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Western sanctions and Russian oligarchs

Nigel Gould-Davies

Are Western sanctions on Russia working? Their effects on the economy as a whole, and on specific sectors, are much scrutinised. By contrast, their impact on Russia’s economic elite remains little studied. Yet this could prove highly significant, for two reasons. First, many elites are heavily dependent on access to Western economic and legal systems. Second, they are well placed to protect their interests. Elites have stronger intrinsic motivation and ability to minimise sanctions’ effects than the wider population.

Russia’s economic elite

Russia’s economic elite (holders of major private wealth, often termed “oligarchs”) emerged in the 1990s through a variety of mechanisms, all involving privileged access to the state. Their power has varied enormously over a short period of time. In the late 1990s a small group wielded enormous influence over a weakened state through access to the president and parliament, media ownership and funding of political parties. Under President Putin their influence declined drastically. He asserted state dominance, punishing and cowing the oligarchs into a far more pliant relationship with political power.

Since then, oligarchs have remained dependent on the state, but from a position of weakness, not strength. They are also more widely unpopular. A section of public opinion had never come to terms with their acquisition of major raw material assets through the loans-for-shares scheme. Oligarchs grew rapidly wealthier under Putin, but this bought neither political influence nor social legitimacy.

In response to this insecurity, oligarchs began to transform their relationship with the West, which until then had been relatively limited. But starting from the early 2000s, they began to invest heavily in influence and legitimacy there. Russian private wealth owners sought new markets and investment in the West. But more important, they sought access to western financial and legal systems to secure their wealth and safety. This took many forms: sending a large share of revenues to offshore accounts; making large property purchases; acquiring EU citizenship or permanent residency; concluding deals (even among themselves) under English law and resolving legal disputes in London courts; retaining top western PR companies; and using English libel law against critics. As a last resort, it could mean seeking asylum in the West.

In short, oligarchs compensated for domestic weakness by outsourcing material, and even some personal security to the West. The result was a new pattern of relations between the Russian state, its elites, and the West, from which all parties gained. Elites outsourced some of their security needs, making Putin’s system more tolerable and thereby stabilising Russia’s authoritarian political economy. The state tolerated elite activity abroad, and even supported it as a means of cultivating influence. Western interests, especially in the financial, legal, real estate and public relations sectors, benefited from the inflow of Russian money.

These arrangements were not without tensions, especially when Putin took a darker view of globalization from 2012 and called for repatriation of oligarch assets (“de-offshorization”). But the mutually-profitable oligarch-state-Western alignments remained strong despite decline in the wider Russian-Western security relationship. This began to change in 2014. The West’s imposition of sanctions in response to Russia’s annexation of Crimea, and subsequent behaviour, has put this web of ties under growing strain.

Sanctions and Oligarchs

Western sanctions target officials and state companies responsible for annexing Crimea, intervening in Eastern Ukraine, interfering in US elections and carrying out the Salisbury nerve agent attack. They also, directly and indirectly, impact oligarchs and their companies. In addition, some Western countries have tightened standards and scrutiny of foreign capital inflows. How have these developments affected oligarch interests?

Revenue. Some oligarchs have become wealthier as a sanctions-weakened rouble has lowered dollar costs of primary production. Agricultural producers have also benefited from Russia’s import sanctions on Western foodstuffs. Other effects have been negative. By slowing domestic growth, sanctions have hit domestic earnings. More striking, the United States has demonstrated its ability to cut off an oligarch, Oleg Deripaska (and implicitly other such figures), substantially from the global trading and financial system.

Investment. Tighter regulation is creating a less permissive environment. Some Russian companies have delisted from the London Stock Exchange. The UK has begun reviewing investor visas. Roman Abramovich took out Israeli citizenship following delay in issuing a new UK visa. Reports suggest he is considering selling Chelsea. In 2015, Mikhail Fridman's ````LetterOne was forced by the UK government to sell recently-acquired North Sea assets due to concerns that future sanctions could disrupt production.

Protection. This is the most important development. Western countries are now reviewing and revising access to their “oligarch valet services” of finance, law and property. The biggest provider, Britain, has introduced anti-money laundering, anti-corruption and “know your customer” regulations. By 2020 Britain’s Overseas Territories, where up to $100bn of Russian money has been sent in the past decade, will be required to hold publicly available ownership registries. Variants of the U.S. Magnitsky Act have been passed, or are being considered, in several EU countries. The exposure of the Danske Bank scandal, whose details are still being unravelled, exemplifies the new climate of concern.

These measures are so far modest. Oligarchs continue to reside, buy and invest, educate their children and resolve legal disputes in Western countries. But it is becoming harder for them to do some of these things.  And the new climate of critical scrutiny is undoing two decades of oligarch investment in reputation. The prospect of further measures creates more uncertainty.

Oligarchs face a more uncertain position in Russia too. Putin has stepped up calls to repatriate capital to Russia. The state’s role in the economy, which resurged soon after Putin took office, has grown further since 2014, partly as a consequence of defensive measures taken against sanctions. Proposed new taxes on commodity profits have prompted rare public defiance. Vladimir Lisin,, who is top of the Forbes Russia rich list, has criticised them as “promotion of inefficiency”. Meanwhile, struggle for control of the assets of a stagnating economy is intensifying. The “silovarchs”, economic interests with a security background who are tied to the state, enjoy a strong position.

In sum, Russian oligarchs face unprecedented challenges. For the first time, they are in a difficult relationship with state, society and the West simultaneously. As the state comes under pressure from the West, it is behaving in ways less reassuring for oligarchs. As the West comes to view oligarchs through the prism of security rather than globalization, it is less willing to provide the asset and legal security that has mitigated insecurity in Russia.

Oligarch Choices and Dilemmas

Oligarchs have innovated boldly in their strategies before – within Russia in the 1990s, and abroad the following decade. They are proven risk-takers. How might they respond to these new and worrying circumstances?

Exit. Choose the West over Russia by emigrating. Few oligarchs in any country do this. It incurs the great personal cost of cutting most ties with native business, culture. Even if the West still allows them to do so, this may not guarantee safety: a displeased Kremlin will still have means of monitoring and possibly punishing. With rare exceptions, exit will be chosen only by those for whom staying in Russia has become intolerably risky.

Loyalty. Choose Russia over the West by returning. This is also risky and unlikely. It would mean giving up most of the protection available in the West, making oligarchs and their wealth even more vulnerable to an increasingly unpredictable state. There is little sign of oligarchs heeding Putin’s call to repatriate capital or themselves. Some Russians may seek to keep wealth overseas, but beyond the West. It remains to be seen whether potential jurisdictions such as Hong Kong and Singapore can provide the security they seek.

Voice. Influence Russian policy. The major business lobby group, the RSPP, has actively lobbied for protection and compensation against sanctions effects. The government’s July 2018 package of anti-sanctions policies reflects some of its proposals. But this is an uncertain course. With oligarchs lacking national popularity, it is not clear how much help they can expect. A draft law to compensate Russian citizens for property lost to sanctions (the so-called “Rotenberg law”) was withdrawn after public criticism.

Could oligarchs go further, and seek to greater influence over policy, or even who governs? This would require a major shift in the relationship between private wealth and the state. The possibility has barely been discussed. The conventional assumption (rarely argued in detail) is that the oligarchs are far too weak to consider doing so. But the question is worth exploring for two reasons.

First, the weakening of the oligarchs after 2000 was rapid and unpredicted. Could this be reversed, in whole or part, and if so under what conditions? Major change has been a periodic feature of Soviet and then Russian development since the late 1980s. Russia’s weak institutions mean there are few constraints on systemic change. Preoccupation in Russia with the “2024 question” – what will happen when Putin’s presidential term ends – reflects this.

Second, economic elites typically play an important role in political change in other countries, especially where institutions are weak. By definition, they have access to the resources that help glue the networks underpinning power. Across the former Soviet Union, apparently strong regimes have suddenly proven weak and changeable when these networks cease to rally around them. This has repeatedly occurred in periods of uncertainty induced by elections (even imperfect ones) and succession. Will Russia follow or defy this wider regional trend?

If the domestic and international circumstances that oligarchs face continue to deteriorate, their incentives to seek change will grow. It would be surprising if some were not at least thinking about this. Less clear is whether they will have the opportunity to do so. There are three reasons why it might be especially hard for Russian oligarchs to mount a campaign for significant change, even if the regime’s handling of the “2024 question” creates the necessary uncertainty.

First, other, stronger networks may play a bigger role in any future. In particular, the “silovarchs” possess the coercive and economic resources to dominate, or resist, change. Second, oligarchs may prove too divided to overcome the collective action problem of coordinating risky action. When they were strong in the late 1990s they engaged in fierce rivalries. It may be harder to concert their efforts in more difficult conditions.

Third, oligarchs’ lack of popular support hinders their ability to mobilise support from below, as elites typically do when seeking major change. Putin’s declining popularity – his approval ratings have fallen to their lowest since 2011 – has resulted in regional election victories for the Communist Party, which is no ally of oligarchs. Oligarchs may conclude that, since some alternatives to Putin are less attractive, it may be safer to muddle through with the devil they know.


Oligarch access to Western legal, financial and property services has played a key role in stabilising the system that Putin has built. Sanctions on oligarchs and their companies, higher standards of scrutiny and more stringent enforcement challenge these arrangements. Further sanctions and related measures would impose deeper strain.

With conditions deteriorating at home and abroad, Russia’s economic elite is in an unprecedentedly discomfiting position. How oligarch interests translate into political outcomes depends on their political choices and resources. One possibility is that oligarchs will in due course seek some form of domestic change to protect their interests.

It is rare for major holders of private wealth to play no significant role in a country’s governance, or for their interests to be systematically overridden. Russia’s past three decades have witnessed striking and unpredictable change. Its future may also prove similarly unexpected.

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