Want to hit Putin where it hurts? Target his friends

Since Russia’s occupation and annexation of Crimea in March 2014, Washington has imposed many sanctions on Russia. But are these the right sanctions and are they effective?

Sanctions on people close to President Vladimir Putin and financial sanctions seem to be the most effective.

The sanctions aim to stop or contain Russian malfeasance, such as the occupation of Crimea, military aggression in eastern Ukraine, cyber warfare, election hacking, human rights violations in Syria and chemical warfare in the United Kingdom. The sanctions should not be abandoned until the Kremlin ceases with its malpractices.

{mosads}Putin guides us. He has been particularly upset about two groups of sanctions. One is the U.S. sanctioning of his close business friends from St. Petersburg, Yuri Kovalchuk, Arkady and Boris Rotenberg and Gennady Timchenko, who have become billionaires as a result of this friendship.

On at least three occasions in 2014, Putin publicly defended his friends with passion: “They are Russian nationals, they consider themselves patriots of this country and this is true.[…]This is a direct violation of human rights.”

In fact, Timchenko and Boris Rotenberg are Finnish citizens and have lived abroad since the early 1990s. When Arkady Rotenberg had some real estate frozen in Italy in September 2014 because of EU sanctions, Putin initiated a law on state compensation for individuals and businesses being hurt by Western sanctions called the “Rotenberg Law.”

Also, the Sergei Magnitsky Rule of Law Accountability Act, which the U.S. Congress adopted in December 2012, has enraged Putin. It sanctioned a number of Russian officials responsible for the murder of Magnitsky and the theft of $230 million from the Russian tax office.

Although its aim was to punish looters of the Russian state, Putin saw it as a hostile act, seemingly acknowledging complicity in the crime.

To date, 49 Russians have been sanctioned, including Alexander Bastrykin, the head of Russia’s Investigative Committee and a law school mate of Putin’s.

The Kremlin sought revenge with a law prohibiting the adoption of Russian children by Americans in early 2013.

These two groups of sanctions have much in common. They focus on specific persons, many close to Putin. It prohibits them from travel and makes all their property in countries sanctioning them liable to asset freezes.

As Ambassador Daniel Fried, the former director of sanctions at the State Department has noted, the Magnitsky Act reached much higher levels in the Russian administration than initially understood.

In July 2016, the United States and the European Union imposed serious sectoral sanctions on Russia. They covered three sectors: finance, oil and defense technology, focusing on large state companies.

The financial sanctions have been the most effective. They prohibited lending to the sanctioned state banks and companies for 30 days or more. Both the government and corporations had to pay off their foreign debt obligations as they came due with minimal possibility of refinancing them. Western banks were afraid of being trapped if the sanctions were to change.

The International Monetary Fund assessed that sanctions could initially reduce Russia’s inflation-adjusted GDP by 1 to 1.5 percent. Foreign direct investment in Russia fell by roughly half.

Since the Russian economy is so small relative to Western economies, it cannot respond effectively without hurting itself more. In August 2014, the Kremlin imposed “counter sanctions” against food imports from the countries that had imposed sanctions on Russia.

Russian consumers felt these sanctions, while Russia’s agricultural producers rejoiced over this protectionism. Putin has prolonged these sanctions twice, and he does not discuss any compensation for ordinary Russians. Many other sanctions have been discussed, but little has been done, as the Kremlin realizes it is the underdog.

On April 6, the U.S. Treasury issued its first sanctions based on the Combating America’s Adversaries Through Sanctions Act (CAATSA) of August 2017, sanctioning 24 people and 14 enterprises. They caused a shock because most of the people sanctioned were close to Putin, including his former son-in-law Kirill Shamalov.

Several big oligarchs were designated, notably Oleg Deripaska, and eight of his companies, including Rusal, which accounted for 6 percent of global aluminium production. After the strange Putin-Trump meeting in Helsinki on July 16, congressmen filed a row of new sanctions bills, and the Russian financial markets fell sharply out of mere fear.

Putin and Russian financial markets tell us what sanctions work the best, namely, targeted sanctions on Putin’s friends and top officials, as well as sanctions against key state financial institutions. Conversely, sanctions on trade and ordinary private companies should be avoided, as they hit ordinary Russians.

The United States should make clear that it is sanctioning bad Kremlin behavior, not Russia. It needs to restore its coordination of sanctions with its allies by reviving the office for sanctions at the State Department.

Finally, the United States should prohibit anonymous companies that can hide Kremlin fortunes in the United States and channel them to political ends. 

Anders Åslund is a senior fellow at the Atlantic Council and author of the forthcoming book, “Russia’s Crony Capitalism.”