Sanction the oligarchs, not just the Kremlin

The U.S. Department of the Treasury’s Office of Foreign Assets Control recently applied sanctions against individuals who had served on the supervisory board of the Alfa Group Consortium, one of the largest financial and investment conglomerates in Russia.

Deputy Secretary of the Treasury Wally Adeyemo declared, “Wealthy Russian elites should disabuse themselves of the notion that they can operate business as usual while the Kremlin wages war against the Ukrainian people. Our international coalition will continue to hold accountable those enabling the unjustified and unprovoked invasion of Ukraine.”

Adeyemo’s big words, however, represent a goal, not the current reality.

Although there has been an unprecedented degree of collaboration between the U.S., the European Union and other Western countries toward applying sanctions against Russia, the U.S. often lags behind in designating members of Russia’s elite. This creates loopholes, enabling Russia to evade sanctions.

Many Russian oligarchs acquired wealth in the aftermath of the Cold War but today have no vested interest in Russia. Yet a new set of Russian elites, whose wealth is accompanied by current political influence, remain unsanctioned. These latter oligarchs, who are closely tied to Russian President Vladimir Putin, maintain monopolies in various sectors, enabling them to help Putin to circumvent sanctions while, for example, funding the Wagner Group’s operations in Ukraine and elsewhere.

The rationale for sanctions is that they create an economic burden for authoritarian regimes, subjecting them to popular pressure that may even destabilize them. In the case of Russia, the reverse has occurred. Putin’s regime has the buy-in of new oligarchs who dominate their respective sectors and shore up its fortress economy.

A false distinction has arisen whereby sanctions aimed at the Kremlin are deemed “smart,” whereas targeting oligarchs is deemed merely symbolic. Proponents of “smart sanctions,” however, fail to account for the acute observation by former counterterror official Juan Zarate, who in his book “Treasury’s War” distinguished between state sanctions and targeted sanctions against financial institutions. He argued that the latter are actually more effective, because “the policy decisions of government are not nearly as persuasive as the risk-based compliance calculus of financial institutions.”

An example of this arose in September 2005, when U.S. Treasury officials designated Macau’s Banco Delta Asia a primary money-laundering concern, alleging that it was a “willing pawn for the North Korean government.” This immediately led its customers to withdraw $133 million, or 34 percent of its deposits, leading other international banks to sever ties with Pyongyang immediately.

In reality however, it is not possible to distinguish between Russia’s regime and the billionaires who maintain close personal connections to Putin and treat the state budget as their personal money anyway. Their criticism of Putin’s policies is what could actually threaten his capacity to access financial resources they share. This may result in their imprisonment, falling from a window or strange deaths like that of Wagner’s late founder, Yevgeny Prigozhin.

Therefore, differentiation between the oligarchs and the regime creates a financial loophole for Putin by which the oligarchs can prop up the regime.

This is why the U.S., EU and UK ought to be sanctioning Igor Sechin, the appointed chairman of Russian oil and gas company Rosneft and chief executive of Transneft. Oligarchs such as Sechin, who sit at the helm of Russia’s oil and gas sectors, have increased energy exports to India and China, earning Russia up to $1 billion a day.

Similarly, being a partner to Putin’s regime enabled oligarch Moshe Kantor to be a major shareholder in Russian fertilizer firm Acron and accumulate a fortune — estimated by Forbes to be $12.7 billion. In a globalized economy, “smart sanctions” must be comprehensive to prevent sanctioned states from exploiting such loopholes.

Most developing countries have refused to comply with Russian sanctions. Even Western-applied sanctions on Russia are not uniform, a fact that Kantor is able to exploit. Although his company, Acron, is sanctioned by the UK and Europe, the U.S. and Canada are lagging behind in designating him and his company as sanctioned entities. This inconsistency could lead sanctions to backfire and accelerate geopolitical realignment away from the Western rules-based order.

Just as the U.S. withdrawal from the Iran nuclear deal, coupled with additional sanctions on Iran led the regime in Tehran to turn eastward and increase exports to China, likewise Russia has come closer to China’s orbit as a result of Western rejection. Both Russia and China are now seeking to challenge the dollar’s role as a global reserve currency and ultimately undermine the West’s dominance of the global financial system.

Russia and China remember Iran’s economic collapse in 2012, after the U.S. blocked the regime’s ability to access the Swift financial transaction system, culminating in the Iran deal. The takeaway lesson for Putin and Chinese leader Xi Jinping has been to attempt to create a mechanism ensuring their continued access to the international financial system no matter what. This has led Russian banks to begin lending in Yuan, and to China seeking to develop an alternative to the SWIFT interbank messaging system.

As sanctioned Russian entities and individuals take advantage of geopolitical tensions and exploit gaps in the sanctions that have been imposed, Putin’s ability to keep his money offshore or in the hands of his oligarch allies is enhanced.

Putin’s money belongs to the oligarchs that surround him and vice-versa. As a result, Western allies must coordinate their application of sanctions against elites while realizing that the oligarchs are Putin and that both are the state. This comprehensive approach will pressure Putin’s finances and his ability to sustain Russia’s war machine in Ukraine.

Harley Lippman is a board member of the United States Agency for International Development’s Partnership for Peace Fund.