New Russia Sanctions, Putin’s Economy, and the Shadow Over Planned U.S.-Russia Business Group

The latest U.S. sanctions against Russia that are due to take effect today throw even greater doubt on an idea President Vladimir Putin floated in his Helsinki news conference with President Donald Trump. Putin said the two had agreed to form a “working group” of “captains of Russian and American business” to try to improve economic cooperation. The proposal already was far-fetched then, considering years of rising tensions and escalating sanctions, most notably in April. But it illustrates two points about the evolution of U.S.-Russian business relations: how much trade and investment continues nevertheless, and the limited influence that business leaders on both sides really have over each country’s foreign policy.

The proposal for a business working group was one of the few specifics to come out of a two-hour private meeting between the two presidents in Helsinki on July 16.

“We paid more attention to economic ties and economic cooperation,” Putin said in the news conference. “It’s clear that both countries — the businesses of both countries — are interested in this.”

As evidence, he said more than 500 representatives from American businesses had attended this year’s three-day St. Petersburg International Economic Forum in May, his annual showcase to regenerate the Russian public’s optimism about an economy that bowed when oil prices dropped and continues to struggle under U.S. and European Union sanctions.

“Entrepreneurs and businessmen know better how to articulate this successful business cooperation,” he said. “We’ll let them think and make their proposals and suggestions in this regard.”

Within days, the Financial Times declared the idea “already appears to be dead in the water.” The paper cited Anatoly Antonov, Russia’s ambassador to the U.S., as saying it would be “awesome” to set up such a structure, “But with all these restrictions in place, it is not working.” The New York Times noted that, after Russia invaded Ukraine in 2014, the U.S. “pulled out of a working group for business executives that had been meeting regularly since the mid-1990s.”

By July 25, Secretary of State Mike Pompeo seemed to downgrade the idea to a kind of exchange program.

“There is an agreement to establish some business-to-business leadership exchanges,” he told the Senate Foreign Relations Committee in response to questions during testimony in a hearing on U.S. diplomacy to advance the national security strategy. He added no details.

But while trade and investment between the U.S. and Russia is lower than before the 2014 Ukraine crisis, substantial ties continue. Officials provided some of the latest data in a panel discussion on U.S.-Russia economic relations during the St. Petersburg forum May 24-26.

U.S.-Russia Trade Increases

“Curiously,” said panel co-chair David Iakobachvili, trade between the U.S. and Russia increased 9.4 percent during the first quarter of 2018, to $5.2 billion, compared with a year earlier. Russian exports increased more than 14 percent to $2.6 billion, and imports rose 4.7 percent to $2.5 billion.

“That’s chicken feed, of course, compared to what it could have been and what it should have been. But it’s a good indicator,” said Iakobachvili, president of Orion Heritage Ltd, a joint proprietor of Petrocas Energy Holding Ltd. “That’s something that gives us hope.”

Panel Co-Chair Alexis Rodzianko, president of the 500-member American Chamber of Commerce in Russia, said the U.S. representation at the conference was the largest from a single country, despite relatively low trade and investment. He noted that multinational companies often invest via units in third countries, and he reported that total investment likely is 7 to 9 times the official figures while trade might be 3 to 4 times greater.

Last year was “a good year” for U.S.-Russia business, Rodzianko said. “Many companies experienced double-digit growth in their businesses in Russia, and so far `18 looks set to even top that … The business relationship continues to be good and healthy.”

The St. Petersburg forum, held in Putin’s hometown, gives him a platform to counter public pessimism over an economy that resumed growth of 1.5 percent in 2017, after two years of decline as a result of sanctions over his invasion of Ukraine in early 2014 and the plunge in oil prices later that year. The economy repeatedly surfaces as the main irritant in the otherwise positive views of Putin among the Russian public. While oil prices have rebounded, sanctions by the U.S. and the European Union have only escalated, especially with revelations of Russia’s interference in the 2016 election and its involvement in the chemical poisoning of a former spy in Britain.

Most forecasts say the Russian economy is likely to stagnate for the foreseeable future, said Chris Miller, assistant professor of international history at Tufts University’s Fletcher School and author of The Struggle to Save the Soviet Economy: Mikhail Gorbachev and the Collapse of the USSR. But for certain sectors like services and consumer goods, Russia remains an important market, and the risk of expropriation of property is much lower than for companies that have major property interests there, such as energy conglomerates or manufacturers, Miller said.

Boeing, Mars, Deere & Co.

The U.S.-Russia panel at the St. Petersburg forum featured business representatives from both countries, with the U.S. company officials slightly lower-ranking but reflecting the likes of Boeing, Mars Inc., and Deere & Co.

The Russian contingent included Viktor Vekselberg, who was listed on the forum website as “President, Skolkovo Foundation,” but who has been sanctioned by the U.S. as the founder and chairman of the board of the Renova Group, an energy investment conglomerate. (Vekselberg has also been tied to payments made to Trump’s former personal lawyer, Michael Cohen, by the private equity firm Columbus Nova.) Vekselberg was among dozens of oligarchs, Russian officials, and private and state-owned entities named by the U.S. Treasury Department in April as advancing or benefiting from “a range of malign activity around the globe” by the Russian government, including the Crimea annexation in 2014, the Syrian government’s barrel bombings and chemical attacks on its own citizens, and the efforts to undermine the 2016 U.S. presidential elections. The Skolkovo Foundation was created as an entrepreneurial innovation hub in 2010 by then-President Dmitry Medvedev, when Putin served as prime minister, and continues to be government-funded, according to its website.

With Vekselberg sitting to his right, Russian Deputy Foreign Minister Aleksandr Pankin lamented the “political factors” that he said eroded trust between the two countries, even as he insisted that trust “has always been there between Russian and American business people.” The claim belies the near-constant risks of corruption in the Russian economy, where so much is subject to government control or influence, and the frequent eruptions of major business disputes such as the multi-billion battles between Russia’s — and the world’s — biggest oil producer, Rosneft, and ExxonMobil. Rosneft CEO Igor Sechin is a close Putin ally, and both the company and its chief executive were sanctioned by the U.S. in 2014 over the Ukraine invasion.

Vekselberg, too, bemoaned a political atmosphere between the two countries that had “taken a turn for the worse,” but urged participants to “keep looking for solutions.” Notably, Rodzianko praised Vekselberg for helping stall legislation the Russian Duma proposed after the April U.S. sanctions. The measure would have criminalized compliance with and support of the U.S. penalties, and constituted “an added element of risk for investors and those who operate here,” Daniel Russell, president and CEO of the U.S.-Russia Business Council, told the gathering.

At the same time, Russell cautioned the U.S. Congress against excessive sanctions, noting the “negative impact” of the 1974 Jackson-Vanik amendment that effectively penalized the former Soviet Union and its successor states with tariffs for human rights abuses against Jews, especially prohibiting their emigration. The amendment was finally repealed for Russia in December 2012 but only in exchange for the punitive Magnitsky Act.

The new measure was named after Sergei Magnitsky, a Russian lawyer who died in a Moscow prison in 2009 under mysterious circumstances after uncovering a $230 million fraud by tax officials against his client, the American-born British financier William F. Browder, and Russian taxpayers. The measure bars travel, blocks assets, and prohibits the use of Western financial systems by individuals and entities deemed to be complicit in human rights abuses and corruption.

With vigorous advocacy by Browder and Russian activist Vladimir Kara-Murza, the Magnitsky sanctions regime has caught on like wildfire. The U.S. expanded its use in 2016 to apply it globally, not just targeting Russian violations, and other countries such as the U.K. and Canada have adopted a similar sanctions regime.

Struggling for Influence

The discussion among the panelists at the St. Petersburg forum illustrates the struggles by business interests on both sides of the trading relationship to influence their countries’ foreign policies. President Barack Obama and his then-Russian counterpart, Medvedev, had formed the U.S.-Russia Bilateral Presidential Commission in 2009, as part of the attempted U.S. “reset” of relations. It continued when Putin returned to the presidency. It included multiple working groups, including one on “Business Development and Economic Relations,” chaired on the U.S. side by the secretary of commerce, including Penny Pritzker when she was in office. The commission’s work was suspended after Russia’s 2014 invasion of Ukraine.

“Certainly, businesses must comply with the laws of their countries,” Pankin, the deputy foreign minister, told the panel. “But business must also have an influence on the making of laws, teaching their government what is good for business and what is not.”

While they might be able to temper legislation or even stall some of the most egregious measures like the compliance proposal in the Russian Duma, “it’s generally been high politics that drives the relationship, not commercial considerations,” Miller said. Even if U.S.-Russia trade improved, it isn’t likely to have that much influence on the trajectory of political relations, he said.

That has been the case historically, Maria Snegovaya agreed, but it might be changing, as opinion polls show Russians growing increasingly concerned about the economy and the pressure grows on Putin. The sanctions the U.S. imposed in April were particularly shocking, said Snegovaya, an adjunct fellow at the Center for European Policy Analysis in Washington and author of the center’s recent report, “Tension at the Top: The impact of sanctions on Russia’s poles of power.”

Sanctions the U.S. imposed on financial services in the wake of the 2014 Ukraine invasion hit the Russian economy hardest at first, because they stopped certain types of loans and trading in bonds and equities, Snegovaya reported. The sanctions were a new form and, until Western financial institutions and investors could understand them properly, shut off many Russian banks and companies from Western capital entirely. She cited a scholarly assessment published in the Russian Journal of Economics that estimated the penalties might have cost Russian GDP as much as 2.4 percent by 2017.

“Yet, by fall 2016, the de facto freeze on Russian credit operations dissipated,” Snegovaya wrote. “Western creditors slowly adjusted their approach by avoiding cooperation with only Russian persons and companies who were directly targeted by sanctions. Since September 2016, the Russian government and companies have effectively regained access to Western financial markets.”

Business Titans Spooked

But the sanctions the U.S. Treasury imposed this April froze the assets of and barred transactions with seven Russian oligarchs, 12 companies they own or control, 17 senior Russian government officials, and a state-owned Russian weapons trading company and its subsidiary, a Russian bank. This particularly spooked Russian business titans, Snegovaya said in an interview.

The blacklist prompted one of the oligarchs, Oleg Deripaska, to resign as director of Rusal, an aluminum producer that accounts for 7 percent of the world’s supply, in a bid to protect his company from suffering from its association with him. Still, he retained enough connections that the company earlier this month warned of “catastrophic shutdowns” if the sanctions weren’t eased, because U.S. customers would be forced to wind down business with the company by late October. (Derispaska has been caught up in allegations involving Paul Manafort’s activities during the 2016 election.)

Deripaska’s and Vekselberg’s bank accounts in Cyprus have been frozen as a result of the April sanctions, Russian news agency Tass reported last week, citing a U.S. Treasury official testifying to the Senate Banking committee. And Credit Suisse has frozen 5 billion Swiss francs (almost $5.1 billion) of Russian money, Reuters reported, adding that the bank didn’t say who owned the funds. Switzerland received about $6.2 billion, or 14 percent of total Russian cross-border outflows, in 2017, Reuters said, citing Russian central bank data.

Despite the severity of the April measures, powerful Russian business leaders, fearing an accelerated downward spiral, persuaded the Duma to withhold its threatened counter-sanctions, including the compliance bill and another to ban imports of essential medications and technology, and employment of U.S. citizens in Russia. Andrey Kostin, the president of state-owned VTB Bank who was sanctioned in April, said in a U.S. television interview that he advised his government not to engage in tit-for-tat retaliation, Snegovaya said. It’s a sign of the Russian business community’s concern, she said.

“They can’t really lobby for Putin to fundamentally change his foreign policy,” Snegovaya said. “What they can do is they can soften the blow.”

Though plenty of American companies continue to operate in Russia, as evidenced by the frequent commercials on television for consumer products from soap to chocolate bars, it is clear that the accelerated rounds of sanctions this year are beginning to bite. The Treasury official testifying on Capitol Hill last week, Under Secretary Sigal Mandelker, told the committee the department’s Office of Foreign Assets Control (OFAC) had “issued Russia-related measures in seven of the last nine months.”

The Washington Post reported earlier this month that, despite cushioning from rebounded oil prices, the Russian currency’s value had dropped to 66 rubles to the dollar, from about 58 before the April sanctions, “a decline that harms the buying power of Russians interested in traveling abroad or in buying foreign goods.”

Not All Trade is Cut Off

On Aug. 8, the State Department announced that it had determined that Russia had used the nerve agent Novichok to poison a former spy living in Britain, Sergei Skripal, and his daughter, and that the U.S. will soon levy further sanctions as punishment. The penalties, due to go into effect today with publication in the Federal Register, include stopping certain weapons sales and financing for them, with exceptions such as for the joint U.S.-Russia space program; denial of certain credit and credit guarantees; and a prohibition on exports of sensitive security-related items. Last week,  OFAC issued two other sets of sanctions against Russian firms or individuals for prohibited trade with North Korea and doing business with Russian intelligence agencies.

Republicans and Democrats in Congress also are steering proposals for further sanctions against Russia’s energy and financial sectors and its sovereign debt. Senator Lindsay Graham, who is helping draft the legislation, has called it the “sanctions bill from hell.”

The proliferation of such specific sanctions creates two seemingly incongruous effects, says Brian Egan, a partner at Steptoe & Johnson LLP who advises on sanctions compliance and a member of the Just Security board of editors. On the one hand, a wide range of business and trade continues because the penalties are more targeted; and yet as the sanctions grow in complexity, it can discourage a broader range of business.

The efforts at surgical targeting of U.S. blacklists stems from concerns in the 1990s that more general sanctions against Iraq under Saddam Hussein hurt too many innocent civilians. U.S. officials have sought, instead, to target the specific individuals and entities responsible for the concerns.

“It leads to some situations that are surprising to some, where not all business activity between the U.S. and Russia is cut off,” Egan said. A textbook example was the controversial shipment of liquefied natural gas that arrived in Boston in January from a sanctioned project in Russia’s Arctic. But while the sanctions barred financing for a specific producer’s projects, they didn’t prohibit purchases from that location, the Washington Post reported.

But over time, even specific sanctions discourage trade and investment, because as they proliferate, compliance becomes increasingly complicated and costly, Egan noted.

Considering the U.S. tightening of the economic noose on Russia and the tensions resulting from the pressure, it is hard to imagine what the focus would be for a working group of business executives, said Alina Polyakova, the David M. Rubenstein Fellow in the Brookings Institution’s Center on the United States and Europe.

Egan and Snegovaya say Putin and his regime are under increasing pressure from business leaders and the Russian public over the sluggish economy. Since Putin is unlikely to meet the terms the U.S. has outlined for lifting sanctions – returning control of Crimea to Ukraine, for example, or allowing chemical weapons inspectors to check for Novichok — a working group would be one way for him to demonstrate that he’s taking action.

Egan notes that it also might provide a vehicle for protecting certain business titans who might be at risk of being sanctioned.

“If the business captains who are part of a bilateral discussion with the United States are oligarchs, the theory might be that the U.S. might be more reluctant to sanction them if they are being seen as doing something productive in the United States,” Egan said.

However, that joint effort does not appear to be on the Trump administration agenda in the near term. A State Department spokesman, asked earlier this month whether the U.S. government has taken any action to create a joint business working group with Russia or begin business leader exchanges, said, “We have no updates to announce at this time.”

Presidents Trump and Putin shake hands during a joint press conference after their summit in Helsinki July 16. (Photo by Chris McGrath/Getty Images)

 

About the Author(s)

Viola Gienger

Washington Editor for Just Security and research scholar at NYU School of Law. You can follow her on Twitter (@violagienger).