MACRO ADVISORY: Why some oligarchs are sanctioned and some are not

MACRO ADVISORY: Why some oligarchs are sanctioned and some are not
Any Russian who is rich and famous has been sanctioned by the EU for "contributing to Russia's economy" or being "close to Putin" but in reality many of those who are on the list shouldn't be as they are neither of these things, and many others that should be, arn't. / bne IntelliNews
By Chris Weafer CEO of Macro-Advisory October 26, 2023

"If the people who are in charge in the EU believe that because of sanctions, I could approach Mr. Putin and tell him to stop the war, and it will work, then I’m afraid we’re all in big trouble. That means those who are making this decision understand nothing about how Russia works."

Mikhail Fridman, Bloomberg interview, March 2022   

Sanctions against Russian oligarchs are a blunt tool and often misdirected. As top Russian oligarch Mikhail Fridman says, they have little influence over Putin and while the state is deeply involved with the stoligarchs, or state-sponsored oligarchs, it has little to do with the new generation of billionaires that made their fortunes in the boom years of the noughties from things like supermarkets or e-commerce.

Yet many of the “real economy oligarchs” are on the sanctions lists, mainly because they are famous and rich. However, even more stoligarchs that really do work in the Kremlin’s interests are not, simply because they are not on the western radar, argues Chris Weafer, the founder and CEO of Macro Advisory and former head of research at multiple Moscow-based investment banks, in a report on why some oligarchs are sanctions and others are not.

A veteran of the Russian market, Weafer has worked for some of the oligarchs, and met most of them. Below is an abridged version of the report. The full report is available via a link at the end of the article.


Government relations Russian style

The ability of most Russian businesses to influence President Putin and his foreign policy is exaggerated by Western media and politicians. To the extent that business can affect policy, it is usually only related to their direct interests and sector, and that requires significant resources. Most businessmen spend their GR (government relations) resources defending themselves against the government, not influencing it. This is normal in most economies around the world. The EU has over 12,000 entities on its transparency register which exist to “influence the law-making and policy implementation process of the EU institutions”. The OECD has described business lobbying as a global multi-billion-dollar business that employs a considerable number of individuals.

Three types of major businesspersons. There are three broad categories of the wealthiest businesspersons in Russia. First, managers of state-owned companies and owners of oil and gas companies, who are very close to the government and whose wealth is dependent on it (the “state tycoons”).

Second, there are the procurement tycoons, who have made money under Putin predominantly from government contracts. These persons have succeeded in business because of their influence over, or friendship with, Putin, instead of the other way around.

Third, there is everyone else in the private sector who tends to make money despite the state, not because of it. It is hard to imagine that sanctioning these individuals would exert any real pressure on the Russian president to change his policies concerning Ukraine.

EU forced to define leading businessperson. The EU Court’s recent reversal of some sanctions decisions is a welcome injection of reality into the process of deciding who should be sanctioned. It has forced the European Union to define more precisely what it means by a “leading businessperson”. However, we still believe that the current approach to sanctions targeting is based on a misunderstanding of how business and government relate to each other in Russia.

Proper sanctions targets. There are legitimate targets for sanctions in the Russian business community, and most of them are already on the EU’s list. These are either the businesspeople who were able to acquire assets from being close to the Yeltsin regime, and who still maintain close ties to the state into the tenure of Vladimir Putin, or Putin-era businessmen who built their wealth because they were close to Putin and who make most of their money through contracts with the government or with state-owned enterprises (SOEs).

It should be pointed out that not all of them have necessarily been listed as “leading businesspersons” – the grounds for their previous designation were premised on providing support to, or benefitting from Russian decision-makers and the Government of the Russian Federation or supporting or implementing actions or policies which undermine the territorial integrity, sovereignty and independence of Ukraine – which seem to be clearer grounds for designation than just being a “leading businessperson” operating in Russia. However, the EU Council now seems to put all businesspeople in this same basket.

Too wide a net. There is a group beyond this, however, who made money in sectors that have historically been of no interest to the Russian state, including consumer-focused and innovative sectors, like retail or technology, and did this without any help from the state. They conduct lobbying activities that would be recognizable in the West and meet with Putin as part of these efforts, but they have a strictly one-way relationship with his regime. It should be noted that many foreign businessmen did the same thing, and some met with Putin more often than did Russians who are now under sanctions.

The view is that these Russian businesspeople have been targeted simply because they are known in the Western states as they are either on “rich lists,” or because their companies carried out IPOs in the UK or U.S., or for other reasons not directly related to politics.

Putin trusts the state and only the state. As the diagram shows, Putin relies on the state-owned sectors (including industries managed by state-appointed managers) to provide stability in the economy and the country. The bulk of his meetings are with this group, especially in recent years. There are well-documented cases where President Putin has been openly hostile to private businessmen who fail to follow his agenda, such as Igor Zyuzin and Oleg Deripaska.


The European Union Council Decision (CFSP) 2022/329 of February 25th, 2022 amended the original Council decision on personal sanctions 2014/145/CFSP to add the following category to the list of sanctioned individuals: “Leading businesspersons involved in economic sectors providing a substantial source of revenue to the Government of the Russian Federation, which is responsible for the annexation of Crimea and the destabilization of Ukraine.”

On June 5th, 2023, this listing criterion was substantially amended to allow sanctioning of any “leading businesspersons operating in Russia” regardless of whether they are involved in the most profitable economic sectors or not.

The desire to reduce the Russian government’s revenues by sanctioning the main revenue generators makes sense from the EU’s point of view. However, the EU Council then went on to say in recital 4 in the preamble to Decision (CFSP) 2023/1094 of June 5th, 2023: “The Council has assessed that a relationship of mutual benefit and support exists between the Government of the Russian Federation and leading businesspersons operating in Russia. In particular, the Government of the Russian Federation has systematically allowed prominent Russian businesspersons to accumulate their wealth through the exploitation of natural and other public resources”.

The EU Council has also asserted that, in the explanation of its decision to sanction some Russian businesspeople, Russian businesses can exert some influence over the actions of the Russian government. They justify this by alluding to the businessperson’s presence at public meetings with President Putin, either one-on-one or in group meetings. If this were true, it would make sense to put pressure on these individuals, in the hope that they would be able to persuade President Putin to change his actions in Ukraine.

However, there are a number of problems with this approach. It misinterprets the position of the majority of prominent businesspeople operating in Russia today and exaggerates their real ability to impact the Russian government. The report will give a brief history of the businesspeople who have emerged since the fall of communism. It divides Russian businesspeople into three groups:

  • those who made money because they were close to Yeltsin and have maintained that proximity to the Putin regime;
  • those who have made money because they are close to Putin;
  • the rest, most of whom made their money through legitimate business operations.

Only two categories fit the EU Council’s description. Looking at the list of the hundred richest people in Russia, there is a group in the oil and gas sectors, as well as the base metals sector, who grew their assets due to their proximity to the Yeltsin Administration and, unlike the dispossessed oligarchs of that era, have maintained that proximity to the Putin regime.

There is a second group of businesspeople close to Putin that has built businesses whose sole or main source of income originates from state procurement or other forms of “favorable treatment” by the Russian state. These persons have succeeded in business because of their influence over, or friendship with, Putin, instead of the other way around.

These two groups have “a relationship of mutual benefit” with the state and are considered legitimate targets for sanctions. In simpler terms, in Russia power can give wealth, but wealth rarely gives one power.

The remainder don’t fit. This leaves a broad group of leading businesspeople who have been sanctioned simply for being known in the Western media or because they are on rich lists, as their companies carried out IPOs in the UK or the U.S. or for other reasons, without having any sort of mutually beneficial relationship with the Russian government. For instance, those who made money in consumer-focused and innovative sectors, like retail or technology.

Companies: the wrong target to reduce federal budget revenue. The EU Council has taken the position that even loss-making companies, which pay no tax, contribute to the Russian economy in other ways (as in the case of e-commerce company Ozon, which is a business effectively serving not the Russian state but ordinary citizens and SMEs, who pay taxes (such as VAT)). At the same time, the EU Council rejects the idea that it should sanction Western companies that are still large taxpayers in Russia.

Other missed targets. There are still a large number of rich Russian businessmen who are inexplicably absent from EU sanctions. There is also an emergence of a new set of businessmen who are buying up the assets of departing Western companies, clearly with the Kremlin’s blessing. They also are not sanctioned, almost entirely because they are not well known in the West.

Meetings with Putin

The diagram shows how frequently leading businessmen have met with Putin since he became president. This is notable because the EU Council has alluded to these public meetings as evidence of a given businessperson’s proximity to Putin and their ability to influence decision-making at a senior level.

Putin prefers managers of SOEs. The graph is dominated by Alexei Miller and Igor Sechin, the heads of Gazprom and Rosneft, respectively (also both close to Putin since his time in St Petersburg). These two, and other heads of state-owned companies like Alexei Kostin and German Gref, are marked in pale green, with private sector businessmen in dark green. The graph shows that heads of state-owned companies hold significantly more meetings with the Russian president than do their private-sector counterparts.

Yeltsin-era oligarchs predominate. Of the private sector businessmen, by far the most frequent guest of Putin has been Vladimir Potanin, who is the beneficial owner of Norilsk Nickel. The other point worth making here is that most of the meetings took place during Putin’s first term as president when businesspeople had significantly more access to him. These meetings are much less frequent now.

Covid ended this. There is no public evidence of Putin meeting with any of the oligarchs or any private sector business owner since the start of the outbreak of Covid in early 2020 or since. This is because his meetings have generally been curtailed, and businesspeople were unwilling to take the two weeks’ quarantine that was required before they could meet one-on-one with the president. Also, Putin has generally taken less interest in business-related issues since 2014, when he became more focused on foreign policy.

Not a perfect representation. This indicator is an imperfect guide to businessmen’s real contacts with Putin, as these are only the ones that are disclosed on the Kremlin website. There will be multiple other contacts and meetings that are not recorded. For instance, there is no mention of either the Kovalchuk or the Rotenberg brothers on the Kremlin website, yet they are known to be close to Putin and likely meet with him frequently. Either way, the EU Court held in its September judgments that participation in these meetings itself is not a decisive factor for sanctioning businesspersons.

Mechanics of a public meeting. Publicly recorded meetings between Putin and a businessperson are usually meant to send a public signal of Putin’s support for a particular decision that the businessman has been lobbying for. As such, the meetings likely mark the endpoint of a process of work between the businessman, the Presidential Administration, and the government. Once the meeting has been agreed upon and inserted into the president’s schedule, it is usually shown on television that night, with a couple of minutes of anodyne discussion for the viewers before the meeting is closed and the real business is discussed.

Foreign meetings. President Putin has also met with a number of foreign businesspeople. For example, he met four times with the CEO of Siemens, not including group meetings with German industry, twice with the CEO of Daimler-Benz, and three times with the CEO of BP. To be fair, most of these meetings took place before 2007. However, even after 2007, Putin met with foreign businessmen on numerous occasions – thus, he met with the CEO of ExxonMobil, Rex Tillerson, several times and even presented him with the Order of Friendship in 2013. This is not to accuse these companies of collaborating with Putin but to show that meetings with the president have long been a normal part of government relations for any businesses operating in Russia.

RSPP. The U.S. Chamber of Commerce, the largest lobbying organization by spending in the United States, is the direct counterpart of the Russian Union of Industrialists and Entrepreneurs (Russian acronym RSPP), which holds annual meetings with the Russian president as part of the process of lobbying the interests of its members. It was one of these annual meetings that took place on February 24th, 2022, which had been planned for several weeks in advance but had been repeatedly postponed due to issues with the participants’ schedules, and which has been frequently cited by the EU Council in its designation of businessmen who allegedly have significant influence over the government.

President Putin has evolved a quite formal structure of relations with business over the years. There is an annual meeting with the RSPP, which has both closed and open sessions. There is a lot of work that goes into preparing this meeting so that the businessmen can make requests to Putin which have already been pre-screened by the government with a solution prepared for the president to suggest. Companies will lobby to get their issues onto the agenda for this meeting, and the RSPP will negotiate with both the government and the Presidential Administration about the agenda, as well as the resolution of the issues raised.

Foreign business has its lobbyists. The necessity of lobbying in Russia is supported by the fact foreign businesses have created their representative bodies, including the Association of European Businesses, the American Chamber of Commerce, and the Association of International Pharmaceuticals Manufacturers, which spend their time working with the Russian government on amending regulation. Both sides welcome this constructive process.

Lobbying is one-way. The other point to make is that no one would expect any of the top twenty lobbying organizations in the U.S. to be able to affect the U.S. government’s military or diplomatic policy. If a U.S. drone kills innocent people in a foreign country, there is no point in sanctioning as an organization with significant influence over U.S. policy, even if it generates major revenues and is the seventh-largest lobbying spender in the country. Russian companies interact with the government at various levels. But there is no evidence of any case where a Russian company or business lobbying group tried to change a policy that was not directly relevant to its sphere of business.

International forums. A second forum for business is investor conferences, such as the annual St Petersburg International Economic Forum (SPIEF), the annual VTB Investor Forum, and the Far East Economic Forum. At these events, Putin always appears with a speech and meets with businesses. The president will often make business-related policy announcements at these events. Again, companies will lobby to insert themselves into the agendas. Before sanctions were imposed on Russia, there would generally be a special session with foreign businesses at these events.