Owing to Vladimir Putin’s war in Ukraine and the West’s response, hundreds of billions of dollars’ worth of assets are up for grabs in Russia. As ownership changes hands, the country’s shrinking wealth will become even more concentrated among the kleptocrats who have remained.
By Anders Åslund*
Wars and sanctions usually lead to major redistributions of property through nationalization, confiscation, and often criminalization. Russia today is no exception. Largely underreported, a radical redistribution of property is underway in the country. Just as the Kremlin’s war of aggression in Ukraine is increasing President Vladimir Putin’s control of society, it is severely damaging economic efficiency, with international sanctions hitting energy, banking, armaments, and other core industries with increasing force.
Before Russia invaded Ukraine last February, it boasted cumulative foreign direct investment of about $500 billion. But most of this was from Western companies that have since declared their intention to leave the country. According to Yale University’s Jeffrey A. Sonnenfeld, more than 1,000 firms have announced that they are cutting back operations in Russia beyond what is required by sanctions. Assets worth hundreds of billions of dollars are up for grabs, and though the changes of ownership will be gradual and non-transparent, the nature of the transformation is clear.
The biggest share of foreign ownership was in the hydrocarbons sector. Most of the industry’s major multinational players had a presence in the country through partnerships with state-owned companies like Rosneft and Gazprom. For example, BP owns a 19.75% share of Rosneft previously valued at $14 billion, and it remains unclear how it will unload this stake. Presumably, Rosneft will eventually acquire the shares for kopecks on the ruble.
Similarly, Exxon had a major joint venture with Rosneft in Sakhalin, but it appears to have had its ownership transferred to the Russian government. It previously valued its share of the company at more than $4 billion, and it has yet to clarify whether Rosneft offered any compensation. We know that Shell’s share in a Sakhalin project with Gazprom was effectively confiscated without compensation.
Then there is the French multinational TotalEnergies. Having invested in Novatek – which is controlled by two Putin cronies, Gennady Timchenko and Leonid Mikhelson – and its huge Yamal LNG plant on the Arctic Sea, TotalEnergies was the last big Western energy company to declare that it would leave the market. So far, it has not done so; but it has written off $3.7 billion of its investment in Novatek, and it is likely to settle on terms favorable to Timchenko and Mikhelson.
Meanwhile, two big energy service companies – Halliburton and Baker Hughes – say they have left Russia. They appear to have sold their local subsidiaries to those entities’ Russian top managers, which is a common practice. It is hard to say which, if any, of these deals could be reversed if Western sanctions were lifted. Schlumberger, however, decided to remain, only suspending new investments and technology deployment.
While the big Russian banks have been sanctioned, most smaller ones have not, which has allowed for arbitrage opportunities. But any changes in bank ownership are likely to proceed more cautiously, because the Central Bank of Russia – which seems to hold a great deal of sway with Putin – is worried about destabilizing the banking sector.
The outstanding case concerns Vladimir Potanin, one of the original oligarchs from the 1990s, who sold his Rosbank to Société Générale many years ago. Following Putin’s invasion, Société Générale wanted to get out. So, Potanin (who had not yet been sanctioned) stepped in to buy Rosbank back at a massive discount, paying just €500 million ($545 million) while Société Générale wrote off €3.1 billion from the sale. Then, Potanin (who was eventually sanctioned) turned around and bought 35% of Tinkoff Bank from its founder, Oleg Tinkov, after the latter publicly criticized the war and then fell out with Putin. In Tinkov’s estimation, the shares he sold were worth ten times more than what Potanin paid for them.
Aside from the Russian state, the most important beneficiaries of this redistribution are likely to be Putin’s main cronies from St. Petersburg – the brothers Yuri and Mikhail Kovalchuk, the brothers Arkady and Boris Rotenberg, and Gennady Timchenko. Yuri Kovalchuk – who is known as Putin’s banker and closest adviser – owns most of Russia’s television stations and has acquired most of the Russian internet by purchasing mail.ru from Alisher Usmanov, an oligarch who is close to Putin (but apparently not close enough).
Similarly, several other predominantly oligarch-owned industries are being redistributed from those who have left Russia or distanced themselves from Putin to those who remain loyal. Not coincidentally, those who remain in Russia – with whom Putin has now surrounded himself – tend to be those who probably would be arrested if they went abroad.
Others who have left Russia include tens of thousands of the country’s excellent computer scientists, whom the armament industry desperately needs. In fact, so many Russians have emigrated to neighboring countries that Armenia expects its 2022 GDP growth to come in at a whopping 13%. Unlike oil fields, this is capital that Putin cannot nationalize or seize.
Naturally, Putin has used the situation to enrich himself even further. The Financial Times recently reported that, “a Russian court has ordered the seizure of a luxury hotel complex owned by billionaire Oleg Deripaska, one of the few oligarchs to have criticized” the war. These assets were valued at $1 billion, and they have now essentially been handed over to Putin by a court whose decisions he ultimately controls.
Finally, Russian wealth is also being redistributed in the West. Russian companies are being forced to sell their subsidiaries or face nationalization, as with Gazprom’s gas-storage facilities in Germany, Rosneft’s oil refinery in Germany, and Lukoil’s oil refinery in Sicily.
However this redistribution plays out in Russia, it is already clear that vast fortunes will be concentrated in the hands of the state and the cronies and criminals closest to Putin, while foreigners and émigrés will be expropriated. But the Kremlin does not appear to be in any rush. So far, it has used redistribution as punishment for disloyalty. But that hasn’t stopped Putin from openly seizing property for himself.
Anders Åslund is the author of Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy (Yale University Press, 2019).