Russian CEO Sanctions, A Year Later And No Change Of Heart In Moscow

The Western world’s unprecedented sanctions against the Russian economy is approaching its one-year anniversary. Russia is still standing, the typical Kremlin acolyte would remind anyone. Many Russia watchers have spent the last 10 months predicting the ouster of Vladimir Putin, the collapse of his all-powerful United Russia party, and a Great Depression similar to what occurred in the early 1990s after the fall of the USSR. That has not happened yet, and may never.

A surprisingly low 8.5% of all European companies that were in Russia actually left Russia, according to research from the University of St. Gallen and the IMD Business School in Lausanne, Switzerland. Fewer than 18% of U.S. subsidiaries operating in Russia have left, the study found.

(I wrote about this way back in April.)

In addition to taking control of Russian Central Bank accounts held in banks in the U.S. and Europe, Washington and Brussels took it upon themselves to sanction private sector CEOs and company founders this time. Usually, the sanctions against Russia, due to its actions against Ukraine, have targeted state-owned businesses and their CEOs.

Igor Sechin, CEO of oil giant Rosneft, has been sanctioned since 2014. That’s when Russia annexed Crimea, a peninsula jutting into the Black Sea.

But the war in Ukraine changed that.

Russian tanks rolled into East Ukraine in February 2022. The West didn’t just go after Russian bankers and industrialists representing the class of so-called oligarchs, but also their CEOs and members of the board of directors, who were all blamed for having “ties to Putin” or “ties to the Kremlin” – a famous phrase in Washington since at least November 2016.

Over 400 Russian executives were sanctioned beginning in March 2022, including CEOs of private companies that used to be international investors darlings, such as Vladimir Rashevsky of EuroChem, Alexander Shulgin of Ozon and Dmitry Konov of Sibur and many more. They all had to quit.

After escaping the first round of sanctions, Forbes-listed billionaire Vladimir Potanin was finally sanctioned by the Treasury Department in December. Potanin is the second-wealthiest Russian, thanks to his roughly 33% stake in Norilsk Nickel, one of Russia’s 10 largest public companies. While Potanin criticized the sanctions battle between Russia and the West in March last year, warning it would take Russia’s economy back to the early 1900s, he has not come out as an influencer who could persuade The Kremlin on Ukraine.

Before blacklisting Russia’s internet billionaire Arkady Volozh, founder of Yandex, the European Union sanctioned the company’s CEO, Tigran Khudaverdyan, who had to immediately step down.

Another Forbes billionaire, Oleg Tinkov, was also sanctioned. He criticized the war with Ukraine, saying he saw “no benefit from this crazy war.”

Putin isn’t listening. Tinkov doesn’t even live in Russia. His views hold no sway in United Russia, let alone in Putin’s inner circle.

The idea behind sanctioning the head of Russia’s business class was that by instilling a punishing financial blow to these founders and their chief executives, who like to spend time in Europe and the U.S., have their summer homes in Europe and have investment portfolios managed by American and European money managers, it would get them to join Team West.

Russian CEOs: Rich Technocrats With No Political Power

Russia’s private sector bred hundreds of multi-millionaires who would later become multi-billionaires post-Soviet Union. The destruction of the old system had them buying up state assets on the cheap, with cheap rubles, a currency no one really knew the worth of anymore. Many of those assets were in dire straits when privatized, but the new owners managed to turn them into efficient cash machines, many of which went public on stock exchanges in Europe. The West loved Russia then. Then came in – the bankers, the consultants, the hedge funds, the offshoring manufacturers – and bought Russian assets.

Distrust ensued quickly. The real powers behind the throne were centered in The Kremlin, not inside Moscow board rooms. The siloviki rule the roost in Russia; that’s the unofficial term for the hardliners in positions of power in the intelligence services, military and defense, primarily, opposed to liberals like Elvira Nabiullina in the Central Bank and even Herman Gref, the CEO of state-owned Sberbank.

Oligarchs like Potanin, Tinkov and dozens of other uber-rich Russian executives were influential only to a certain degree. It’s not common in Russia to employ armies of lobbyists working on your behalf, and if they do, those lobbyists focus on commercial interests and stay out of foreign policy.

Any influence they had with Putin has waned considerably as sanctions made them even weaker in the eyes of The Kremlin. The hired executives running their companies' operations on their behalf had no influence. Those sanctions were meant to hurt the billionaire founders, who were supposed to lobby on behalf of Washington and Brussels – if the world was run by Unicorns and pixies.

Sanctions Expose Russian Business Class: A Distant Second to Government Elite.

For more than 30 years of economic transformation in Russia, there has not been a class of top Russian business managers in the Western sense.

If one looks at the top 200 CEOs of 2022 from CEO World Magazine, one will see a lot of influential managers from China, India, Brazil, Saudi Arabia and Taiwan. The only representative of Russia is Alexey Miller, CEO of Gazprom. (Sanctioned, of course.) In terms of influence, Miller is ranked 145th out of 200, compared with the CEO of Taiwan Semiconductor, Chun Chin Wei, who is in 9th place.

CEO Today doesn’t have a single Russian in its top 50.

In 2009, Putin famously humiliated the mightily sanctioned Oleg Deripaska in front of his face. It was like Republicans grilling Jack Dorsey and Mark Zuckerberg, only more relevant because it was the head of state doing it, not a member of Congress. Deripaska stepped down as CEO of Rusal in 2018, the aluminum giant he founded, all because of sanctions. The new CEO and entire board quit that year due to economic problems created by the shake-up and the sanctions, which at the time had to do with allegations related to Trump and not Ukraine. Blowing up Deripaska had no impact on Russian foreign policy.

Rumor had it that China was interested in taking over the Russian company Deripaska helped build. But instead, Rusal has opted to issue bonds in yuans.

Russian business daily Kommersant says Russia’s generally weak CEO is a problem for Russia’s entire business community. It means the state pulls the strings. The state has the influence over the company, not the other way around.

Kommersant said that economic development requires not only structural reforms to the economy, which are ongoing, but a complete change of attitude on the part of the government and society when it comes to the managerial class. If the managerial class is seen as having run amok in the West, it is seen as non-existent in Russia. And that has made sanctioning these individuals not go according to plan. They have failed to change the narrative in Russia on the war. And it is unlikely the Russian government will let these companies fail. Stagnate? Maybe.

BNE Intellinews wrote about the Kommersant report on Jan. 23, saying “sanctions have stymied the rapid progress Russia’s leading corporates were making” on Europe’s favorite corporate governance model – the ESG model – Environmental, Social, and Corporate Governance targets meant to please climate activists and diversify the labor force along race, gender and sexual orientation. That would make them look more Western, opening the door to more investment. That’s gone.

Most top companies had adopted ESG policies already, including Norilsk Nickel, prior to the war in Ukraine in an effect to be seen on par with European standards of corporate niceties. Now many of the same companies are simply trying to protect their business from the fallout from sanctions, and are not worried about ESG, if they ever really were.

Lackluster influence among the Forbes Russian billionaire list might be expected from a country whose top-tier leadership grew up and became adults under Soviet Communism. That was only 30 years ago, barely one generation.

Russia’s exit from that political debacle is not much different than Brazil’s exit from the dictatorship years, which folded shop in the late 1980s. Brazil’s currency, for example, is only 28 years old.

The economic transition from a centrally planned economy where the state’s “managerial elite” say what goes where, to a more free-market approach didn’t change the role of the CEO in Russian politics.

Independent economist Alexander Zotin said in Kommersant, “Major shareholders and the company founders are perceived as the decision-makers in business. The state and its regulators are accustomed to talking only with them. CEOs are, at best, managers dressed in straitjackets, and at worst, scapegoats.”