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 under way in the country. Just as the Kremlin’s war of aggression in Ukraine is increasing Russian 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 in February last year, it boasted cumulative foreign direct investment of about US$500 billion, but most of this was from Western companies that have since declared their intention to leave the country.
Illustration: Yusha
According to Yale University professor Jeffrey 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 although the changes of ownership are 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 such as Rosneft and Gazprom.
For example, BP owns a 19.75 percent share of Rosneft, previously valued at US$14 billion, and it remains unclear how it might unload this stake. Presumably, Rosneft would 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 US$4 billion, and it has yet to clarify whether Rosneft offered any compensation.
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 liquefied natural gas 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 US$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 — said 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.
However, oilfield services company Schlumberger 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 the Russian Federation — 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 Rosbank to Societe Generale many years ago. Following Putin’s invasion, Societe Generale 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 euros (US$534.88 million) while Societe Generale wrote off 3.1 billion euros from the sale.
Then, Potanin — who was eventually sanctioned — turned around and bought 35 percent 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 10 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 — brothers Yuri and Mikhail Kovalchuk, 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. So many Russians have emigrated to neighboring countries that Armenia expects its 2022 GDP growth to come in at a whopping 13 percent. 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 US$1 billion, and they have now essentially been handed over to Putin by a court whose decisions he ultimately controls.
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 and 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 are concentrating in the hands of the state, and with the cronies and criminals closest to Putin, while those of foreigners and emigres are expropriated.
The Kremlin, though, does not appear to be in any rush. So far, it has used redistribution as punishment for disloyalty, but that has not stopped Putin from openly seizing property for himself.
Anders Aslund is a Swedish economist and former senior fellow at the Atlantic Council.
Copyright: Project Syndicate
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