On Friday, April 6, the Treasury Department unveiled a new round of sanctions against Russia, blacklisting seven oligarchs and their affiliated companies, along with over a dozen government officials, the state-owned weapons trading company Rosoboroneksport, and its subsidiary bank. The result was a dramatic sell-off across Russian markets that quickly became known as Black Monday: the worst day for the Russian stock market since the annexation of Crimea.
This week, The American Interest publisher Charles Davidson and assistant editor Sean Keeley spoke with William Browder—the financier, CEO of Hermitage Capital, and architect of the Magnitsky Act—to learn why these sanctions hit Russia so much harder than past ones, and what they may presage for the future.
Charles Davidson: So, Bill, do you want to delve right in, and explain why these sanctions are different and so much more robust than what’s occurred previously?
William Browder: Yes. By going after these oligarchs, the U.S. government is effectively going after Vladimir Putin. Vladimir Putin has amassed enormous wealth over the last 18 years. In order for him to hold that wealth—he can’t do it in his own name—he’s effectively appointed oligarchs to be his trustees. And he’s had to do that because if anything was held in his own name, then those people who knew that would be able to blackmail him. However, he’s created an ideal situation for us in the West because politically we can’t sanction Putin, we can’t put Vladimir Putin on a sanctions list. But we can put his oligarchs on a sanctions list and know exactly what we’re doing to him.
By going after this group of Russians, we’ve now gotten Putin’s attention.
CD: Right, but before we had the sanctions related to Ukraine, we had Gennady Timchenko who was sanctioned, and many other people who are fairly close to Putin. What’s so different about this round?
WB: Well, Timchenko, Arkady and Boris Rotenberg, and Kirill Shamalov were the four relevant people in the Ukraine sanctions. However, with Timchenko, for example, two days before the sanctions were put into place, he allegedly sold his company to his personal lawyer. And therefore the company has continued to operate without any consequence since then. In this particular case, they’ve gone after oligarchs and gone after their companies.
On top of that, the sanctions in the past have gone after apparatchiks, not businessmen for the most part. Other than those four—Timchenko, the Rotenbergs and Shamalov—everybody else had been apparatchiks, not the people holding the money. And so while that’s symbolically helpful, it hasn’t been materially helpful in terms of creating a consequence because it just limits some travel, as opposed to going after worldwide assets.
By contrast, the seven oligarchs on this sanctions list are truly international businessmen. And by being put on the sanctions list, it completely disrupts every aspect of these businesses.
CD: Can you give us a few examples of that, Bill, and how it spins out for them?
WB: Any company, whether it’s American, European, or Latin American, that has business in the United States, can no longer do business with these oligarchs without risking being in violation of U.S. Treasury sanctions. And that goes for people who have major equity investments with them all the way down to a company like Microsoft which sells them software. They can no longer use Microsoft Word anymore because that would be an American company having business with them. And so every bank, every corporation, anybody who has any contact with America has to sever ties with these people. And they’re quickly discovering that since America is so ingrained in the international world of business and the international world of finance, it pretty much paralyzes those companies.
All the people on this list—Oleg Deripaska, Viktor Vekselberg, Suleiman Kerimov—have huge international operations. They have big equity investments abroad. They have Western investors investing in their operations in Russia. And everything now grinds to a halt. You can be assured that the main beneficiaries of this whole thing are international law firms that are now crawling all over all of these companies and all of their counterparties. Everybody’s quickly trying to figure out how to not be in violation of U.S. Treasury sanctions.
CD: A lot of these guys famously have hangouts in London. How will this affect what’s going on in the UK and “Londongrad,” do you think?
WB: I would expect that Theresa May will ultimately replicate the sanctions list because it would be politically disastrous for her not to after the Salisbury poisoning. So my prediction is that in due course, whether it’s a week or two, or a month or two, we’re going to see the UK following the same sanctions list. I suspect we’ll see other countries doing the same.
In the meantime, however, let’s say that Suleiman Kerimov owns a house in London and he wants to sell it. Nobody will buy it from him because nobody wants to transfer money to a person who is on the U.S. sanctions list. So, for all intents and purposes, that house is frozen, because nobody wants to be in the crosshairs of the U.S. Treasury.
CD: What about stakes or stock holdings that these oligarchs have in Western companies?
WB: They’re stuck. And on top of that, if they have shareholdings in Western companies and dividends are issued by those companies, those companies cannot pay these people for their dividends because that payment would be considered a violation of U.S. Treasury sanctions.
Let’s say someone owns 100 shares of General Motors. They can’t sell it—it’ll just sit somewhere. And most banks who are the custodians of these people will also be trying to extricate themselves from those relationships as quickly as they can, because they don’t want to be holding assets on behalf of a sanctioned individual.
There are different layers of effects, and the new sanctions touch on every layer, because nobody wants to be on the wrong side of the U.S. government.
CD: It sounds like we’ve got a whole new atmosphere, then, a whole new set of circumstances. How does this affect the Russian economy in the short term and going forward? And for that matter, how will this affect Putin’s future?
WB: Putin, in response to this, has said that the government is going to essentially indemnify these companies or help them sort through the short-term problems that they’re having. All these big companies have different types of debt. Some of the debt is long-term, but a lot of it is short-term. Every bank that’s lending them money on a short-term basis will not renew any of those loans. Therefore, there are large financing needs that need to be met, and the Russian government will have to step in to meet those financing needs.
Where the story gets interesting is that the Russian government is going to have to burn through a significant amount of hard currency reserves in order to help these companies stay afloat. And that’s the reason why the ruble devalued on the back of this—because everybody understood that if the central bank is burning money for sanctioned Russian oligarchs, that’s less money available for foreign exchange reserves, and therefore the ruble should be weaker. It will probably devalue further as people speculate on new sets of sanctions against other oligarchs.
We may also have more sanctions coming in the future over the Syria crisis. It doesn’t like those are really going to attack the oligarchs, but everybody in the business world is already looking at who are the likely next targets among the other oligarchs. And some of their companies are being punished in anticipation. So the share prices are being punished in anticipation of problems that may come down the road.
CD: So what does this all mean for the Russian economy in the longer term?
WB: Well, basically it means that Russia becomes much more of a non-global economy. The Russian economy is weak to start with because there’s so much crime in Russia that it’s very difficult for entrepreneurs to start businesses. And as a result, the economy is ridiculously skewed towards large resource-based enterprises that are either oligarch-owned or state-owned. Those businesses are mostly in the oil business and metal business, and they haven’t been growing much.
And so the economy overall has been stagnating. All this does is it creates a further bit of pressure on the economy. If you’re a Russian, the last thing you want to do is bring money back into Russia where it can be stolen, and now you also have the problem that it can be seized in the West. And so at this point Russian businessmen are not going to be thinking about how to grow their businesses and become more successful. They’re all just frantically searching around for ways of preserving their capital. And so this only makes it that much more of a grave issue for them. Nothing good is going to come to the Russian economy as all these things start to bite.
CD: How do you think this may affect Russian politics?
WB: I don’t think that this affects Russian politics because there is no such thing as Russian politics. The phrase “Russian politics” would suggest that there is a competition, that there is uncertainty. Russia has mutated from democracy under Yeltsin, to authoritarianism under the last version of Putin, to what I would describe as totalitarianism under the current version of Putin. And so it’s purely a question of how he keeps people in line, not a question of whether people support him.
SK: So, would you say though that the goal of these sanctions is to make the oligarchs who are dependent on Putin to see him as a liability in the long term?
WB: No, I think that the purpose—whether it’s intended or not—and the benefit of these sanctions is that they go directly to Putin’s own money. And this is a big misconception. Some people think that somehow the oligarchs are going to overthrow Putin. That’s never going to happen. All this does is it shows Putin, if you go around using chemical weapons in western Europe, we’re going to go after your money.
CD: So what will the effect be on Putin, do you think?
WB: I think the effect is going to be dramatic. I think that Putin is now going to stop doing these brazen acts because he’s going to be afraid that we’ll go after further oligarchs.
CD: So you predict it will rein in his behavior and aggression?
WB: I think this will definitely rein in his behavior. I don’t think it will rein in his rhetoric. I think the Russians will continue to lie, and cheat, and obfuscate in international forums, but the really brazen stuff—the chemical weapons attacks in western Europe, and the brazen interference in elections—they’re going to dial that back a lot because Putin is not interested in further oligarch sanctions which touch his money.
That doesn’t mean that we’re not going to see him rearing his ugly head in the Balkans or in places where we don’t have a direct emotional, political interest.
CD: So if the Russian economy spirals down, Putin stays in power, the place gets poorer and more disconnected from the West, and perhaps even from China because Beijing is trying to keep good economic relations with the West—does Russia then retreat into a sort of autarky, cut off from the rest of the world as it was when the Soviet regime took control?
WB: I think that’s already happened to a certain extent, and it’s only going to solidify. Vladislav Surkov, Putin’s ideologue, has more or less said those exact same words: that Russia’s future is going to be an inward-looking future.
This transcript has been edited for clarity.