Foreign AffairsHomepage

The US Sanctions on Russia: This Time They Matter


Picture: The Economist

By Mark Narusov

Ever since the introduction of Ukraine-related sanctions by the United States and the European Union in 2014, their efficacy has been questioned by Russia sympathizers and hawks alike. The fallout from the new sanctions announced by the U.S. Treasury on April 6 has proven less ambiguous in terms of its scope. The measures targeted seven Russian oligarchs, twelve of their companies and seventeen senior Russian officials. Also designated were the arms trade company Rosoboronexport and its subsidiary Russian Financial Corporation Bank, the decision being significant due to the importance that the Kremlin attaches to arms trade in its foreign policy. The sanctions froze the individuals’ assets under American jurisdiction, prohibited U.S. citizens and permanent residents — as well as possibly non-U.S. citizens — from dealing with the listed individuals and entities. The measures also de facto forbid those designated from dealing in U.S. dollars.


These sanctions are supposed to punish the full array of Russian “malign activities” over the last few years: the annexation of Crimea, the instigation and continued sponsorship of the anti-Kyiv rebellion in the Donbas, support for the Assad dictatorship, subversion of Western democracies and cyber attacks. While less flashy than the expulsion of spies under diplomatic cover in response to the Skripal poisoning, this is more important among the recent anti-Kremlin actions taken by the American government. This time, the United States decided to strike where it matters — the financial security of oligarchs doing the Kremlin’s work. U.S. Secretary of the Treasury Steven T. Mnuchin clearly explained the logic behind the measures: “Russian oligarchs and elites who profit from this corrupt system will no longer be insulated from the consequences of their government’s destabilizing activities”.


Of the seven designated oligarchs, five — Deripaska, Bogdanov, Rotenberg Jr., Shamalov, Vekselberg — were sanctioned at least in part “for operating in the energy sector of the Russian Federation economy”. Suleyman Kerimov was put on the list for money laundering in France, possibly with the goal of assisting far-right French politicians from the National Front. As Philip Ewing of the NPR has pointed out that, ironically, three of the individuals also have ties to the “Trump world”. Deripaska is a former partner of the ex-manager of the Trump campaign Paul Manafort and is alleged to have used this connection to keep the Kremlin informed of the functioning of the campaign; Alexander Torshin has significant ties to the National Rifle Association, while the head of Vekselberg’s US-based company had previously donated $285,000 to Trump’s inauguration fund. As a side note, these connections reinforce the argument I made a year ago that allegations of collusion often prompt the accused to publicly turn against their former sponsor in order to disprove such claims, as Nicolas Sarkozy did with Gaddafi.


One did not have to wait for long before the effects of the measures manifested themselves: the next Monday the rouble fell by almost 4%, its biggest devaluation in three years. Shares of the non-sanctioned large banks Sberbank and VTB also fell, by 17.3% and 9.1% respectively. According to Forbes, the fifty wealthiest Russians collectively lost 12$ billion dollars in the immediate aftermath of the Treasury’s announcement.


The oligarchs on the list of course suffered the most, Oleg Deripaska most of all. Eight of the fourteen designated entities are owned by him, making this “the first time the U.S. has gone after an oligarch and his entire business empire”, as the FT pointed out. Besides working in Russia’s energy sector, the reasons for his designation also included money laundering, criminal behavior and his work on behalf of the Russian state. Rusal, Deripaska’s main source of revenue and the “biggest aluminium producer outside China”, lost “over half its value” on the Hong Kong stock market in a single day. Deripaska’s estimated personal net worth has decreased by 43%, a loss of $2.9 billion, at the time of writing. The Russian journalist Yuliya Latynina did not exaggerate by much in saying that “[the U.S. Treasury] fired Deripaska and Vekselberg from their oligarch positions” for the simple reason that “international business for Viktor Vekselberg is impossible from now on”.


Even though he was not personally sanctioned, Vladimir Potanin’s Norilsk Nickel, dropped by 19% in London on Monday. As a senior lecturer at King’s College London Adnan Vatansever said, “The main drawback for investors in Russia is the lack of predictability about whom the next wave of sanctions will hit and how. This is particularly of concern to foreign investors with plans to do business in Russia”. This should be viewed as more of a side effect than the intended result, however. The United States decided to soften its stance on Rusal, emphasizing the fact that the company was targeted for the limited purpose of punishing Deripaska. As Mnuchin said, “Rusal has felt the impact of U.S. sanctions because of its entanglement with Oleg Deripaska, but the U.S. government is not targeting the hardworking people who depend on Rusal and its subsidiaries”. As long as the company fulfills expectations and changes its ownership, it will be able to avoid financial devastation. The implications are significant: not only has the US Treasury demonstrated the ability to deprive the oligarchs of their status as international businessmen, but also the capability to de facto determine the ownership of major Russian companies.


The main Russian liberal oppositionist Alexey Navalniy was quick to support the measures: “Russian citizens benefit from these individual sanctions against Russian oligarchs and officials <…> These people steal our money and doom our country to poverty and backwardness”. In solidarity with the US Treasury he proclaimed that “there will come a time when not the American but the Russian state will prosecute the corrupt. But we will do it a hundred times more forcefully”.


The 2014 Crimea-related sanctions were largely laughed off in public by the Russian elites, with the Kremlin and state-controlled outlets talking ad nauseum about “import substitution” that would supposedly strengthen Russian businesses due to the reduced access of Western companies to the Russian market. This time, however, there was no pretense about the supposed benefits of Western measures.


Vyacheslav Volodin, Speaker of the State Duma, Russia’s lower chamber of parliament, openly suggested that the state should “support” the sanctioned “businessmen”. The government led by Prime Minister Dmitriy Medvedev did not need much convincing, with Medvedev himself promising on April 9 to explore ways of supporting the oligarchs. The Ministry of Economic Development suggested a plan to create two offshores under Russian jurisdiction, the Oktyabrskiy Island in the exclave of Kaliningrad and the Russkiy Island in the Far East. It is expected to be approved by the Russian parliament before the end of the spring legislative session, June 15-19. The project had been in the works since before April 6, but the sanctions have made its implementation far more likely. It will also allow for cost-free transfer of foreign-based money back to Russia, as well as various regulatory benefits, possibly including exemptions from labor, corporate, currency and other laws. As Meduza has pointed out, the abolition of the tax on income earned abroad would be very helpful to businesses like Rusal, whose share of the revenue earned outside Russia was nearly 80% last year. The Russian opposition has expectedly capitalized on the anti-egalitarian nature of the plan.


The Treasury’s sanctions do not undermine the Putin regime solely by fostering divisions within the elites, they also expose the illegitimacy of the system to the Russian public and indirectly aid the opposition. By trying to keep the oligarchs’ businesses afloat through measures that damage the budget, the regime works against the average citizen. Navalniy made the same point during one of his regular Youtube broadcasts.


The April 6 package of sanctions has proven to be game-changing. By imposing costs on the aggressive Putin regime that has for too long felt unconstrained on the world stage, the United States government is finally on the right track.

Other posts that may interest you: