Many more Russian oligarchs, bureaucrats, companies, and businesses can expect to appear on future U.S. sanctions lists. Russia, not seeing an immediate catastrophic effect, will respond to new sanctions by searching for more enemies within and ramping up anti-American propaganda. The United States, which loses nothing from this policy, isn’t likely to initiate change. So it will be up to the Kremlin to change its approach — before it’s too late, says Andrey Movchan on Carnegie Moscow.

by Andrey Movchan

The expansion of U.S. sanctions to 24 individuals and 14 companies linked closely to Russia should not have come as a surprise to anyone: the United States had warned many times that oligarchs close to the Kremlin might be added. Andrei Skoch and Suleiman Kerimov, two of the businessmen who were added, have long been politicians, and have restructured their property accordingly, and therefore won’t fall under the purview of the sanctions. Vladimir Bogdanov, the head of Surgutneftegaz oil company, who was also included on the latest list, had only been left off previous lists by a fluke: Surgutneftegaz itself has long been under sanctions. Only two names add a new dimension to the list: Oleg Deripaska and Viktor Vekselberg.

Aluminium King Oleg Deripaska saw Rusal stocks drop 50 %

The choice of two major Kremlin-controlled businessmen who had been working productively with the United States and with Americans would seem random if not for one thing that unites them: aluminum. Deripaska’s En+, together with SUAL, co-owned by Vekselberg, are the two main owners of Rusal, the Russian aluminium giant.

The United States consumes 16 percent of the world’s aluminium, but due to economic inefficiency in recent years, American production has dropped fivefold to less than 1 million tons a year. The Trump administration has announced the beginning of a fight to revive domestic aluminium production. That’s why the 10 percent import tax on aluminium was conceived, and it’s also the reason for the sanctions against Rusal and En+: as a result, there will be 700,000 tons less aluminium on the U.S. market.

Of course, the first civilian casualties of the sanctions war must be aggrieved: En+ stocks fell 25 percent following the announcement of the sanctions, Rusal stocks dropped 50 percent, and the decline continues. U.S. investors and spooked amateurs are pulling out, traders are putting contracts with Rusal on hold, and there are many more small problems ahead: company employees with U.S. citizenship will likely quit to avoid violating the sanctions, and European and Asian partners will reevaluate cooperation programs (this is especially important for the Hong Kong–based Rusal).

Billionaires are stewards

But Russian billionaires differ significantly from their American counterparts, both in status and strategy. Russian oligarchs quite justly view their Russian assets as only temporarily taken for management from the state. They might formally own a business empire on Russian territory, but in reality, they are only junior managers working at the pleasure of the Kremlin. When these businessmen get stabbed in the back by the United States due to Kremlin policies, they don’t have much of a choice.

Speaking out against the Kremlin would be a shortcut to at best losing their fortune, and at worst ending up behind bars. Fleeing to the West is no longer possible after being sanctioned: by labeling the oligarch 'pro-Kremlin', the West has cut off this option. In any case, the only tycoons who can move abroad are those who have existing foreign assets, a decent reputation, and can prove that they earned their assets through hard work, not through corruption and collaboration with the state. There aren’t many such oligarchs in Russia, and most of them have already fled.

The final option for oligarchs is to declare the sanctions a reflection of their loyalty to the Kremlin, signal absolute loyalty, threaten default, and ask for more financial support. The Kremlin, which views oligarchs as stewards looking after its property, will certainly fulfill such requests. Every possible form of support to those affected by the latest sanctions has already been announced, and they will undoubtedly receive preferential credit lines, better contracts, and, if necessary, tax cuts.

This is why Deripaska and Vekselberg’s reactions were so predictable. They are both working to restructure the empires entrusted to them by the Kremlin to adjust to the current situation, and are asking for support from their beloved government. Renova is selling Italian gas assets (which weren’t that profitable to begin with), reducing its share in foreign enterprises to less than 50 percent so that sanctions do not apply to those enterprises (a deal to reduce Renova’s shares in Switzerland’s Sulzer to 48 percent has already been announced), and focusing on the Russian, Iranian, and Southeast Asian markets.

Kremlin not worried

The Kremlin isn’t worried about the effects of the sanctions. It has never understood the meaning of shareholder value, especially for supposedly private companies. So Rusal’s market plunge hasn’t caused much concern: the production and sale of aluminium won’t be seriously damaged. And even if it were, a few billion dollars’ worth of exports for a country that grows several dozen billion in reserves per year is only a thorn in the side. This is mere collateral damage compared to the effect that the actions of the United States have on Russian society, which is to unite it around the Kremlin and the president in response to an external threat.

Russian society will unite around the Kremlin against US...

Strangely enough, as often happens in realpolitik, all sides are happy. The White House can report to voters that it is taking adequate measures against the dysfunctional Russian regime, while at the same time solving smaller problems like protecting American aluminium production.

In addition, the United States and Europe understand perfectly that a time bomb has been placed under the Russian economy by banning exports to it of sensitive technologies (and a de facto refusal by Western companies to deliver a far longer list of technologies, just to be on the safe side). Over the next ten to fifteen years, this boycott will lead to a loss of competitiveness in the few areas of Russian production that are still on par with the rest of the world. This means that dependence on imports will only grow, while the production of fossil fuels will decrease. Russia is being forced out of the set of countries capable of being economically competitive — and its foreign policy is a major factor in this. This essentially solves the West’s Russia problem without crises, catastrophes, the danger of the use of nuclear weapons, or crowds of refugees flooding out of Russia.

...but Russia is forced out of economically competitive countries...

The Kremlin can be satisfied with the result of its policy. The active greenmail of the global community and the latter’s clumsy reaction have been able to buoy the ratings of the ruling regime. At the same time, tough macropolitics prevent the economy from falling apart. The slow recession doesn’t worry anyone, and nor do the losses of oligarchs. Long-term prospects, in which Russia gradually tumbles to the level of an unsuccessful developing nation — albeit one equipped with nuclear missiles — are beyond the planning horizon for the current regime. There’s always the option of transforming into liberals and asking for help from the West: after all, uncontrolled nuclear weapons and crowds of refugees should worry them, not the Kremlin.

Many more oligarchs, bureaucrats, companies, and businesses can expect to appear on future sanctions lists: mostly (but not only) those whose sanctioning will boost Trump’s policy of supporting the domestic market. Russia, not seeing an immediate catastrophic effect, will respond to new sanctions by strengthening control within the country, banishing foreign media (and possibly embargoing certain goods and brands), searching for more enemies within, and ramping up anti-American propaganda.

...which is beyond the horizon of the current regime

All the while, the technology stranglehold will get tighter and tighter. Each new list (or prohibition, or obstruction in Russia) will be greeted as a new stage, a serious amplification, or a change in approach. Only when voters stop taking reactionary positions will politicians have to seek more rational ways of interaction. The United States, which isn’t losing anything from this policy, isn’t likely to initiate changes, so it will be up to the Kremlin to change its approach — before it’s too late.

This article was first published by Carnegy Moscow.