A new round of sanctions against Russia, issued by the State Department for the poisoning of Sergey and Yulia Skripal in Salisbury, and a bill introduced in Congress for Russia’s meddling in the elections could create a perfect storm for Vladimir Putin. Though this is hardly the last nail in his coffin, a confluence of economic woes within and without Russia have left the Russian President in a far more precarious position than usual—and emboldened criticism from both the Russian elite and the public at large.
Not only does Vladimir Putin’s regime now face some of the toughest sanctions ever imposed on Russia, he also has to struggle with highly unpopular pension reform inside the country and find the money to pay for his campaign promises. The latter effort touches the interests of Russia’s richest men, which could further complicate Putin’s travails.
The sanctions for the Skripal poisoning, announced last week, will be imposed in two rounds under the Chemical and Biological Weapons Control and Warfare Elimination act of 1991. First, by August 22 the U.S. government will ban exports of so-called dual-use technologies to Russia except for those intended for the International Space Station. After that, within 90 days the U.S. government would require Russia to prove it no longer uses chemical and biological weapons, allowing on-site inspectors into the country to verify compliance.
If Russia doesn’t comply, as is almost certain, the Trump Administration may impose a second tranche of sanctions. A refusal to comply would lead to a possible ban of any loans to Russian state-owned banks, trade suspension, and the downgrading of diplomatic relations.
Meanwhile, a bipartisan group of U.S. Senators including Lindsey Graham, Bob Menendez, Cory Gardner, Ben Cardin, John McCain and Jeanne Shaheen recently introduced the Defending American Security from Kremlin Aggression Act of 2018. The full text of the bill was first published not on the Senate’s website but by the Russian newspaper Kommersant. (The Senators’ press offices later confirmed its authenticity). The bill’s toughest measures include banning seven major Russian banks from all operations in dollars, prohibiting transactions relating to new sovereign debt of Russia, and sanctioning Russian energy projects supported by Russian state-owned or parastatal entities.
The Kommersant story sent the ruble crashing the very next day to its lowest value since the fall of 2016. When the State Department announcement followed, Russia’s national airline Aeroflot’s market value dropped 8 percent on news that its U.S.-bound flights might be banned, too. The Russian financial markets have registered high volatility, and Russian politicians have been struggling to get on message.
Finance Minister Anton Siluanov, as usual, issued a flat-out lie: the reason for the ruble’s fall was not only the upcoming sanctions, but “also an unstable situation in emerging markets.” Later he doubled down, saying sanctions against Russian banks “won’t create serious problems for the country’s economy” and musing that Russia might switch to national currencies in oil and gas trade as a counter-measure against the United States. The head of the Central Bank of Russia called the fall of ruble “natural.” The Russian Embassy in the United States, on the contrary, was uncharacteristically honest when it called the State Department sanctions “draconian.”
But the most candid reaction with respect to acknowledging the possible damage came from Prime Minister Medvedev, who said that new sanctions would be perceived as a declaration of war against Russia. However, this unprecedented honesty was only the pretext for a typical series of vague threats: “And such a war would have to be reacted to—with economic methods, political methods, and if necessary with other methods, too. And our American friends should understand that,” threatened Russia’s Prime Minister.
All of this is par for the course—the desperate “sanctions don’t hurt” reassurances and the promise of a “devastating response” are both familiar propaganda ploys whenever the Kremlin gets hit by new sanctions. But there are reasons to believe that this time may be different.
As of Monday, the ruble has kept up its free fall. But, as Konstantin Eggert argued in a recent column, the Kremlin has precious few tools in its arsenal to respond with. Russia might ban Californian wine imports, it might prohibit U.S. flights over the country if Aeroflot is sanctioned, or it might stop selling RD-180 engines for U.S. air space programs. But that’s about it.
Moreover, Eggert points out, Putin’s elites are far more vulnerable than the Soviet elites of old. It is impossible to imagine the U.S. Congress requiring the FBI and CIA to publish information on the finances of Leonid Brezhnev or Yury Andropov, because no such assets existed. Soviet party commanders certainly had their privileges—dachas, cars, and health retreats in Sochi—but they kept their money in Russia and thus remained invincible. They subscribed to the ruling ideology and tried to stay in power.
Putin’s elites don’t believe in anything, says Eggert. They pay lip service to the Orthodox Church but would profess any belief that was necessary to survive. They live off income from global energy markets and keep their assets in the West. That leaves them vulnerable as Congress instructs the intelligence agencies to dig up dirt on their wealth. “Paradoxically, the Politburo was stronger in the face of American pressure,” Eggert plausibly concludes.
The last time Moscow “punished” the West for sanctions was three years ago, when the Kremlin banned food imports from Europe and the United States. For American farmers the measure passed unnoticed, while Europeans got bailed out by the EU government. Russian consumers, meanwhile, were deprived of both quality and quantity, having to pay double or triple prices for what was left in their grocery stores. (Russia doesn’t produce enough to cover its needs.)
And of course, the Kremlin’s most notorious “tit-for-tat” was the ban on the adoptions of Russian orphans, first by Americans and later by Europeans, it enacted in response to the Magnitsky Act. In other words, Putin’s Administration knows well how to punish its own people, and it probably will again in this instance.
Simultaneously, fresh Levada polls show that support for Putin’s foreign policy has dropped 6 percent compared to two years ago. Only 16 percent of respondents approve of the Russian leader’s foreign agenda today, according to a poll that came before the news on new U.S. sanctions had broken. Levada sociologists attest that people have grown weary of foreign policy and want to see the government spend money at home rather than abroad. Instead, the government is seeking a reform of the pension system, which has led to a major drop in Putin’s approval ratings, even bigger than the one following the Moscow protests of 2011-2012.
Even worse for Vladimir Putin, big business has spoken up. After Putin became Russia’s President for the fourth time, he signed his economic program, the so-called May decree, which would require 8 trillion rubles ($120 billion) from the budget to achieve new economic goals. The only problem is that there is no money in the Russian budget for covering existing retirement payments, let alone ambitious new spending programs. In addition to the retirement reforms, therefore, the financial bloc of the government is looking for creative new ways to generate revenue. First, it raised VAT rates from 18 percent to 20 percent.
Now the new Economic Development Minister Andrey Belousov, the replacement for the sentenced-for-bribery Alexey Ulukayev, has proposed a measure that is shocking in its brazenness: taking 514 billion rubles ($7.5 billion) away from big businesses with a targeted tax on 14 leading metal and chemical companies. Belousov says that because oil and gas companies in Russia have to pay mineral extraction taxes, their profits are less than those of large metal, mining, chemical, and petrochemical companies. This is unfair, concludes Minister Belousov, and thus the latter should pay more to the federal government.
Belousov has submitted an official proposal to Putin, who conditionally endorsed the offer. The measure would hit 14 companies, whose owners are all among the top 20 richest Russians. The ostensible criteria for calculating the tax hike is earnings before interest, taxes, depreciation and amortization (EBITDA), a controversial accounting metric that is sometimes used to assess profitability. But in this case the formula seems to have been applied inconsistently and arbitrarily, to shake down leading tycoons. The government may have simply looked at the balance on the companies’ bank deposits (which are all kept in state-owned banks) and figured out how much might be taken away, in what the document euphemistically terms annual “withdrawals.”
Under the table drafted by Belousov, for instance, NLMK—a steel company owned by Russia’s richest man, Vladimir Lisin—would have 20.98 billion rubles ($300 million) expropriated. Lisin has since publicly criticized Belousov’s idea, in a rare rebuke of a top government official. In a statement to the press on behalf of the Russian Steel Association, Lisin said the measure “looks like the encouraging of inefficiency” and that taxes should be calculated on the basis of profit, not income. On Monday, the 14 companies singled out by the proposal cumulatively lost $3.1 billion in just one day, as news of the tax hike proposal hit their shareholders. Lisin alone lost $832 million, equivalent to 4 percent of his net worth.
However, those losses may not presage a full-fledged rebellion from Russia’s business class. When Putin’s regime tries to rip off wealthy businessmen, they bargain, not fight. Тhe Yeltsin-era oligarchs are more asset holders than owners; at any moment, they might be imprisoned or have their business taken away. For Vladimir Lisin and others in his position, it’s not a question of whether to pay or not, but of how much they will pay. More to the point, even if Lisin were to start a public fight with the Kremlin, he most certainly wouldn’t be joined by his wealthy compatriots. Instead, the latter would use such a great opportunity to circle around the remains of his business like vultures.
Even so, there are visible signs of discontent among Russia’s ruling class. Even the generally pro-Kremlin political expert Alexey Makarkin has registered rising conflicts within the elite, and an increase in their public airing of grievances. Apart from Lisin’s reaction, Makarkin mentions two other cases.
One is the surprising criticism of the criminal prosecution of 18-year old Anna Pavlikova which came from the RT head and top Russian propagandist Margarita Simonyan. Pavlikova, who suffers from heart disease, was charged with creating an extremist group and put in jail, all for exchanging anti-Putin messages with friends in social media chats and gathering in McDonalds, where they were joined by an undercover FSB agent who had staged a sting operation. Meanwhile, the pro-Kremlin lenta.ru news outlet published a damning report on the Russian Orthodox Church’s abuse of children: a usually taboo subject that reflects poorly on the powers that be.
All of this, concludes Makarkin, signals “the erosion of the ‘besieged fortress’ effect, when all other interests back off in the face of a national idea of standing against a foreign enemy.” A large part of the elites are not happy with the growing powers of the siloviki, Makarkin notices.
I would add that even Putin’s loyalists are finally coming to realize that the uncontrolled, arbitrary, often barbaric power of the siloviki means they could be the next to be targeted—which of course must frighten them. Unfortunately for the regime functionaries, the times of authoritarian stability have passed, and now loyalists and servants are endangered along with the usual suspects (the liberal media, political opposition, and human rights advocates).
Of course, the best indicator of loyalty is money. And on that front, the news for Putin is grim indeed: the net cash flow from Russia between January and June 2018 has more than doubled, to $21.5 billion, compared to the same period last year. Businessmen are voting with their wallets, as the United States shows no signs of slowing down its sanctions drive. As Konsantin Eggert fairly puts it, “the sanction war” is like a long-distance run, “where the one who is objectively stronger and more patient wins. And this, however you look at it, is the United States.”