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OSW COMMENTARY NUMBER 264 1 State Support for Their Foreign Economic Activi- in These Companies Centre for Eastern Studies NUMBER 264 | 11.04.2018 www.osw.waw.pl A test of strength The escalation of the crisis in Russian-American relations Marek Menkiszak, cooperation Witold Rodkiewicz On 6 April, the Trump administration introduced additional, more severe sanctions against Russia, covering 24 people and 14 companies: Russian oligarchs, the businesses they run, sen- ior government officials and heads of state corporations, and (again) the Russian state arms company Rosoboroneksport. The immediate consequence of the new sanctions has been a downturn on the Russian stock market and the weakening of the rouble, as well as financial problems for the companies sanctioned, especially those belonging to the oligarch Oleg Deri- paska. In the longer term the Russian oligarchs and their companies which conduct extensive activity abroad will find that the sanctions hamper their operations, and as a result, their dependence on the Kremlin will increase. On the other hand, the Kremlin will have increasing difficulty in recouping the affected oligarchs’ losses, which will lead to an increase in ten- sions within the elite, as well as a rise in social discontent, which will make the functioning of Putin’s regime more costly. The US sanctions represent the next stage of the crisis in Russian-American relations. They were imposed just after the expulsion from Russia of 60 American diplomats in retaliation for a similar decision by the US regarding Russian diplomats. The crisis may deepen further as a result of the military response which the US has announced in response to a chemical attack in Duma, Syria on 7 April, most likely by the Assad regime’s forces. An escalation of the crisis does not suit the Kremlin, which still seems to nurture hope that the recently announced fur- ther Putin-Trump meeting could initiate the process of normalisation of Russian-American re- lations. On the other hand, for reasons concerning its image, the Kremlin will probably under- take some kind of limited retaliation against the US, in order to demonstrate to Washington its potential to cause harm. All this means a long-lasting crisis in Russian-American relations. The new US sanctions the occupation of Crimea, and its support for the Assad regime in Syria. Four categories of The expansion of the designation list of sanc- Russian entities have been included: tions against Russia, introduced on 6 April by a decision of the US Treasury Department, has 1. Seven people from a larger group of Russian been justified by the hostile (from the point of oligarchs belonging to the Russian elite, includ- view of the US’s interests) activities Moscow has ing Oleg Deripaska, Suleiman Kerimov and Kirill undertaken in recent years and which are still Shamalov (the President’s former son-in-law; continuing: attempts at hostile interference in for more, see the Appendix). These individuals the internal affairs of Western countries (includ- have benefited from profitable public procure- ing the US), the aggression against Ukraine and ment contracts, and have sometimes received OSW COMMENTARY NUMBER 264 1 state support for their foreign economic activi- in these companies. By the decision of the US ty; in return they have funded political and eco- authorities, the sanctions can also be extended nomic projects on behalf of the Kremlin, as well to cover companies from other countries which as the luxurious lifestyle of some members of fail to dispose of their significant shares and/ the ruling elite’s inner circle. or continue to conduct significant transactions 2. Twelve companies whose principal owners with those firms affected by the sanctions, are the individuals mentioned above; seven of which poses a risk to some European compa- these companies are controlled by Oleg Deri- nies, among others. paska (see Appendix). These entities general- The sanctions have been severely criticised by ly conduct a wide range of foreign activities, the Russian authorities. While Premier Dmitry including on the US market. Medvedev has warned that Russia “reserves the 3. Seventeen Russian high officials and heads right” to take retaliation, a spokesman for Pres- of public companies, including Viktor Zolotov ident Dmitri Peskov responded more temper- (Commander of the National Guard), Nikolai ately when asked about the Russian response, Patrushev (Secretary of the Security Council) and and stressed that Russia would be guided by its Aleksei Miller (head of Gazprom) (see Appendix). own interests; this could suggest that the Rus- These individuals belong to the ruling elite, sian response will be limited. and/or are suspected of personal involvement in lobbying and implementing Russia’s aggres- The consequences of the sanctions sive actions. for Russia 4. Others have been included on the sanctions list for their support of the regime in Syria: once The new US sanctions have both economic as again, the Russian state arms company Rosobo- well as political consequences for Russia both roneksport (which was placed under sanctions in the short and the long term. in 2014 for its role in the aggression against With regard to the short-term economic conse- Ukraine) and the Russian Financial Corporation quences, the most seriously affected are the Rus- Bank (RFK) which provides its services to it. sian oligarchs affected by sanctions, as well as other members of the richest Russians. Accord- ing to calculations by Forbes, as a result of the In the longer term the Russian oligarchs fall in the value of the stock in their companies and their companies which conduct exten- on 9 April alone, Deripaska lost US$1.3 billion, sive activity abroad will find that the sanc- Viktor Vekselberg more than US$900 million, tions hamper their operations, and as a re- and Suleiman Kerimov more than US$800 mil- sult, their dependence on the Kremlin will lion. In total the 50 richest Russians (including increase. both those covered by US sanctions and those not) lost a total of US$12 billion on that day. The Russian stock market has been seriously af- The sanctions against the physical persons in- fected, losing between 9% and 11% of its main clude a ban on their entry onto the territory of indices on 9 April. Many Russian companies the US, the freezing of their assets in US finan- saw significant declines in their share prices, cial institutions, and a ban on transactions with both on the stock markets in Moscow (as ex- US entities. The sanctions against legal persons amples: Rusal lost around 46%, Mechel around also include freezing their assets on the terri- 30%, Norilsky Nikel around 17%, Polyus around tory of the US, a ban on transactions with US 13%, the VTB bank 11%) and London. Earlier in entities, and an order to dispose of any shares Hong Kong, shares in Rusal fell by around 50%. OSW COMMENTARY NUMBER 264 2 There was also a sudden weakening of the Rus- and Yuri Kovalchuk). However, this would be sian rouble, which by the morning of 11 April quite costly for the budget (which would re- had lost around 15% of its value against the US ceive less tax revenue); and the measure was dollar and the euro. previously applied to members of Putin’s inner Further economic consequences will depend on circle, which most of those covered by the new both how the Russian authorities respond to sanctions are not part of. the sanctions and on the subsequent moves by Washington, as well as the reactions of Russia’s other important economic partners (the EU, Chi- On the other hand, the Kremlin will have na). Above all Moscow fears the indirect effects increasing difficulty in recouping the af- of sanctions: deterring foreign entities (mainly, fected oligarchs’ losses, which will lead to but not only, from the West) from any cooper- an increase in tensions within the elite, as ation with major Russian companies (primarily, well as a rise in social discontent, which but not only, those already covered by the sanc- will make the functioning of Putin’s regime tions) for fear of negative reactions from the more costly. United States. Representatives of the Russian government (Prime Minister Dmitry Medvedev, Deputy Prime Minister Arkady Dvorkovich, the Thirdly, the creation of tax havens on Russian minister of industry and trade Denis Manturov) territory, and the transfer to these places of declared the government’s (undefined) support the registered head offices of Russian global for the companies affected. The Russian gov- companies, which would somehow retain their ernment is also meeting in session to discuss previous legal form. According to reports in the matter. From leaks emerging in the Russian Vedomosti, the Russian government has accel- media, it appears that various forms of assis- erated the preparation of legal acts (which has tance are being considered: already been underway for some months) to First, big state corporations may partially pur- set up such special zones on Oktyabrsky island chase shares in the private companies affected. in the Kaliningrad oblast, and on Russky island This would fit in with the government’s exist- near Vladivostok in the Primorsky krai. Entities ing policy of increasing the state’s participation belonging to Russian oligarchs and located in and control in the economy, and also with the such places would be treated as foreign enti- ambitions of the individual heads of the state- ties, and would pay taxes only on that part of owned corporations (in particular Rosneft’s their business which is carried out on Russian president Igor Sechin, who has been trying to territory. This solution, although legally com- consolidate the country’s energy assets). How- plex and fairly time-consuming, would be quite ever, the problem lies in acquiring the funds beneficial for the Russian government, as it for such transactions, which could potentially would substantially increase its control over the prove very expensive.
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