World Latest sanctions push Russian economy into a 'new stage'

Compared to the sunny, palm-lined offshore tax havens where Russians typically stash their fortunes — think the British Virgin Islands or Cyprus — two chilly, windswept Russian islands would seem to offer little.

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London’s financial district, Feb. 7, 2018. London has for decades served as a haven for Russia’s wealthiest families, who own iconic British assets, from Chelsea Football Club to whole swaths of the city’s high-end real estate market. play

London’s financial district, Feb. 7, 2018. London has for decades served as a haven for Russia’s wealthiest families, who own iconic British assets, from Chelsea Football Club to whole swaths of the city’s high-end real estate market.

(Andrew Testa/The New York Times)
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Yet October Island, a glorified swamp in Russia’s European exclave of Kaliningrad, and Russian Island, a former cow pasture facing the far eastern port of Vladivostok, were highlighted by Moscow this week as potential alternatives.

Washington’s imposition of unexpectedly tough sanctions against several leading oligarchs is in many respects a game-changer for Russia, with repercussions that are only slowly coming into view. Establishing tax havens within the country was just one reaction by the Kremlin, seemingly caught off guard as aftershocks rippled through currency and financial markets.

“Russia has no strategy on how to react to this situation, to these new economic circumstances,” Evgeny Gontmakher, a prominent opposition economist, said.

The most immediate effect is being felt by Oleg V. Deripaska and his aluminum giant, Rusal, which has lost about one-third of its value on the Moscow stock exchange. “This is a new stage,” Gontmakher said. “This is targeting for isolation a very big, export-oriented company. That is very painful.”

The ramifications could also be felt by wealthy Russians in London, as Washington warned British banks on Tuesday that they could face severe penalties if they continued dealings with any of 24 Russians named in the sanctions, including seven oligarchs.

Paradoxically, the sanctions could help President Vladimir Putin to accomplish a long-held goal of putting more of the economy under state control and pressuring billionaires to bring their money home.

Yet the sanctions might also work against Putin’s interests, forcing some of the wealthiest Russians to decide just how closely they want to be identified with the Kremlin by financing militias, political organizations or other adventures abroad. “Anyone who wants to help the Kremlin outside will think twice,” said Konstantin Gaaze, an analyst and frequent contributor to the Moscow Carnegie Center website.

In a larger sense, the sanctions are expected to have a limited overall effect after the initial shock wears off, because they ultimately targeted just a handful of companies. But the virtual sequestering of a critical Russian commodity producer has introduced a strong element of uncertainty into dealings with all Russian raw materials, the taproot of the country’s income, which is likely to further isolate Russia from the world.

The initial government response was muted, with Dmitri S. Peskov, the spokesman for Putin, telling reporters that “it would be wrong to make hasty decisions” and predicting that the value of the ruble and the Russian stock market would bounce back once emotions settled down.

Given the tiny size of the Russian economy — around 2 percent of global GDP — and its limited trade with the United States, there was little expectation of economic retaliation. Any Russian response was likely to come in places like Syria or Ukraine, analysts said, where the Kremlin might ratchet up tensions in order to leverage any solution on ending the sanctions.

With a U.S. strike in Syria possible at any moment, in response to what was suspected to be a chemical weapons attack by the forces of President Bashar Assad, an occasion for that scenario might materialize quickly.

Russia had been lulled into thinking no significant sanctions were coming. In January, in response to a new U.S. law last summer demanding tougher action against Moscow, the Trump administration did nothing more than publish a list culled from the pages of Forbes Magazine of every billionaire in the country along with the Kremlin’s internal telephone directory.

“People thought this was a joke, but now it is clear that the situation is serious,” said Vladislav S. Zhukovsky, an economist and investment consultant. “This is more serious than the previous sanctions.”

The two most prominent industrialists targeted were Deripaska, whose Rusal company employs an estimated 60,000 in Russia, and Viktor F. Vekselberg, one of the richest men in Russia, whose projects include trying to develop the country’s tech sector.

Overall, the sanctions were imposed on seven Russian oligarchs, 12 companies they control and 17 senior government officials who the U.S. Treasury said profited from the Russian state’s “malign activities” around the world.

“It is not clear what are the key sins that got people transferred from the big list to the small list,” said Kirill Rogov, an independent political and economic analyst. “The logic is not clear, which increases the risk for all others.”

More possible sanctions are already in the pipeline, following the poisoning in Britain last month of a Russian former spy, Sergei V. Skripal, and his daughter, Yulia. A draft law in Congress would ban Americans from any dealings with new Russian sovereign debt.

In the end, the most important ramification of this round of sanctions is the uncertainty they introduce to all of Russia’s dealings with the West. “There is a big possibility that this is only the beginning of the campaign,” Gontmakher said.

The government said it would address that uncertainty by providing whatever support was needed to keep the targeted companies functioning and their employees in jobs. “The main thing now is to minimize uncertainty while securing the stable functioning of the companies, where hundreds of thousands of people work,” Arkady V. Dvorkovich, a Russian deputy prime minister, told an economic conference on Tuesday.

Most analysts suggested that the Kremlin was likely to buy Rusal, for example, and try to rebrand it to avoid it being stigmatized on the world market and to sell the aluminum at rock-bottom prices just to keep Russians employed. This might well provide a multibillion-dollar payday for Deripaska.

To the dismay of liberal economists, Putin has pushed state ownership of the economy from about 35 percent to between 50 and 70 percent, and taking over Rusal would further expand government control.

Russia weathered a previous round of sanctions over the annexation of Crimea in 2014, which limited its access to Western capital markets, cut off arms sales and limited technology transfer. The latest are narrower, but more intense, analysts said, since they effectively shut out a giant commodity producer from Western markets.

The Kremlin has been trying to force rich Russians to bring their money home and the sanctions might help. “As one of our clients said, when sanctions were introduced it was the wrong way to destroy Russia,” said Oleg Kouzmin, chief economist at Renaissance Capital, a Moscow investment bank. To really wreak economic havoc in Russia, he joked, the West should roll out the red carpet for assets from the oligarchs, effectively stalling the Russian economy.

Habitually, tycoons have feared falling afoul of the Kremlin and having their assets in Russia seized, but any oligarch cut off completely from international financial markets might be more amenable to shifting funds home. Still, it would be only a short-term fix, noted several analysts, because Russia is not a big enough or attractive enough market for significant, sustained investment.

“We have to understand that we are entering a new reality — Russia is being turned into a toxic asset,” said Zhukovsky, the economist.

This article originally appeared in The New York Times.

NEIL MacFARQUHAR © 2018 The New York Times

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