Ukraine Showdown

As Europe Mulls Sanctions, Putin Supporters Quiet Oligarchs, Business Rivals

Russia's president Vladimir Putin: new sanctions could could weaken Russia's economy. Source: AFP.
Russian President Vladimir Putin faces new sanctions that could weaken Russia's economy.
  • Why it matters

    Why it matters

    Western sanctions on Russia are having severe repercussions on industry yet business leaders have few means of opposing President Vladimir Putin.

  • Facts

    Facts

    • The European Union and the United States imposed tougher sanctions on Russian firms on Wednesday, the day before the airliner crash.
    • EU foreign ministers meet Tuesday to consider tougher measures.
    • German industry is concerned at the impact of Russian sanctions on business back home.
  • Audio

    Audio

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Russia’s business elite are being forced to stand by helplessly as their country risks turning into a pariah state.

The shooting down of the Malaysian Airlines aircraft, flight MH17, over eastern Ukraine last week has further hardened international opinion, with pro-Russian separatists widely assumed to have been responsible for the tragedy in which 298 people died. However, Russian President Vladimir Putin insists Ukraine itself is to blame.

EU foreign ministers were meeting Tuesday to consider imposing further sanctions on Moscow in response to its involvement in the separatist movement in eastern Ukraine.

Now, many oligarchs in the country are coming to the conclusion that Mr. Putin is driving the country toward disaster, said Russian sociologist Olga Kryshtanovskaya, who has met with many top business managers and officials.

“But they cannot act against Putin, he is too powerful,” she told Handelsblatt.

A summit of EU leaders on July 16, the day before the airliner was downed, agreed to punish Russian companies that are helping to destabilize Ukraine and block new loans to Russia. A concrete list is to be presented by the end of the month.

The United States, meanwhile, imposed sanctions on a number of Russian companies, including natural gas producer Novatek, Gazprombank and oil giant Rosneft. They are now forbidden from borrowing money from American financial institutions or issuing debt to investors with links to the United States.

“The West can no longer ignore the war in eastern Ukraine”

Lilia Shevtsova, Moscow Carnegie Center

The West had already imposed sanctions on Russia in March after it annexed the Ukrainian region of Crimea.

The imposition of those tougher international sanctions will only serve to tighten the screws on Russia’s business elite, according to Russian analysts.

For example, Gennady Timchenko, who has a substantial stake in the gas firm Novatek, is set to lose a fortune. The company has seen its market capitalization drop by $3 billion (€2.2 billion) since last week’s sanctions were imposed.

The Putin loyalist could lose even more money if tougher EU sanctions see him lose out on building the Bulgarian part of the “South Stream” pipeline.

For now, Mr. Timchenko is talking tough. So too are the Rotenberg brothers, Arkady and Boris, who control two banks. The judo buddies of Mr. Putin have been on the U.S. sanctions list for months. They claim that they will do fine without access to Western credit.

Mikhail Kasyanov, the former Russian prime minister who has now gone over to the opposition, is convinced that “the Russian economy would collapse within six months if the entire financial system is placed under sanctions.”

Ahead of the Tuesday’s meeting in Brussels, Frank-Walter Steinmeier, Germany’s foreign minister, said: “Unfortunately, it is still not apparent that Russia is really using all necessary measures to influence the separatists.”

“Economic sanctions will not solve a still delicate political situation”

Rolf Langhammer, Institute for Global Economy in Kiel

If new sanctions are imposed then it could be a “wake-up call for those in Russia who up to now have underestimated our economy’s dependency on Western credit,” said Vladimir Milov of the Moscow Institute of Energy Policy.

Lilia Shevtsova of the Moscow Carnegie Center believes the Malaysian Airlines tragedy is likely to be met with tougher sanctions. “The West can no longer ignore the war in eastern Ukraine,” she said.

However, the sanctions should not be too tough, warned Aleksei Makarkin, a Moscow-based economist. “Otherwise it will have a counter-productive effect,” he said, adding that West could lose any influence it had left on Russia.

Meanwhile, some German analysts and business leaders are worried about the effects of sanctions on the vital trade links with Russia.

“Economic sanctions will not solve a still delicate political situation,” said Rolf Langhammer of the Institute for Global Economy in Kiel. “The politicians have to find political solutions.”

Sanctions damage not only Russia but also those affected by the sanctions, he said.

Malaysia Airlines Flight MH17 crash sparked new debates over E.U. and U.S. sanctions for Russia. Source: Reuters.
Malaysia Airlines Flight MH17 crash sparked new debates over E.U. and U.S. sanctions for Russia. Source: Reuters.

 

Deutsche Bahn, the German national rail company, which has close ties with the Russian state railway company RZD, is also concerned. The company wants to see a “diplomatic solution” to the conflict, said Rüdiger Grube, Deutsche Bahn’s chief executive.

EU sanctions against Russia can lead to a “dangerous spiral” and are thus an “unreliable tool,” Volker Treier, president of the German Chamber of Industry and Commerce (DIHK), told Handelsblatt. According to the DIHK, one in four export businesses in Germany is feeling the pinch over the sanctions imposed on Russia.

Marcus Felsner of the Central and Eastern Europe Business Association warned that the “hopes of a normalization of economic relations with Russia will have to be buried in the longer term.”

Hundreds have died in a pro-Russian separatist rebellion in eastern Ukraine. The insurgency began after Russia annexed the Crimea peninsula following the toppling of the pro-Moscow Ukrainian president in February.

Following last Thursday’s crash, rebels in eastern Ukraine had blocked access to the bodies for days. On Monday, night the rebels in the city of Donetsk handed over the airliner’s black box to a Malaysian delegation and on Tuesday morning, a train carrying the remains of 282 of the deceased was released and made its way to Kharkiv where Dutch and Ukrainian recovery teams were waiting.

Christoph Schlautmann and Dorit Hess contributed to this story

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