Posted on Nov 02, 2022
The EU sanctions against Russia have so far failed to reach their goal: to force its president, Vladimir Putin, to end the war in Ukraine. Instead, they have hurt the European economy, triggering double-digit inflation and a potential economic slowdown.
Sanctions have also derailed the efforts of a number of pro-Western Russian businessmen, who have spent years trying to steer the country towards a competitive and transparent market economy.
The West’s focus on Putin and his inner circle is understandable: in the authoritarian regime created by the current Russian leader, nearly all decision-making power rests in the hands of a small group of individuals. But this approach has led the West to lose sight of the country at large.
Russia is not limited to its president, who sought a land grab in neighbouring Ukraine to solidify his power. It is a country of 146 million people, nearly a quarter of whom say they oppose Putin’s actions – and this number may be much higher, given the well-known Russian hesitance to express their views in public opinion polls.
Russia also has an educated and well-developed private business community, which has been working with European businesses for years and strived to integrate European business practices – including respect for international legislation and the rule of law – at home.
Now, EU sanctions have called the West’s own adherence to the rule of law into question. According to reports, individual sanctions against Russian non-state businessmen and executives were based on hastily compiled news articles and public information.
The typical reasoning went as follows: this individual heads a large company that pays taxes to Russia’s federal budget (which includes defence spending), which makes them complicit in the war in Ukraine. In reality, large Russian companies pay most of their taxes to regional budgets, which aren’t used for military purposes. But even putting this aside, is it fair grounds to sanction executives for the mere fact that their company pays domestic taxes or plays an important role in the Russian economy? This approach has rendered any successful Russian businessman guilty by default, resulting in the sanctioning of individuals who played no identifiable role in the current conflict.
The West appears to lack enough expertise about Russian business and politics to craft smart sanctions. In 2018, when the U.S. was exploring stricter sanctions against Russia for alleged interference in its presidential election, it complied a list of 96 Russian “oligarchs” as potential targets.
This document didn’t contain any in-depth analysis on whom to punish and why. It turned out to be a copy-paste job from the Forbes ranking of all the Russians whom the magazine designated as billionaires. The U.S. plan was not ultimately implemented. But this spring, the EU approached sanctions in essentially the same way. It took a list of businessmen invited to a meeting at the Kremlin on February 24, which was published in social networks linked to the Financial Times, and imposed personal sanctions against nearly all of them.
Treating all Russian businessmen as “Putin and his oligarchs” is an outdated and deeply mistaken concept. “Oligarch” is a Greek word referring to a businessperson who has strong political influence. This term stuck to Russian businessmen in the 1990s and was relevant at the time: under President Boris Yeltsin, owners of Russia’s largest non-state banks took part in the privatization of government-controlled assets and strongly influenced political decision-making.
They even orchestrated Yeltsin’s re-election in 1996, despite his low level of public support. Back then, oil was cheap, the Russian government was weak, and a small number of well-connected tycoons called the shots.
Under Putin, things have changed. The Kremlin regained control of the political system and key state industries, cementing its grip on the back of surging revenues from the oil and gas sector. In the early 2000s, Putin set the new rules of the game with the persecution and imprisonment of the billionaire owner of Yukos oil company, Mikhail Khodorkovsky. The message to Russian businessmen was clear: you can lose everything if you interfere with politics in opposition to the president.
Today, there are few oligarchs in the old sense of the word remaining. Businessmen have become fully subordinate to the Kremlin and have no leverage over its decisions, whether they support them or not. “The power distance between Mr. Putin and anybody else is like the distance between the Earth and the cosmos,” as billionaire Mikhail Fridman, one of the oligarchs of the 1990s, put it in an interview with Bloomberg earlier this year.
When Putin meets with businessmen today, it is not a meeting of equals to discuss pressing issues. It is more like a summons to announce major shifts in policy, with an implicit message to key business leaders that they need to stay in line. At the infamous meeting on February 24 – which, by some accounts, had been planned well in advance – Putin gathered executives to explain post-factum why he sent troops into Ukraine (he has repeated the same reasoning in his public speeches). According to a number of sources, many businessmen left the meeting deeply frustrated.
After that event, most of its participants were blanket sanctioned by the EU. This included not only billionaires, some of whom indeed made their fortunes in the unfair privatizations of the 1990s, but also Western-minded CEOs of non-state Russian companies. Among these were the heads of internet technology giant Yandex, e-commerce platform Ozon, and private petrochemical company Sibur. All of them have since stepped down from their positions. At least 30 Russians, including the above, are now appealing EU sanctions on the grounds that they have no material basis linking them to the events in Ukraine.
It is reasonable to sanction state-controlled oil and gas companies, military equipment producers or state-owned banks. But other major industries in Russia – such as metals and mining, petrochemical production, pulp and paper, fertilizers, internet technologies and many others – have nothing to do with the government. They are dominated by private business and have made significant strides in adopting Western practices in areas like innovation, corporate governance and sustainability. Still, a lot of their products were sanctioned by the EU to “punish” Putin and make him end the war.
It is a grave mistake to equate Putin’s government with Russian businessmen and society at large. Many Russians, both public and private, have expressed their opposition to current policy, with hundreds of thousands leaving the country since the start of the war. Many more remain silent, as the Kremlin has largely cut off any channels to effectively and safely express one’s public opinion.
In these circumstances, it is not only useless but counterproductive to punish Russian private business for government actions over which they have no influence. This has resulted in the destruction of economic ties that took decades to build, leading to inflation in Europe and a rollback in Russia’s development towards a competitive market economy. The EU may be thinking that sanctions against Russian businessmen will inspire them to stage a “palace coup”. But for this to happen, they would need to be in the palace to begin with.
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