Moving on up to the state’s side: Transferring sanctioned private risks to the state is already under way

By Maximilian Hess

The 6 April US sanctions are the most significant escalation of the sanctions regime under the Trump Administration to date, targeting seven oligarchs, 12 companies under their control and 17 government officials. The Kremlin, as expected, slammed the move. While it vowed that it would help the companies and workers affected by the sanctions, the government stated it would not seek to take the affected businesses over as a protective measure. Doing so would set a dangerous precedent that could leave the Kremlin vulnerable to saving private businesses similarly targeted, and would counter their goal of reducing the state’s role in the economy. Despite the official line, the financial risks are indeed being passed on to the state, highlighting the fundamental contradiction at the heart of Russia’s political economy: that profits are retained by a narrow elite but losses are borne by the state and Russian taxpayers.

The most notable targets of the April sanctions expansion were oligarchs Viktor Vekselberg, president of Renova Group, and Oleg Deripaska, president of EN+ and Rusal, whose primary businesses listed as well. Since 6 April, the state has quietly extended support to prevent these businesses from going under and ensure that the Kremlin is able to exert some level of control over the way they’re run. The message that many oligarchs heard from the initial sanctions was this: the US Treasury can affect the distribution of spoils within Russia, as demonstrated by knocking Deripaska off his perch. This was despite the Kremlin publicly intervening on his behalf at the beginning of the year. Following the finances of Renova, EN+ and Rusal reveals that the Kremlin is once again moving mountains to protect affected entities, even going so far as to defend affected oligarchs’ assets abroad.

US sanctions have also squeezed Vekselberg by forcing Renova to relinquish shareholdings in a series of Swiss firms. Through Renova, Vekselberg controlled a majority of the engineering firm Sulzer but was forced to bring his shareholding to below 50 per cent, thereby alleviating concerns that US sanctions would also apply to the firm. Vekselberg also had to re-adjust his shareholdings in industrial technology firm Oerlikon and in steelmaker Schmolz + Bickenbach, which Renova was long interested in taking over.

After taking these measures to minimize sanctions impact, Renova was still able to repay just over US$1bln in loans to a series of creditors, including US bank JP Morgan, that were secured over these stakes at the beginning of May. Reuters cited a source claiming the funds were repaid with Vekselberg’s own money, which is only a half-truth – the funds were Vekselberg’s, but on loan from the state.

On 14 May, the Russian Finance Ministry intimated that it would financially support Renova. It said that it had extended a line of credit to Renova, via state-owned Promsvyazbank. The terms of the loans were not revealed, but Promsvyazbank was itself taken over by the state last year and has been recapitalized entirely at the state’s expense. One can then speculate that the loan was not given on purely commercial terms. After all, Renova’s creditworthiness has decreased due to the sanctions, which have prevented the company from engaging in new significant business abroad and frozen many of its assets. In effect, the Kremlin protected a leading oligarch – despite the fact some have called into question whether he is truly ‘close to the Kremlin’ – from losses incurred as a result of his decision to move into business in Switzerland that have little to do with the Russian state or population.

In the case of Rusal and EN+, Deripaska’s main assets are responsible for employing tens of thousands of people within Russia. Deripaska has stated he will lower his shareholdings below 50 per cent in EN+ to gain sanctions reprieve, but he is also being helped by the Russian government due to the far reaching economic impact of his firms. The transfer of Rusal and EN+’s risks to the state have been even more opaque than in Renova’s case. A 23 May Vedomosti article demonstrated how the Russian National Reinsurance Company (RNPK), wholly owned by Russia’s Central Bank, has guaranteed the companies’ risks. RNPK President Nikola Galushin told the outlet that the firm’s exposure to EN+ and related companies had “increased significantly” after the sanctioning.

Galushin noted that many international, and presumably domestic, reinsurers had refused to take on these credit risks as well. Vedomosti cited a source as saying that Ingosstrakh – an insurance firm that is ultimately also controlled by Deripaska – had reinsured all its related risks with RNPK. In other words, in the event of sizeable losses, they will be backstopped by RNPK rather than Deripaska’s funds. Though details were not announced, this could expose the Russian state to hundreds of millions of dollars, if not more, in exposure.

Further reporting will likely ultimately reveal other measures so far employed by the Russian state to back up Deripaska and Vekselberg’s businesses. Yet it is already clear that the so-called ‘privatization of profits and socialization and losses’ is under way.

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