NEWS

Russia's elite are nervous about new US sanctions

There's a chill settling in over Moscow, and it's not just the arctic temperatures that typically smother the Russian capital in January.


As U.S. officials put the finishing touches on new financial and travel sanctions against Russia, expectations that the punitive measures will target an expanded list of secondary companies, as well as Kremlin-connected insiders and business leaders, are causing consternation.

Unlike previous rounds, when Washington tried to punish Russia for its actions in Crimea and Syria by targeting big fish like major state-run firms and government agencies, the focus is shifting. The new wave to be announced by month's end is expected to be broader, focusing on companies that do business with previously sanctioned entities, closing loopholes that allowed Russia to skirt punishment, and identifying — and potentially going after — the Kremlin's inner circle of smaller fish.

Moscow appears to be on edge. One official has accused the United States of trying to influence the upcoming presidential election. An influential Russian newspaper has reported that as many as 300 people close to President Vladimir Putin's inner circle could be identified. And financial institutions are taking steps to minimize their risk.

Vladimir Putin held the first meeting with Government members this year. (Image from Moscow Kremlin)

'Freaking out'

"It is true that the Russians have been freaking out over this for more than a month now," said Daniel Fried, who was formerly the chief sanctions coordinator at the U.S. State Department.

Andrei Piontkovsky, a Russian political analyst now based in Washington, D.C., echoes that assessment. "The expectations are very gloomy" in Moscow, he said, "because for the first time, it will bring personal pain to those closest to Putin."

The new measures, expected to be rolled out beginning Jan. 29, stem from a bill passed overwhelmingly by Congress last summer and signed reluctantly into law by President Donald Trump in August.

Known as the Countering America's Adversaries Through Sanctions Act, the law firstly provides for "secondary sanctions" that broaden the restrictions against people or companies doing business with Russians hit earlier.

The earlier measures were imposed by Trump's predecessor Barack Obama not only for Russia's Crimea annexation in 2014 but also for Moscow's alleged meddling in the 2016 U.S. presidential election, its military campaign in Syria, and other things.

Related: US intel officials report that Russian leaders think US wants to topple Putin

In October, in the first indication of whom the new law would be targeting, the State Department put three dozen major Russian defense companies and intelligence agencies on notice, indicating that other companies, Russian or foreign, who do "significant" business with them could face restrictions.

In theory, this meant that a foreign bank that provided credit to a company supplying a previously sanctioned Russian state-controlled company could be targeted for doing business with listed companies. That might include state arms exporter Rosoboroneksport or the legendary weapons-maker Kalashnikov.

'Oligarchs list'

The law also ordered the Treasury Department, in coordination with intelligence agencies, to provide Congress with a list of prominent Russians and their family members who would potentially face direct restrictions. Known as Section 241, the instruction includes identifying oligarchs according to "their closeness to the Russian regime and their net worth."

This, in theory, could target the daughter of a high-ranking Russian official who owns property in the United States, or the head of a major industrial corporation with holdings in the West.

Around Washington, close observers of the sanctions process are calling it "the oligarchs list."

"This will hit people because it shows they are not safe; that the U.S. is willing to go after this class of people and Putin cannot protect them… that there will be consequences for Russians who seem to be in Putin's corrupt inner circle and [are] aiding and abetting his corrupt activities," Fried told RFE/RL.

Those included will not immediately face financial or travel restrictions, but experts say it would be a clear signal of what may soon come and, more immediately, would have a major psychological effect on those listed and those who do business with them.

It could also foreshadow a public record of some wealthy Russians' sources of income and assets in the United States.

"For some people, it's very personal. For others, it will be very political," said Olga Oliker of the Washington-based Center for Strategic and International Studies. "The question is: What's the signal that is being sent by the administration and how will it be received in Moscow?"

The Kremlin in Russia. (Photo from Wikimedia Commons)

Parlor-game guessing

For the moment, the potential nominees for the "oligarchs' list" is a closely held secret by both members of Congress and administration officials. But sanctions experts, Russian opposition activists, and Western lawyers and business groups have been trying to guess. Some wealthy Russians have also stepped up quiet lobbying campaigns in Washington, trying to persuade Congress or administration officials to keep them off the list, according to several observers.

On Jan. 12, the Russian newspaper Kommersant, citing its own sources in Washington, said as many as 300 people could end up being listed, a number that includes both officials themselves, but also their relatives.

In December, a group of Russian opposition activists with backing from chess master and outspoken Kremlin critic Garry Kasparov met in Lithuania to compile their own sanctions list. The compilation features more than 200 names, including prominent business tycoons who have so far avoided restrictions, including Aleksei Mordashov, owner of the steelmaking giant Severstal, and German Gref, chief executive of Russia's largest state bank, Sberbank.

Several prominent Russians included in the opposition group's list were already on earlier U.S. sanctions lists, including Sergei Ivanov, an ex-defense minister and President Putin's former chief of staff; Lieutenant General Igor Sergun, head of Russian military intelligence; and Gennady Timchenko, an oil trader hailing from Putin's hometown of St. Petersburg.

Garry Kasparov. (Photo from Flickr user Gage Skidmore, cropped to fit)

The Treasury Department did not immediately respond to queries about its upcoming list.

Credit crunch

One indication of how the Kremlin has sought to get ahead of the new measures came in November. The business newspaper Vedomosti reported that Prime Minister Dmitry Medvedev had signed a decree that would exempt Russian state companies from the requirement to disclose the names of their contractors.

Already there are signs that financial markets, in and out of Russia, are factoring the likelihood of sanctions into predictions for 2018. But among bond traders, equity dealers, and other portfolio managers, the measure that has prompted most worry is a possible restriction on buying Russian government debt.

That measure is seen as an attempt to close a loophole that allowed Russia to skirt sanctions imposed in 2014 that cut certain companies close to or controlled by the state from international credit markets.

The Kremlin ended up bailing out those companies to the tune of tens of billions of dollars and was still able to raise capital on its own. In 2016, for example, Russia sold around $3 billion in new Eurobonds.

The Countering Adversaries law includes the possibility that U.S. citizens could be barred from buying ruble-denominated, Russian government bonds. It's unclear how much of Russia's overall sovereign debt is held by Americans, but Central Bank data from October showed that foreigners held about $38 billion of it.

That decision won't be handed down for some months, but still, analysts predict a ban would put severe pressure on the Russian ruble, which plummeted in 2014 after the Crimea sanctions and amid low world oil prices and has yet to fully recover. In the medium term, that would drive up inflation, Bank of America/Merrill Lynch said in a research note in December.

Ripple effect

Some Russian financial institutions have also given indications that whatever the measures are that end up being issued by Washington, they will ripple through the country's economy.

For example, Alfa Bank, Russia's largest private commercial lender, said it was cutting back its exposure to the country's formidable defense industry.

"This does not mean that we have severed relations with it overnight," Oleg Sysuyev, a deputy chairman of the bank's board of directors, told Ekho Moskvy radio. "But we are just trying to minimize risks."

In the short term, that could pose a direct challenge to Putin, who will run for another term as president in the election scheduled for March, a month after the new measures are unveiled.

Deputy Foreign Minister Sergei Ryabkov alluded to this on Jan. 13 when, in comments to the state news agency TASS, he charged that the U.S. measures were an attempt to influence the vote.

Deputy Foreign Minister Sergei Ryabkov. (Photo from Flickr user Moscow CTBTO Youth Group Conference. Cropped to fit)

Piontkovsky, a longtime critic of the Kremlin, predicted that the U.S. move to target more individuals could help undermine the broad support that Putin has enjoyed for years.

"It means he is losing his meaning for the elites, his function was to protect them, and their assets in Russia and the West, to ensure their security. And now, on the contrary, he is becoming toxic," he said.

The question now, according to Oliker, who directs the CSIS's Russia and Eurasia Program, is whether the new sanctions will, in fact, affect Kremlin policies.

For example, with the conflict in eastern Ukraine grinding into its fourth year, dragging on Russia's economy and losing popularity among Russians, there's good reason for Russia to pull back on its support for separatist fighters.

However, it would be virtually impossible for Putin to pull back if it appeared he was giving in to the pressures from U.S. sanctions, she said.

Depending on who or what is targeted, the problem is that the new measures could reinforce the perception — encouraged by the Kremlin — that Washington only wants to damage Russia, Oliker said.

"In Russia, the pervasive narrative is that all the sanctions are merely to punish Russia — [that] they're punitive, it's not a matter of attaining actual policy goals," she said. Many think "it's just those nasty Americans trying to get us."

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