In freezing the assets of seven Russian oligarchs on April 6 under the Countering America’s Adversaries Through Sanctions Act and other Russia sanctions authorities, the U.S. government went after individuals with a sizeable economic footprint in the United States and Europe. This decision raises the stakes of the Russia sanctions program, as it targets individuals and their companies who hold large investments in the West and who have important relationships with Western businesses and financial institutions — and who are in Vladimir Putin’s inner circle. The action may result in the freezing of hundreds of millions or billions of dollars in assets, and it will likely have disruptive effects on multinational corporations with exposure to U.S. jurisdiction. Western businesses will have to unwind their relationships with sanctioned actors quickly and then figure out how to insulate themselves from the risk of follow-on designations of entities in which sanctioned oligarchs own a stake or exercise control.
The Treasury Department designated seven oligarchs and seventeen Russian government officials in this tranche. The designations of Oleg Deripaska, Suleiman Kerimov, and Viktor Vekselberg were particularly notable, as they all own or control vast holdings in the West. Although, like most Russian oligarchs, the three men originally made their fortunes in extractive industries in Russia, their companies are now closely interwoven with the Western financial system. Deripaska’s EN+ Group is incorporated in Jersey and trades on the London Stock Exchange. Kerimov’s family owns Polyus, one of the largest gold miners in the world, which also trades in London. Vekselberg’s Renova Group has substantial operations in Zurich and owns a large U.S. investment firm. Renova, through an affiliated company, is also the single largest shareholder in the largest bank in Cyprus.
The Office of Foreign Assets Control, which manages financial sanctions for the Treasury Department, issued two licenses granting American businesses and individuals a short window to unload equity or debt holdings related to these sanctioned companies and to wind down business relationships. The licenses signal that Treasury anticipates these seven oligarchs are extensively intertwined with American companies and capital markets. While U.S. businesses may find it complicated and costly to extricate themselves, that very entanglement also means that the subjects of sanctions may stand to lose their shirts. Time will tell.
A willingness to target Russian oligarchs and businesses with significant exposure to the West creates the possibility that the U.S. government will be willing to ratchet up the pressure in ways that were until now unforeseen. The targeting of more powerful oligarchs, of Russian-affiliated banks in the West, and even of Russian state-owned enterprises now seems plausible.
The deterrent effect of this round of targeting may be felt even absent additional actions, as the logic of the expectations game plays out — if other oligarchs think they will be next, they may be forced into a fire sale of assets. If Western businesses perceive that the previously unimaginable is now likely and retreat from Russia, the Russian business climate could deteriorate quickly.
To cite one example, oil major Rosneft, VTB bank, and gas giant Gazprom — three of the largest companies in Russia, all state-owned — have long been subject to restrictions on dealings in their debt and equity under U.S. sanctions, although not to asset freezes or transaction bans. Gazprom head Igor Sechin has also been subject to an asset freeze in his personal capacity, but business with Gazprom itself was not seen by Western firms as off-limits. VTB President Andrey Kostin and Gazprom Chairman Alexey Miller were targeted along with the seven oligarchs. Will Western firms now view the three Russian state giants as higher risk than they did before this action?
Equally important is what Europe does next. After the annexation of Crimea and destabilization of eastern Ukraine, the European Union and the United States developed a joint, albeit limited, sanctions response. There are institutional constraints in the European Union, such as the requirement that sanctions be imposed through the unanimous consent of member states, that make it difficult for Europe to match these latest sanctions designations immediately. But the targeting of the oligarchs comes on the heels of the swift multilateral response to the poisoning of Sergei and Yulia Skripal and promises of aggressive action by the United Kingdom to target illicit Russian wealth. A forward-looking, comprehensive, and coordinated strategy to deter Russia — of which sanctions are one important element — may finally be within reach.