Titans in Russia Fear New Front in Ukraine Crisis
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Pro-Russian protesters Monday in Donetsk, Ukraine. Russian oligarchs are facing the prospect of economic fallout from the crisis. Credit Uriel Sinai for The New York Times
MOSCOW — When Vladimir V. Putin returned to the Russian presidency in 2012, one of the first messages he sent to his political elite, many of them heads of banks and large corporations, was that the times had changed: Owning assets outside Russia makes you too vulnerable to moves by foreign governments, he told them. It is time to bring your wealth home.
Nearly two years later, those words seem almost prophetic. After a week of escalating tensions between Russia and the United States, it has become clear that the conflict over Ukraine will move to the battlefield of finance. Those same business titans are now contemplating the damage that the crisis could inflict on Russia’s economy.
Twenty years into the project of integrating Russia into Western institutions, they now face the prospect that the process could slow, or even reverse.
Financial sanctions, which the United States and the European Union have suggested they will impose if the conflict escalates, are intended to test the cohesion of the political system. Mr. Putin demands complete loyalty from those who are allowed to lead Russia’s business empires, and he has made it clear that he will punish those who undermine him. His tough stance in Crimea, meanwhile, has been enthusiastically welcomed by the general public, including, insiders say, many of those in business. No one is breaking ranks.
Still, the prospect of losing access to Western finance is a frightening thought for Russian business leaders, whose voice in foreign policy decision-making is muted compared with the tight circle of Mr. Putin’s former K.G.B. colleagues, for whom economic factors may be secondary.
Anxiety over possible economic fallout has begun to radiate from business circles, and some wondered whether Mr. Putin had been warned clearly about the magnitude of the possible damage to the economy. One analyst described their mind-set as one of “cognitive dissonance.”
“I’ve seen 10 people from the Forbes list in the recent few days. They’re pale; they don’t understand,” said Aleksandr Y. Lebedev, a prominent banker who sold most of his Russian assets after public disputes with Mr. Putin. But the oligarchs realize, he said, that their interests carry no weight in this situation, especially if they, like Mr. Lebedev himself, own property outside Russia.
“It’s those who are here who will take the burden,” said Mr. Lebedev, speaking from Moscow. “They all keep their mouths shut.”
Last week, days after Russia took control of Crimea, the United States announced a modest first round of sanctions, and the European Union indicated it would follow suit, with both making it clear that there may be further rounds. Officials have suggested that a range of measures is being considered, leaving open, by implication, the most extreme one: barring Russian companies and banks from access to the Western financial system, similar to sanctions adopted against Iran.
President Obama has broad executive powers to declare sanctions without approval from Congress, and he would most likely consider the next steps after Crimea votes in a referendum on separating from Ukraine, scheduled for Sunday, said Michael A. McFaul, until recently the American ambassador to Moscow. “It needs to be spelled out as explicitly as possible, either directly to Putin or to the two or three people who could talk to him about this,” he said.
Russia may be betting, as many analysts do, that the United States and its allies will not follow through with draconian sanctions, and has made it clear that it would respond harshly and asymmetrically. On Friday, Gazprom hinted that it might cut off gas exports to Ukraine over unpaid bills, as it did in 2009, and an unnamed Defense Ministry official told Russian news agencies that it would consider stopping international inspections of its nuclear weapons.
Russia’s tycoons have been silent since the crisis began, apart from approving messages on social media. Many inside Russia’s large corporations are no doubt supportive of Mr. Putin’s moves in Crimea, which are widely seen here as correcting a historical error made by the Soviet leader Nikita S. Khrushchev, when he transferred Crimea to the Ukrainian Soviet Socialist Republic. Mr. Putin’s approval ratings are at their highest point since he returned to the presidency in 2012. If corporate leaders are complaining, they are doing it quietly.
“Of course they’re upset, but it doesn’t mean they are prepared to challenge Russia’s foreign policy,” said Mikhail E. Dmitriyev, an economist whose research group, the Center for Strategic Research, was originally founded to shape Mr. Putin’s economic platform. “This is a new reality. Even if somebody has reservations with regard to the policy’s effectiveness, I strongly doubt they would express it. This is a policy which, for the moment, is backed by the vast majority of the public. It’s not an exaggeration.”
In private conversations, though, several people described high anxiety within corporations, especially about the prospect of any sanctions’ affecting banks. Large Russian corporations have significantly increased foreign borrowing in recent years, and 10 were negotiating loans when the crisis boiled over, said Ben Aris, the editor and publisher of Business New Europe. Financial sanctions could set off a chain reaction of blocked transactions, frozen accounts and bank closings. “Those oligarchs who are already having trouble would be completely cut off,” he said.
Sberbank, the state retail bank, and the state investment bank VTB have actively expanded into Eastern Europe, including Ukraine, and own assets in Western Europe and the United States. Rosneft, the state oil company, has a deal with Exxon Mobil to drill in the Russian Arctic, the flagship project of Igor I. Sechin, a deputy prime minister and one of Mr. Putin’s closest aides.
Some pointed to a more long-term danger that the conflict over Ukraine, if it escalated, could culminate in a turn toward isolation for the Russian economy.
“It may be that we look back on the events of last weekend and remember it as an inflection point when Russia’s growing integration with the planet, which has been remorseless — Russia has integrated into the global architecture, and people feel they are part of the world — maybe we look back on this weekend as a time when there were a big set of steps back,” said Bernard Sucher, the former head of Merrill Lynch in Russia.
It is unclear how heavily Mr. Putin weighed the economic consequences when he decided to take control of Crimea. During his first years as president, Mr. Putin was known as an economic liberalizer, and one of his most trusted advisers was Aleksei L. Kudrin, the liberal-leaning former finance minister who gave him his first job in the Kremlin administration.
But Mr. Putin, whose return to the presidency was opposed by many urban liberals, now makes his most important decisions in an inner circle of men who emerged from Soviet security services. Among the first new projects in his new presidency was a push to “nationalize the elite,” requiring officials to sell off investments and properties outside Russia that could, in his view, undermine their loyalty in the event of a confrontation with the West.
Indeed, among the small group of people present when Mr. Putin made the final decision on Crimea, according to officials and analysts, were five or six former K.G.B. colleagues believed to have minimal assets outside Russia, and who were therefore not vulnerable to sanctions. Some of those now closest to Mr. Putin, like the head of the Russian Railways, Vladimir I. Yakunin, have long argued for Russia to turn away from Western economic models and toward Chinese-style state capitalism.
In a column in the Russian newspaper Vedomosti on Friday, the economist Yevgeny S. Gontmakher described a number of painful steps that might allow Mr. Putin to manage an economic contraction: increasing taxes on the rich and the middle class; reducing spending on education, health and social services; decreasing unemployment payments and subsidies to struggling factories; and reallocating the budget to support constituencies crucial to social stability, like pensioners and state employees. All of them, he pointed out, would require tightening social controls.
Mr. Dmitriyev, who has remained in touch with the economic officials who advise the Kremlin, said he believed Mr. Putin had a clear understanding of the potential for damage to the economy when he made the decision on Crimea.
“Economic risks are an important factor in the whole policy agenda, but of course this is not the only factor, and the Ukrainian events cannot be wound back,” Mr. Dmitriyev said. “This is a ratchet mechanism which unwinds in only one direction. This is one reason there is a lot of wishful thinking in the West.”
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