Latest EU Sanctions Target Different Set Of Russia’s Business Elite

Russia is closer to Europe than China in every conceivable way, but not for long.

The people look the same. They share the same Christian religious beliefs and holidays. Their economies – up until recently – were fairly well integrated. This is especially true with energy.

But the war in Ukraine changed all that. And now canceling Russia is the new thing for the Euros. Russia is forced to turn even more to China, arguably the biggest political rival to the West and surely the biggest geopolitical rival to the U.S.

Russia is being ringfenced. It’s the most sanctioned country in the world after Iran because of its actions in Ukraine. Barring the destruction of Germany and its ruling party, the Allied Powers never treated a country so bad.

This is economic war, or what else is it? Sanctions have not stopped Russia’s war in Ukraine. Individual sanctions have taken away yachts and frozen bank accounts. Is it true that all of that money was from ill-begotten gains,as President Biden said at this year’s State of the Union address?

By comparison, these are not even some of the richest 50 on the planet. Imagine Russia taking away Jeff Bezos’ yacht and blaming it on tax evasion. (Of course, it cannot do this because Bezos doesn’t have millions in ruble bank accounts, but I digress.)

The point is – the West is signaling to Russia that it is through with them. How else is the business community – and Russian society as a whole – to view this?

As an aside, I am often on the receiving end of messages from people I have known in Moscow for 12 years who wonder if I hate them now.

Putin won’t be around forever. The 40 and 50-year old Russian business leaders and their families and friends will be around for a while longer. Will all be forgiven ?

Over the weekend, The Financial Times interviewed the former CEO of Lukoil, Vagit Alekperov where he said that wars can end rather quickly, but “the energy configuration of the world has been sets by decades of investment and hard work of many generations of professionals. There is no need to undermine or destroy it.”

Europe in particular risks blaming western-leaning Russian businesspeople—like former owner of the Chelsea soccer club — Roman Abramovich – for Russia’s military operation.

As the EU, UK, and allies scramble to find new Russians to add to their sanctions list, they are increasingly turning to managers of private Russian companies with close ties to the West as if they can somehow convince the ruling United Russia party, and the Russian military establishment, to stand down. Russia would consider those people to be tools of a foreign state, and would ignore their concerns.

Many of the individuals featured in the previous few rounds of sanctions were educated abroad and brought western values like the beloved ESG investment thesis and international cooperation to their enterprises. Oleg Deripaska tried taking that Davos-espoused route and has been sanctioned since 2018, regardless of going along with the European establishment’s views on corporate social responsibility and the environment. In March, Deripaska lost a court battle to lift sanctions on him.

As more Deripaska-types get added, including those that Wall Street knew and liked – such as Herman Gref, CEO of state-owned Sberbank, Europe may soon find that it has burnt all its remaining bridges with the Russian business community. Revenge is a dish best served cold, as the saying goes.

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Existing Business Sanctions: An Overview

Sanctions targeting the economy and military have been particularly successful. Exports of dual-use goods which can be used by Russia’s military have been banned by the U.S. Europe and the United Kingdom, as has all business with state-supported weapons manufacturers. Japan and the European Union will also stop exporting high-tech components like advanced semiconductors to Russia.

Europe stopped buying Russian coal, steel and wood, and is weening itself off Russian fuel, particularly oil. The EU has sanctioned more than 80 Russian entities, prohibiting European companies from doing business with them. Many have quit their JVs with Russian oil and gas companies, including Shell and BP – both are getting out of the market this year.

Europe also imposed personal sanctions against more than 1,090 Russian individuals – mainly politicians and lawmakers, as well as about a dozen of the 88 Russian billionaires. This implies travel bans and the freezing of their assets (including bank accounts and property) in the EU.

The IMF expects the Russian economy to contract by 8.5% this year. The country’s equities are no longer tradable in the U.S., with the VanEck Russia ETF now offline. Yandex, a search engine often called the Russian Google, is also off limits.

Beyond the Oligarchs: Meet Russia’s New Sanctions Class

Individuals sanctioned since the start of the war with Ukraine can roughly be arranged into two categories. The first are the A-list oligarchs; the second are the entrepreneurs and executives from modern, private companies.

Some of Russia’s leading oligarchs are beneficiaries and facilitators of the government, but they remain underrepresented on the sanctions lists. Only nine of Russia’s 100 wealthiest individuals have been sanctioned.

Here are some of the latest Russian business leaders being sanctioned by Europe.

Tigran Khudaverdyan, former executive director and deputy CEO of Yandex. Yandex was born as a search engine in 1990s Russia. Since then, it has evolved into a European tech giant, with head offices in the Netherlands. Yandex commands the largest market share of any European search engine. It also operates as a taxi service and launched e-grocery delivery services in London and Paris. Khudaverdyan was also a Davos Man in training; featured in the World Economic Forum’s Young Global Leaders list in 2019. He actually denounced the war on Facebook, saying “war is a monstrous thing.” That wasn’t enough.

Dmitry Konov, former Chairman of the Management Board of petrochemical company SIBUR. He has an MBA degree from IMD (Switzerland), one of Europe’s leading business schools. “Mr Konov is frank compared with many Russian chief executives,” the Financial Times wrote in a profile from 2018. “He is younger than most, and he speaks flawless English — another uncommon trait among senior Russian business people. His relaxed approach to the media and investors casts him as a western-style leader, and reflects his belief that a culture change should be led from the top.” Konov transformed SIBUR from an underperforming, near-bankrupt and highly polluting company to a world leader in petrochemicals. Since he joined the company back in 2004, SIBUR’s turnover increased from $3 billion to $16 billion and is part of Europe’s beloved ESG universe. In 2021, SIBUR was named among Russia’s 30 top eco-friendly companies in the first such ranking to be put out Russian Forbes. The same year, SIBUR launched a net-zero collaboration platform with the European-leading World Economic Forum to help coordinate climate change. Sibur is closely integrated with the European market. The products which Sibur supplies are critically necessary for the European economy, so sanctioning the executive who turned it into a modern and reliable European partner seems somewhat self-defeating. But that didn’t matter. Why would Sibur and this man want to mend ties with the Europeans? They have to hope he blames Putin fully for his troubles.

Oleg Tinkov, founder of Tinkoff Bank, a new kind of bank in Russia, and unlike all the state owned ones…this one is private and is publicly traded. Tinkov made his money by importing electronics wholesale and selling them in Russia at a markup. He models himself on Richard Branson. Tinkoff is Europe’s largest digital bank (no retail offices, just ATMs).

Tinkov said on Instagram that 90% of Russians opposed the war. That makes sense, many Russians, including soldiers, know people living in the Donbass regions of Donetsk and Luhansk, the epicenter of the current crisis. Eastern Ukraine, especially in Donbass, is majority ethnic Russians. Many of those Russian-Ukrainians have fled, were killed in 8 years of civil strife, or have toughed it out at home hoping for better days. Yet, on the war Russians know well due to family and Ukraine-based friends in the crossfire, said, “How could the army be good if everything else in the country is s**t and mired in nepotism, sycophancy and servility?”

The U.K. has since reversed some of the travel restrictions imposed against Tinkov, Vedomosti reports.

Alexander Shulgin, former CEO of Russian e-commerce major Ozon, which had a successful New York IPO last year, where it raised $1.2 billion. It is known as the Russian Amazon

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. Shulgin was forced to step down as CEO of Ozon in April after the EU and Australia announced sanctions on him. Like Konov, the rationale was that he attended a meeting of business leaders with the Kremlin on February 24. Reports in the media say that attendance of the meeting was mandatory. Ozon sells globally to the Russian diaspora. Logistical bottlenecks caused by the war in Ukraine have upended their business there.

Anatoly Karachinsky, founder of software companies Luxoft and IBS Group, was sanctioned by the US. In Russian business circles, he is simply known as a career executive and entrepreneur, not an oligarch anywhere near Putin’s inner circle. He might be a supporter of United Russia, but so tens of millions of babushkas nationwide.

In one interview, he said that “We’re building a high-tech company along western lines. Sooner or later, all employees will become shareholders.” Luxoft was acquired by DXC Technology of Ashburn, Virginia in 2019. They own 83% of Luxoft shares now and sold their Russian operations to IBS Group in April.

It is unclear if the Europeans, or the U.S., have any specific intel on these guys, such as they are off-the-reservation FSB assets, or were caught money laundering for Russian state-owned enterprises. None of them are under investigation by U.S. criminal courts.

Tinkov once had issues with taxes in the U.S. and had to pay a hefty fine last year.

Sanctions will enact damage to the Russian economy.

Moves away from its oil and gas market will have long term consequences and disable Russia’s ability to use energy as leverage in its diplomacy with Europe.

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Perception is another factor. Doing business with Russia is now deemed toxic, which makes one wonder if executives who run consumer software firms and search engines will forgive and forget.

Their market expansion opportunities are all in Europe, and that may be evaporating. Ukraine doesn’t want anything to do with Russia, though Yandex is still the premier search engine there.

China isn’t interested in Yandex or Tinkoff Bank. That’s not a growth market for them. Maybe Kazakhstan and Uzbekistan are, but these are small countries in comparison.

One also has to assume that these sanctioned individuals have some sense of loyalty to their homeland. It’s not a far stretch to imagine that they feel they are being punished for being Russian.

The efficacy of the sanctions regime to date mostly comes down to the success it had in turning Western capital off from Russia. The plummeting of the ruble after Russian foreign currency reserves were frozen quickly reversed once oil prices rose and Russia demanded payment for its oil and gas exports in rubles.

With fewer oligarchs and high-profile targets left, the West is resorting to sanctioning Russia’s newest business class – the ones who will lead post-Putin Russia. They are freezing shares in companies which have close links with European industry and marginalizing modern Russian businesses after spending a decade of calling the country nothing more than a “big gasoline station masquerading as a country,” as the late Senator John McCain famously said.

Is making Russia’s most Western-facing businessmen answerable for what its political, defense and intelligence apparatus having an impact on the war? Other than ruining Russia’s economy, which is the goal, then no, it is not.