Ever since the West imposed sanctions on Russia in 2014, Vladimir Putin’s response has been based on the premise that sanctions are meant to divide Russian elites and eventually overthrow Putin himself. In this narrative, equating his cronies’ interests with the country’s, the Russian President has portrayed himself as the only one who can resist Western hostility and prevent the country from falling apart. Every new round of U.S. sanctions has been received by Russia in this light, with the assumption that they are intended to drive a wedge in the Russian elite.
When U.S. and EU officials talk about sanctions on Russia, though, they mention deterrence and punishing the Kremlin for military interventions and election meddling. If the question of creating an elite split ever arises, it does so only privately.
However, whether by mistake or design, a split in the Russian elite might have occurred anyway. When it comes to the current sanctions regime, at least two distinct interest groups have formed in Russia: those who benefit from Western sanctions (and the very helpful counter-sanctions the Russian government has imposed) and therefore welcome them, and those who don’t. In short, Western policy has not fallen evenly across the oligarchic class but has created both winners and losers within the elite—with potentially profound consequences for Russia’s future.
First, it helps to remember what Putin’s circles looked like a few years back, when an authoritarian regime in Russia had finally come into its own. In Putin’s closest circle were his personal friends from the 1990s Ozero cooperative in Saint Petersburg, consisting of the Rotenberg family, the Kovalchuks, Gennady Timchenko, and a few others who made their fortunes on state contracts in the late 2000s. The second tier was comprised of the billionaires who had built up their fortunes in the 1990s. They were oligarchs back then, meaning that their money still decided politics; with Putin they lost significant political influence but kept the money and continued profiting from the regime. And of course, there were the siloviki, members of the security services who have ascended to ever-greater heights of power during Putin’s reign and now control a large portion of Russia’s businesses, especially in the financial and banking sectors.
Essentially, Vladimir Putin shook up the system to create his own power groups that he could rely upon. And because the so-called Yeltsin-era oligarchs had already snatched up the most lucrative former Soviet property in the 1990s, and because Russia’s economy could not produce any competitive product, the only option Putin had left was to distribute the federal budget among his friends—to divvy out government contracts to particular groups of loyalists. Thousands of miles of pipelines that cannot be filled with enough oil and gas, massive sports stadiums and bridges—all these big-ticket infrastructure projects have been and continue to be built to line the pockets of Putin’s “friends,” as Putin once famously referred Yury Kovalchuk and Arkady Rotenberg. Those same gentlemen have hardly been hurt by Western sanctions. To make their lives even easier after they had been sanctioned, the Russian government started depositing federal funds and reserves into the banks they owned.
Russia’s self-imposed counter-sanctions, which banned groceries and medical imports to the country, also benefitted Gennady Timchenko’s business. And a big winner from the Western sanctions is the military production industry, which is fully controlled by Sergei Chemezov, the head of the gigantic state corporation Rostec and one of the most powerful siloviki in Russia.
Thus, in a way, sanctions against the Kremlin did help make some of Putin’s elites pull together around Russia’s President—particularly those who live comfortably off state contracts, like the Rotenbergs and Chemezov, and those who operate inside Russia, like the terrorizing FSB, which has become an instrument of frequent business raids. The number of businessmen put in jail or worse, murdered in prison while awaiting trial, has never been higher in Russia. Neither have the financial flows controlled by the FSB.
These groups do not just incidentally profit from Western and self-imposed Kremlin sanctions—they probably welcome them. Sergei Chemezov reported to Putin in 2017 that the military exports of Rostec, which controls assets worth 3 trillion rubles ($50 billion), increased. Acknowledging that Russia had lost the American gun market for Kalashnikovs, Chemezov said that Rostec nevertheless has expanded into Latin America and the Middle East.
The siloviki rhetoric is bluntly hostile towards the United States, almost isolationist in its suggestion that Russia can get by without any Western cooperation. The Security Council head and former FSB director Nikolay Patrushev recently talked once again about the hostile pressure from the United States on new power centers and the multipolar model of the world.
The Investigative Committee head Aleksandr Bastrykin, who miraculously survived resignation last year and has now been nominated to head the Constitutional Court of Russia, strikes a similarly paranoid and anti-Western tone. He recently called for banning Instagram because “it helped conduct a terror attack in Leningrad” in 2017. He apparently mistook Instagram, the popular social media photo service, with Telegram, the messenger service that the Russian court has stated to ban. Leningrad, of course, ceased to exist with the fall of the Soviet Union and has since been renamed Saint Petersburg.
But not all of the businessmen in Russia profit from the country’s isolation and want Moscow to break up with the West. Andrey Kostin, a top governmental manager and the head of the second-largest Russian bank VTB, which is 60.9 percent owned by the government, had this to say about sanctions in an interview with CNBC in May:
I think again it is unfortunate, a level of misunderstanding, maybe the lack of communication. […] The only good communication we have [is] between businessmen. That’s why we normally have a good context and I think most of the businessmen are against any sanctions. . .
I think Russian businessmen were always like, acted like a bridge between, between Russia and the West for example. And I think they did a lot of good things, like Mr. Abramovich by buying Chelsea and improving its performance. I think that [there are] so many fans in England who are fans of Chelsea. . . last weekend the Times, Sunday Times wrote an article that VTB Capital sponsored the Chelsea for a flower show and they said ‘oh this is Putin’s crony Kostin [who] is trying to do something wrong.’ I mean first of all I am not a crony of Mr Putin but secondly, what’s wrong in supporting the Chelsea Flower Show? […] I think Russian businessmen they are not politically involved…even if they meet [the] President and the prime minister quite often they’re doing it for their business purposes. . . and that’s the practice in Russia. But I think it’s the wrong decision. I think if the West will start to create specific problems, an obstacle for Russian business, I think [it] will be no good for both sides. My personal opinion.
Our readers might remember Kostin’s name from our reporting of his unofficial, semi-confidential visit to Washington, DC two years ago. VTB had already been sanctioned by that time, but Kostin himself had not. He came to persuade congressmen and Administration officials to lift sanctions from VTB. Two years later, in a new round of sanctions in April, Kostin was sanctioned as well.
When talking to CNBC, Andrey Kostin apparently represented not only the interests of his bank, but of his clients as well. The sanctioned Oleg Deripaska used to be a client of VTB and the bank had to stop financing him. Kostin admitted that if any other of VTB’s clients get sanctioned, the bank would have to stop dealing with them.
It’s quite difficult to operate as a successful bank without access to Western financing; it’s almost impossible to conduct business without large clients like Deripaska. That is why Kostin plays the part of the persecuted, Western-oriented businessman to argue against sanctions to gullible foreign audiences—even as he cozies up to the regime and indulges in Soviet nostalgia at home. (At a recent party for top investors, the VTB executive was spotted dressed in full Stalin regalia: a curious display of doublethink from one of Russia’s leading capitalists.)
Andrey Kostin is not a lonely warrior in this battle. Sberbank, the largest state-owned bank in Russia, has been hit hard by Western sanctions. And in recent months, the bank has aired some unusual criticisms against the oligarchs who have most benefitted from them, suggesting a latent rebellion among some parts of the Russian elite.
The bank’s audit branch Sberbank CIB issued a report in March, three days after the presidential election, saying that the main beneficiaries of Gazprom’s pipeline projects are not the company’s shareholders but the general contractors for the projects: namely, Arkady Rotenberg and Gennady Timchenko, whose companies were given the contracts for construction of the Power of Siberia, Nord Stream-2 and TurkStream pipelines.
The analysts said that given the projected cost of the Power of Siberia pipeline—$55 billion—it is unlikely to ever turn a profit, because it cost five times more than a proposed alternative pipeline. Nord Stream-2 won’t become profitable for at least 50 years, they said, and TurkStream not for another two decades. This is typical of the state projects that Arkady Rotenberg is involved in: They are all highly and needlessly expensive ones, like the bridge to Crimea, which has quickly become the most expensive bridge ever constructed, tripling the cost of the Chinese Jiaozhou Bay Bridge.
As to Sberbank CIB’s assessment of Gazprom, it was not the first time it had issued an honest report on a state monopoly. This past fall, the same authors wrote a report on Rosneft called “We need to talk about Igor,” referring to Rosneft CEO Igor Sechin. The report criticized Rosneft for not reducing its enormous debt accrued since acquiring TNK-BP with a roughly 40 percent market premium, and instead spending $22 billion on new acquisitions “without any clear focus.”
Both reports were meant for Sberbank’s clients only but were leaked to the media. The first time, Sberbank withdrew the personal criticisms of Sechin from the report. The second time, the author and his supervisor were publicly fired. Sberbank’s CEO German Gref apologized to Gazprom’s CEO Alexey Miller.
Despite the disgraceful ending, the story itself is a remarkable display of the divide between two distinct interest groups that have arisen in Russia because of the sanctions. Another example is the case of Roman Abramovich, who recently rushed to get an Israeli passport after having been denied a British investor visa, but chose not to come back to Russia. This, and the official data on Russia’s net capital outflow more than doubling in the first quarter of 2018, contests the Kremlin’s propaganda on how sanctions only make businessmen pull tight around Vladimir Putin. The effect of sanctions is not monolithic. And although Russian policy has cushioned the blow or provided new opportunities for the likes of Rothenberg and Timchenko, even some oligarchs who are unflaggingly loyal to Putin can feel the sting of sanctions.
Igor Sechin himself has been put in an interesting position. On the one hand, he is Putin’s closest ally, a silovik who maintains a strong alliance with the FSB. On the other hand, he is a corporate giant and the ambitious CEO of Rosneft, a company that Sechin wants to make the world’s leading oil company (as he has claimed on multiple occasions). Therein lies the rub: Despite the fact that Rosneft has always enjoyed the government’s largesse, it cannot develop as a global company under the burden of sanctions. Sechin confirmed as much in a rare interview to Frankfurter Allgemeine Zeitung earlier this year. Rosneft’s CEO called the sanctions against the company illegal and said that he believes in the European market, and will continue to strengthen the company’s position within it. “The oil business is a competitive one. I’m utterly convinced that the main thing here is contractual obligations,” Sechin said. In the same interview, he again showed off his ambitions for Rosneft, claiming that if “you compare the global public companies in our sector, you’ll see that Rosneft is number one in terms of resource base. The net cost of crude production is very competitive as well.”
Describing the interview, the Russian pro-Kremlin newspaper MK called it a demonstration of Sechin’s openness to Western business. And he has signaled that openness in more concrete ways, too: In 2016, Rosneft acquired a major stake in an oil refinery in the eastern German town of Schwedt in Brandenburg. At the end of 2017, Gerhard Schroder was appointed Rosneft’s chairman.
In any case, the mixed effect of sanctions is no reason to make fine distinctions or offer relief to those who profess an openness to the West. Neither Kostin nor Gref ever thinks about the interests of Russia and its people. The only thing they care about is their profit margins, which is made abundantly clear when they whine to Western media outlets.
But such complaints only go to show that the Russia sanctions do work. True, there are no brave souls among Russia’s oligarchic elite who would dare to openly confront Vladimir Putin and his policies. But there is a clear confrontation of ideas and interests at play here. Ironically, the United States might have created a new field for competition in a country where Vladimir Putin has long sought to suppress it. And in the long run, such competition could be the only thing that might change an authoritarian regime like Russia’s.