Russia’s government moves towards further economic isolation as it expects new sanctions post-Helsinki

1. The meeting between Putin and Trump may result in new and more severe sanctions for Russia.

Vladimir Putin before the meeting with Donald Trump. Helsinki, July 16, 2018. Photo credit: Anatoly Maltsev; EPA/TASS

What happened

It may seem that the Helsinki summit has turned out hyper successful for Russia — Vladimir Putin has outplayed Donald Trump and has gained points internationally. But for Russia, the only real outcome of the summit where not a single document has been signed may only be represented by new sanctions, which are now being pushed by the Congress.

• In Russia, the results of the Helsinki summit are not perceived to be a clear-cut victory of Putin. Two federal officials, who were asked by The Bell to give an informal appraisal of the summit’s outcome, refused to talk about it. State TV channels, instead of discussing the victory of Russian diplomacy, criticise Trump for taking back his words about Russia’s noninterference in the American election and runt and rage at Trump’s opponents for their reaction following the summit. As for Putin himself, it was only once that he gave a public comment concerning its results — and he, too, had taken a swipe at the “forces that try to downgrade, to disavow the results of the meeting.”
• All this suggests that it is well understood in Moscow that the outcome of the summit, which had culminated in a scandal in the USA, may have grave consequences. Real benefits for Russia following the summit is yet unclear. Even Trump’s meeting with Kim Jong-un resulted in signing a joint statement, whereas his meeting with Putin has left nothing on paper — and verbal statements, as is the case with Trump, can be perfectly easily swallowed and altered every other day. But at least one negative consequence is evident — now the sanctions policy of the frenzied American lawmakers will be way more hardline. The best confirmation of this is the Congress’s coming around to considering the DETER Act by Senators Marco Rubio and Chris Van Hollen. Half a year ago its authors did not even introduce the draft bill for consideration — at that time it had no chance for adoption.
• It’s a coin toss whether the Rubio-Van Hollen draft bill will be adopted in its original form or become a basis for new sanction measures. But in all likelihood, two of its main clauses will find their way to any new anti-Russian law: the capability of imposing new sanctions without the President’s consent and the list of tough measures exercised against Russia in case of a new accusation of election meddling.
• DETER Act proposes economic sanctions against Russia whose severity is unparalleled — freezing all American assets and correspondent accounts of all Russian state banks, energy and defense companies and everyone detailed in the “Kremlin List” (i.e. the whole оf the Russian Forbes List), as well as а the ban for working with Russian sovereign debt for American investors. Anastasia Likhacheva, an economist of the Moscow Higher School of Economics, says that the potential harm inflicted by these sanctions upon Russia’s economy is colossal: the restructuring of Russia’s economy in order to work under such sanctions will take at least 5 to 7 years. Fundamentally, any company slapped by new sanctions will follow the Rusal scenario, i.e. value plummeting by half and foreign markets closing, says the chief economist of a large Russian investment bank. The draft bill mentions three particular companies — Rosneft, Gazprom and a private Lukoil. Their overall export revenue in 2017 amounted to $184 billion, which is 12% of Russia’s GDP.
• For these consequences to emerge, there will be no need for a full-blown hack of election infrastructure, as was the case in 2016 — in accordance with the DETER Act, any election advertising or spreading false information in social media is to be considered as meddling. Against the backdrop of suspicion, during the November midterm elections new sanctions may be triggered by any controversial situation — such as Maria Butina case (see below). The first media reporting on Russia’s interference with the Midterms has already appeared.

Why the world should care

In January, the Rubio-Van Hollen draft bill was torn to pieces by one of the architects of today’s U.S. sanctions policy, Daniel Fried. Collateral damage for the world’s economy in case of such sanctions was called by him insupportable — thus, the ban on dealing in Russian companies’ shares may result in freezing a considerable part of index funds, which are being piled into by American investors, and the sanctions against Gazprom and oil companies will cause a downright crash of the world’s energy market and place the U.S. European partners in a difficult situation, considering their dependence on Russian gas. “Placing political advertising” was referred to by Fried as questionable grounds for such tough moves, and delegating the political decision on sanctions to National Intelligence — as a strange initiative that undermines the role of Intelligence as politically neutral institution. We can only add that sanctions, which will become such a devastating blow to Russia’s economy, may result in the country’s total isolation and make the government’s foreign policy behavior completely unpredictable.

2. Russia’s government is aggravating economic isolation for fear of new sanctions.

What happened

Russia’s government started getting ready to new sanctions long before the Putin-Trump summit. In early July a plan was approved by the government for protection against new sanctions, whose main idea is maximum reduction of dependence on dollar assets and payments, which may be blocked by the USA. Beforehand, as early as April and May, Russia got rid of 85% of its holding of the US treasury bonds — it is also a part of the plan, as the officials have told The Bell.

• Until late July, a special team will be set up in the Russian government for developing anti-sanction laws. To date, the government has approved five blocks of sanction protection measures:

1. reduced dollar usage in foreign trade;
2. new restrictions on import from the USA and its allied countries (which of them exactly is yet to be decided)
3. closing public access to the companies’ data if they are under the risk of the coming sanctions;
4. transfer trading with shares of companies under sanctions to Russian stock markets;
5. creating offshore zones inside Russia, where all companies that were slapped by sanctions will be able to re-register.

• The plan for abandoning payments in the U.S. dollars will not be approved until August, but as early as in spring the Central Bank of Russia was almost completely rid of its main dollar asset — the U.S. Treasury Securities. By late March Russia had the U.S. Treasury Securities to a sum of $96.1 billion (over 20% of all Central Bank’s international reserves), and by late May — only in the amount of $14.9 billion. In all probability, in June the Central Bank got rid of this remnant as well, while the respective money was converted into gold or deposited in European banks, economist and former Ministry of Economy official Kirill Tremasov supposes. At zenith, in 2010, Russia’s investments in the U.S. Treasury Securities amounted to as much as $176 billion (35% of reserves).
• Two employees of the Ministry of Finance and the Central Bank explained to The Bell, that the Central Bank started selling the U.S. Treasury Securities in April for a couple of reasons. Firstly, after the 6th April sanctions the risk of keeping the reserves in securities that could be frozen any moment became too great (“Have you seen what happened to Rusal?). Secondly, the particular timing for the sell-off was chosen due to economic reasons: return on the U.S. Treasury Securities reached the half-year peak in May, and it will keep on growing against the backdrop of increasing FRS rates — so the security price will be declining, which means it is time to sell them.

Why the world should care

The government’s plans and the Central Bank’s actions confirm a suspicion that new U.S. sanctions will be answered by Russia’s increasing economic isolation.

3. The “Russian agent’s case” in the USA may cause escalation of spy mania in Russia

What happened

A gun rights activist and an assistant of the Deputy Head of the Central Bank of Russia Maria Butina who was arrested last weekend may become the first of Russians accused of an election meddling attempt, who will appear before the U.S. court. Butina has been officially accused of lobbying a foreign country’s interests without registration, but the documents taken to court by the FBI bring evidence of her connection to Russian intelligence. She had influential patrons connected to security services, and prominent business figures, but nevertheless, the “Butina case” does not look like a full-blown intelligence services plot aimed at meddling in elections.

• An energetic student girl from Siberia. “You are one up on Anna Chapman! She poses with toy guns while you are getting posted with real ones,” Butina’s patron and Deputy Head of the Central Bank of Russia Aleksandr Torshin wrote to her. A 29-year-old Butina grew up in a small Siberian town 3.5 thousand kilometers away from Moscow, was admitted to a local university to train to be a political analyst, and even as a fresher she became engaged in a tumultuous and chaotic public activities: she joined local governmental youth organizations, wrote political articles for the local press. “She is a very energetic person, she was always bubbling up with ideas,” says campaign manager Anderei Kolyadin who accompanied Butina to the National Prayer Breakfast with the involvement of Trump in early 2017. An acquaintance of The Bell’s editor encountered Butina two years ago when he took a flight from New York City to Moscow, and he recalls that “all nine hours of the flight the girl kept chattering,” telling the passengers who happened to be around about her “relations with the American establishment, Russian government and Parliament.” “A Napoleonic idea,” that’s what he calls the desire to arrange Putin’s coming to this very breakfast.
• The patron from the Central Bank. Practically all U.S. events – beginning with Obstetrical Emergencies Conferences and ending with Trump’s Prayer Breakfast – were attended by Butina who was accompanied by the Deputy Head of the Central Bank of Russia Aleksandr Torshin. Torshin is a seasoned political staffer: since early 1990s he has been working in the governmental establishment, the Parliament and the Central Bank, then he was a member of the Parliament, and in 2015 he came back to the Central Bank — as the media had it, in the capacity of an intelligence service supervisor. In 2016, Bloomberg referred to the Spanish investigation and wrote that until his second appointment to the Central Bank, Torshin had been helping one of the organized crime groups in Russia launder money in Spain. In November 2017, The New York Times wrote that in May 2016 Torshin was allegedly trying to arrange a meeting between Putin and Trump, when the latter was still a U.S. presidential candidate. According to The New York Times, Torshin had even sent a letter to this effect to people close to Trump, whiich got round to Jared Kushner, his father-in-law, who didn’t support the idea.
• Mysterious oligarchs. Apart from a possible Torshin, two Russian entrepreneurs are involved with Butina’s case. One of them, called by the FBI “a famous Russian businessman who is well-connected to the Russia’s President administration,” is referred to as a “sponsor” by Butina. It is known that his fortune in the last Forbes List was estimated at $1.2 billion. Twelve Russian businessmen fall under this category. There are interesting figures among them, for example, Boris, the brother of a major oligarch from the “Putin’s circle” Arkady Rotenberg, or ports owner Ziyavudin Magomedov who was considered to be close to Dmitry Medvedev’s circle and who was arrested in April this year. But the one who best of all fits the definition is a former partner of Mikhail Fridman, a billionaire, as well of other Alfa Group co-owners, banker Gleb Fetisov: he was well acquainted with Aleksandr Torshin, was in the same Federation Council’s committee with him and played golf with him. At the end of 2016, one producing company was registered in Hollywood by Fetisov, and by sheer chance this company is planning to shoot a film called “Maria.” Nevertheless, The Bell was told by Fetisov’s representative that the latter had not financed Butina, had not been to the USA for five years and was currently under travelling restrictions. And not long before her first trip to the United States in late 2014, Butina texted a series of messages to another well-off Russian businessman, where she discussed her travelling expenses and the meeting with the “above-mentioned sponsor” – his identity has not been established either.

Why the world should care

What will be the outcome of the “Butina case” for Russian-American relations and whether it will become an important element of “Russia investigation” is yet unclear. But in Russia the consequences are sure to emerge: after such incidents, the government always starts searching for spies at home, so the opposition and human rights advocates from non-profit organizations always have new problems.

4. The former Facebook co-owner’s mobile operator has taken the lead of Russian companies’ leaving the stock exchange

What happened

Russia’s second largest mobile operator, MegaFon, owned by billionaire Alisher Usmanov, announced delisting from the London Stock Exchange. In order to stop being public, the company will not grudge $1.25 billion for buying 20.8% of its shares from minority shareholders. Over the last 7 years, 30% of Russia’s public companies have quitted the market, and the sanctions against Russian business people are only speeding up the process.

• The company explained its leaving the Stock Exchange by the fact that minority shareholders disagree with its new strategy of turning a regular mobile operator into a Russian analogy of Alibaba Group — a digital platform with payment services, online retailing and other online services. The explanation looks all the more plausible taking into consideration that MegaFon is going to build the digital platform in concert with the state defense holding Rostec and Russia’s third largest Gazprombank, which is controlled by Yury Kovalchuk, a billionaire close to Putin — both Rostec and Gazprombank have been under the U.S. sanctions since 2014.
• The next sanctions list may contain the name of MegaFon’s owner Alisher Usmanov, included in top 10 Forbes Billionaire List. On 6 April 2018 his staunchest partner Andrei Skoch has already landed on the SDN List by the U.S. Ministry of Finance. In these circumstances there was no choice for Usmanov — a billionaire who had since the 1990s been building business with the State’s assistance, and then in the 2000s earned $2 billion on early investments in Facebook, has opted for partnership with the State.
• MegaFon minority shareholders are to become the losers in this story — the price at which the company is going to buy their shares from them ($9.75), even considering the bonus to the market, will be half as high as the price it was placing the shares at the time of IPO in 2012 ($20).

Why the world should care

It should come as no surprise that in the atmosphere of impending sanctions large Russian companies are choosing a closed-type business based on government contracts in their native country. But for those investing in Russian assets it is another bad signal — it is hardly worth investing in a company which will end up quitting the market due to political reasons, leaving you with losses instead of gains.

Peter Mironenko

This newsletter is made with the support of the Investigative Reporting Program at UC Berkeley.