Why the President’s Office Is Sabotaging Sanctions Against Russian Oligarchs

Why the President’s Office Is Sabotaging Sanctions Against Russian Oligarchs

Ukraine is lagging behind the world in imposing sanctions on Putin’s oligarchs. Pardoning Russians is a bad story for the trenches, and it is in the trenches that Ukrainians’ moods are now being forged.

At the end of the summer the government created an Interagency Working Group on Sanctions. The new body is supposed to speed up the imposition of sanctions on war criminals and Russian oligarchs, and to accelerate the seizure of Russians’ billion-dollar assets, writes Economic Truth.

On the one hand, the emergence of such a working group indicates the authorities’ desire to hold the war’s sponsors and key Putin associates accountable as quickly as possible; on the other hand, it’s unclear why this has not happened yet.

About a month ago the president held one of many meetings on sanctions, attended by heads of the President’s Office, the Cabinet of Ministers, and some law enforcement agencies.

According to interlocutors of EP, Volodymyr Zelensky was in a bad mood at that meeting and did not hide his outrage. The reason for that mood was precisely the sanctions issues. He reportedly said that while the Western world imposes sanctions on Russian oligarchs and war criminals, Ukraine generates white noise and excuses.

In the Russian version of the Forbes ranking “Top-200 richest,” 21 person is under sanctions in Ukraine. In international partners’ lists there are twice as many. Moreover, since 24 February Ukraine has “sanctioned” only one Russian oligarch.

At that meeting the president delivered a clear message that Ukraine has the political will to punish the “good Russians” and that this should be done, the source notes. And some results are already in place.

According to EP’s sources, the NAPC, whose head is part of the aforementioned working group, proposed a plan that envisions announcing all sanction packages by January 2023 of next year. The first on the lists are Russian oligarchs.

Soon the National Security and Defense Council may adopt the first decisions. They may include the names of the owners of Alfa-Bank, Russia’s richest person Vladimir Lisin, and other Russian oligarchs.

According to the NAPC, as of early September Ukraine significantly lagged behind its allies in imposing sanctions on the Russian establishment.

Who’s in the crosshairs

In July the president’s advisor Oleg Ustenko sent angry letters to the world’s largest banks accusing them of enabling Russia’s aggression against Ukraine. Zelensky’s advisor accused JPMorgan, HSBC, Citigroup and Crédit Agricole of “prolonging the war by financing companies that supply Russian oil.”

He emphasized that Ukraine would block these banks’ participation in the country’s postwar reconstruction. “In my view, they are committing war crimes because in this way they help and support the Putin regime,” Ustenko said.

19 September public hearings were held in the US Congress where JP Morgan CEO Jamie Dimon and Citigroup CEO Jane Fraser dodged direct answers and were unable to fully explain to congressmen whether they had severed business ties with Russia.

The story with Zelensky’s advisor’s letter then received wide publicity. The banks in question reportedly began winding down business with Russians slowly, and world leaders began imposing restrictions on trade in Russian energy resources.

Meanwhile the Ukrainian authorities did not hurry. One popular criticism of Bankova concerns the case of the owners of Alfa Group. Supposedly the US banned any relations with Mikhail Fridman’s bank and he and his partners are under international sanctions, yet in Ukraine Alfa-Bank operates even during the invasion.

As EP learned from one of the President’s Office interlocutors, 19 September Zelensky held a separate meeting devoted exclusively to the Russian shareholders of Alfa-Bank. How it ended will become clear soon. Another interlocutor from the NSDC confirmed to EP that “documents are being prepared” regarding the imposition of sanctions against them.

Fridman has something to lose. The Russian oligarch with roots in Lviv owns assets in Ukraine that before the war were valued at billions of dollars.

All shareholders own Alfa-Bank through the parent holding — Luxembourg’s ABH Holdings S.A. Currently Andriy Kosogov is the largest shareholder of Alfa-Bank Ukraine with a stake of 40,96%. Fridman holds 32,86%, Aven 12,4%. Another 9,9% is owned by Italy’s UniCredit.

Before Russia’s attack on Ukraine the ownership structure of Ukrainian Alfa-Bank was different. The largest shareholder as of 1 January 2022 was Fridman (the same 32,86%), with German Khan and Oleksiy Kuzmychov in second and third places — 20,97% and 16,32% respectively. 14 March the National Bank updated the bank’s ownership structure: Khan’s and Kuzmychov’s shares transferred to Kosogov. Other shareholders retained their stakes.

The Wall Street Journal, citing the chairman of the supervisory board of Ukrainian Alfa-Bank Roman Shpek, recalled that the bank offered the Ukrainian authorities to transfer Fridman’s personal funds of 1 billion dollars to the Ukrainian bank. As EP wrote, this proposal was voiced in government offices back in the spring. “We consider this amount sufficient both to support the bank’s current balance and to invest in new projects. 1 billion in the bank’s capital will allow lending to the economy by 8 billion dollars,” Shpek said.

According to him, it concerns financing projects related to infrastructure, logistics, healthcare, food and energy security. At the same time Shpek emphasized that the shareholders “in no way consider this step as a condition for lifting personal sanctions against them.”

“Talks about ‘buying indulgence’ have no basis,” the top manager assured. He noted that bringing a billion into Ukraine requires permits and the consent of shareholders, the NBU and EU regulatory authorities. “This is exactly what we are working on now,” Shpek explained.

Mikhail Fridman and Pyotr Aven. GETTY IMAGES

A billion dollars is a significant sum for recapitalization in Ukrainian conditions. The last time such large injections into a financial institution in Ukraine were made was during the nationalization of PrivatBank.

Does Alfa-Bank need recapitalization?

Overall the banking system is not in the best shape. According to the NBU’s forecasts, due to the war banks could lose 20% of their loan portfolio. Experts call such calculations optimistic and expect losses at the level of 30-35%.

Under the NBU scenario and based on the size of Alfa-Bank’s capital and its loan portfolio, the required recapitalization amount should not exceed 8 billion UAH, believes CASE-Ukraine associate expert Yevhen Dubohryz, who carried out stress testing of banks at the NBU in 2015-2019 years.

“Even if Alfa-Bank loses 40% of its portfolio and all collateral, the need would be 18-19 billion UAH. That’s the worst-case scenario when loans and collateral are completely devalued, and that happens very rarely,” he says.

The bank itself talks about a larger “cushion.” “The bank may need 500-600 million dollars over the next year to maintain consistently high capital adequacy ratios. It all depends on developments at the front, the state of the economy, Ukrainians’ incomes, clients’ assets,” Shpek believes.

Ukrainian banks will likely need recapitalization in time, but there is currently no economic need to inject a billion dollars into Alfa-Bank and, accordingly, to lift sanctions from those funds. For the Russian oligarch this makes sense because he has far more money in Western institutions.

Russian oligarch Fridman bows to Putin

Reference.

Fridman and Aven sought to put down roots in the West. In 2013 they founded the London-based private investment fund LetterOne. Their European business empire includes the UK retailer Holland & Barrett, the German energy group Wintershall Dea, and the Spanish supermarkets Dia.

On the eve of this, a bill was even filed in the Verkhovna Rada “regulating the process of withdrawing a systemically important bank from the market under martial law.”

One can assume that this is preparation for imposing sanctions on the Russian owners of Alfa-Bank, which is systemically important. However one senior official at the NBU insists that the document was prepared a long time ago.

How Russian oligarchs negotiate

Although representatives of the Ukrainian bank emphasize that they are not counting on indulgences, dozens of Russians prefer to finance Ukraine to get out from under sanctions and preserve part of their wealth, as WSJ and the Financial Times reported.

WSJ also quotes Deputy Head of the President’s Office Rostyslav Shurma. He said that the Kyiv government will consider Fridman’s proposal only as part of a broader structure that could include a fund to help Ukraine. “This should be a common approach to all sanctioned Russians,” Shurma said.

In a comment to FT he stressed that Ukraine does not use sanctions as a bargaining tool and will consider such a deal on lifting sanctions only after the war ends.

Volodymyr Zelensky is dissatisfied with the current state of sanctions: while the Western world imposes sanctions on Russian oligarchs and war criminals, Ukraine generates white noise and excuses. GETTY IMAGES

In June NAPC head Oleksandr Novikov assured that sanctions from Ukraine would be imposed on all Russian oligarchs. “If they do not publicly condemn the war, Putin and recognize Ukraine’s territorial integrity including Crimea and Donbas, they will lose all property in the European Union,” he emphasized.

Novikov also spoke about the possibility of creating a procedure to lift sanctions by transferring funds or assets to a “repentance fund.”

In an interview with Forbes the leader of the Servant of the People faction David Arakhamia admitted that this idea was discussed, but not in Ukraine, rather at the level of international partners.

“Maybe this will work for businessmen who hold Russian citizenship but whose business is entirely in other countries. It is not the Russian budget that suffers from sanctions but, for example, the British one. If such a businessman donates a certain sum to Ukraine’s recovery, I am tolerant toward that. If businessmen pay taxes in Russia and finance the war in Ukraine, I am against it,” he said.

In the West Russian oligarchs are also launching lobbying campaigns to lift sanctions. Kyivstar paid 240 thousand dollars to Washington lobbyists from Yorktown Solutions to draw US authorities’ and the public’s attention to the sensitivity of its client’s operations as one of Ukraine’s leading operators.

At the beginning of September Politico reported about pro-Russian Hungary’s desire to exclude from EU sanctions Fridman’s Alfa partner Petr Aven, Putin-linked Alisher Usmanov, and one of Russia’s largest metallurgical magnates Viktor Rashnikov.

The Czech Republic, which chairs the EU Council, agreed with the Hungarians to postpone consideration of the issue regarding these individuals by two months. If Ukraine had prepared accusations and imposed sanctions on the Russians, the EU would have had more grounds to shame Hungarian leader Viktor Orban and continue blocking Russian money.

Ukraine is falling behind the world in imposing sanctions on Putin’s oligarchs. However, if Kyiv does impose sanctions on oligarchs and their family members, the question of creating “repentance funds” may recede to the second plan. Pardoning Russians is a bad story for the trenches, and it is in the trenches that Ukrainians’ moods are now being forged.

Why the President’s Office Keeps Sanctions “in a Drawer”

Unlike Western partners — from whom Zelensky demanded more on the second day of the full-scale war to halt the aggression — Kyiv did not hurry to impose sanctions on Russians. Not only on oligarchs, but also on Kremlin top officials.

Ukraine announced sanctions against Putin, Lavrov and Shoigu 9 June, and hundreds of lower-ranking invaders were punished only on 7 September. As EP found out, many sanction lists lay in the President’s Office for a long time.

Reference. The president, the Cabinet, the SBU, the Verkhovna Rada and the National Bank may propose candidates to be added to the sanction lists. The NSDC considers these proposals and makes final decisions. Documents are sent to the President’s Office, after which the head of state introduces sanctions by decree.

From February to August 2022 the NSDC voted for a number of sanction lists, but the president did not approve them. They were held up by the deputy head of the President’s Office, lawyer Andriy Smyrnov, who did not forward them for Zelensky’s signature.

EP has documents indicating that there were at least ten such blocked decisions. An interlocutor involved in sanctions policy claims that the total number reaches 20. Another 70 NSDC draft projects were sent to the President’s Office for consideration but were not returned for voting.

Not all the lists concerned the Russian elite. Among the names were, for example, politicians from Serbia, Montenegro, Kyrgyzstan, the Czech Republic, as well as Russian KVN players. Among the companies were Belarusian industry and Russian publishers.

Also included were Russian deputies and senators who for years legalized Putin’s decisions, security officials and members of that country’s National Security Council who approved the unleashing of the war against Ukraine, and Russian defense enterprises.

2 June the NSDC voted for sanctions against FSB director Alexander Bortnikov and Foreign Intelligence Service head Sergey Naryshkin, Federation Council head Valentina Matviyenko and State Duma head Vyacheslav Volodin, Prosecutor General Igor Krasnov, Chief of the General Staff Valeriy Gerasimov, National Guard director Viktor Zolotov and hundreds more Kremlin henchmen.

However these people appeared on the sanction lists only three months later. Smyrnov confirmed to EP that a number of decisions were not forwarded to the president for signature because the documents contained many errors that made implementation of sanctions impossible.

“There were errors in personal data and transliteration, inaccuracies in registration data for legal and natural persons, missing words and sentences. Whether this is done deliberately or not will have to be investigated, but we must put forward a legally perfect document for signature,” Smyrnov assured.

Yermak’s deputy recalls that under the updated law “On Sanctions” it is possible not only to block but also to confiscate enemies’ assets. Such a decision is made by the High Anti-Corruption Court. Since the new law came into force in May, all sanctions introduced before that would have to be re-voted.

The third lawyer’s argument is the absence of a filter that would check the papers and confirm that the sanctions are justified. This refers to a state body, and it, the Interagency Working Group on Sanctions, appeared only on 30 August.

The newly created commission received the decisions from the President’s Office that had not been signed by the head of state. The above-listed Kremlin henchmen were brought again to the NSDC for consideration. After that they finally fell under sanctions.

Yuriy Nikolov, Our Money, Sonya Lukashova, Ukrainska Pravda, Dmytro Denkov, EP; published in Economic Truth