place before 2007. Even after 2007, however, Putin met with foreign businessmen at events: he met ExxonMobil CEO Rex Tillerson on several occasions and even presented him with the Order of Friendship in 2013. I don’t mean to accuse those companies of collaborating with Putin, but I do mean to show that meetings with the president have long been part of the government relations of any company operating in Russia.
RSPP. La U. S. Chamber of Commerce, the largest lobbying organization through spending in the United States, is the direct counterpart of the Russian Union of Industrialists and Entrepreneurs (RSPP), which holds annual meetings with the Russian president as a component of the lobbying process. interests of its members. This is one of the annual meetings that took place on 24 February 2022, which had been scheduled several weeks in advance but was postponed several times due to scheduling disorders of the components, and which was cited by the Council of the EU in its appointment. of businessmen who would have significant influence on the government.
President Putin has developed over the years a formal design of relations with corporations. There is an annual assembly with the RSPP, which includes open and closed sessions. There is a lot of work to be done to prepare this assembly so that businessmen can make demands to Putin that have already been pre-selected through the government with a solution prepared for the president to propose. The corporations will push for their problems to be included in the schedule of this assembly, and the RSPP will negotiate with the government and the presidential administration on the timetable, as well as on the solution of the problems raised.
Foreign corporations have their lobbies. The need to exert pressure on Russia is reinforced by the fact that foreign corporations have created their representative bodies, including the Association of European Enterprises, the American Chamber of Commerce, and the Association of International Pharmaceutical Manufacturers, which spend their time collaborating with the Russian government. on the amendment of the regulations. Both parties welcome this constructive process.
The lobby is a one-way street. The other point to note is that no one would expect any of the twenty most sensible organizations in the United States to be able to influence the military or the diplomatic policy of the American government. If a U. S. drone kills other innocent people in a foreign country, it makes no sense to sanction Amazon. com as an organization with significant influence in U. S. politics, even if it generates significant profits and is the seventh-largest investor in the country. Russian corporations interact with the government on other levels. But there is no evidence of a case in which a Russian corporate or economic organization has attempted to replace a policy that is not directly applicable to its scope of activity.
International forums. A second forum for corporations is investor conferences, such as the St. Petersburg International Economic Forum (SPIEF), the annual VTB Investors Forum, and the Far East Economic Forum. At those events, Putin appears with a speech and meets with corporations. From time to time, the president will make business-related political announcements at those events. Once again, corporations will push to get on agendas. Before sanctions were imposed on Russia, there was a regular special consultation with foreign corporations at those events.
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