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Obama’s Warning Shot: Sanctions Against Putin-Connected Bank

Since Russia’s March takeover of Crimea, critics have accused Obama and other Western leaders of ineffectual policy. But the sanctions hit a bull’s-eye.

The U.S. and European Union sanctions against Russia for its annexation of Crimea have so far looked like half-measures at best. Visa bans and asset freezes on some two dozen individuals, while billions in trade with Moscow carries on as normal, have elicited derision within Russia and abroad. But one measure imposed by U.S. President Barack Obama is a frosty hint of what might be to come if the Kremlin continues its bellicose behavior toward its small southern neighbor, Ukraine. This was the sanctioning of one Russian bank, the tersely named Bank Rossiya. The U.S. Treasury Department echoed Obama’s March 20 sanctions announcement, declaring, “Bank Rossiya is the personal bank for senior officials of the Russian Federation.”

Russia’s 15th-largest bank by assets, Rossiya is not quite at the heart of the financial system, which is dominated by two state-controlled giants: Sberbank and VTB Bank. But it is at the heart of Vladimir Putin’s personal circle, which plays an outsize role in Russia’s economy and affairs of state. Several joint venture associations collectively founded Rossiya in the early 1990s in Putin’s hometown of St. Petersburg. They worked closely with Putin, who at the time was the city’s deputy mayor in charge of foreign investment. The ties soon became personal. In 1996 the future president joined two Rossiya shareholders, Yuri Kovalchuk and Vladimir Yakunin, in purchasing land with five others on a lake outside St. Petersburg to build Ozero Dacha Cooperative, a gated community of dachas, or summer homes. And since 2005, Yakunin he has been the chief executive of Russian Railways, a critical post in rail-dependent Russia.

Kovalchuk remains the controlling shareholder in Rossiya. Since 2008 he has also been a principal shareholder in National Media Group (NMG), which is a 25 percent partner in state television network Channel One, the government’s primary mouthpiece on Ukraine and other matters. NMG also owns a handful of other television stations and the 97-year-old newspaper Izvestia. Last year Forbes estimated Kovalchuk’s net worth at $1.5 billion. In late 2013 Kovalchuk (and by extension Bank Rossiya), along with the CEO of energy and mining company Severstal, Alexei Mordashov, acquired 50 percent of Tele2 Russia, the country’s fourth-largest mobile telecom operator. Another Rossiya shareholder became a key player in Putin’s inner clique: Gennady Timchenko, who owned 43 percent of Nicosia, Cyprus–registered trading company Gunvor before allegedly selling it to a non-Russian partner on March 19, just before sanctions hit. At its peak, Gunvor brokered one third of all the Russian oil shipped by sea. The company says that share has dropped to 20 percent now, but it remains the world’s No. 4 oil trader.

Rossiya has been accused of helping to build Putin’s personal wealth since at least 2008, when opposition presidential candidate Vladimir Ryzhkov leveled the charge. To its sanction announcement, Treasury added tersely that the bank’s assets would be frozen and U.S. entities forbidden to deal with it until further notice. Treasury officials also took aim at Gunvor, declaring that “Putin has investments in Gunvor and may have access to Gunvor funds.” Mentioned by name were Kovalchuk, Yakunin and Timchenko.

One immediate consequence of Washington’s move was that global credit card providers Visa and MasterCard shut down operations with Bank Rossiya and its subsidiary, Sobinbank. Visa and MasterCard services were also suspended but then reinstated at SMP Bank and its subsidiary, Investkapitalbank, which are controlled by sanctions-listed brothers Boris and Arkady Rotenberg. Arkady is a judo partner of Putin from St. Petersburg days.

But more important was the hint dropped about potential repercussions to Russia’s top-heavy, state-dominated banking system should Putin bite further into Ukraine, for instance, with an incursion into the country’s Russian-speaking eastern provinces. Sberbank and VTB Bank control as many assets as the next 35 Russian banks combined. Both have shares listed on the London Stock Exchange and extensive formal operations around the world. A stroke of Obama’s pen in the direction of either of these two institutions, particularly if coordinated with Europe, could have consequences the Kremlin would find much harder to shrug off. Sberbank’s stock plunged 26.5 percent and VTB Bank 33 percent between February 24, when the Ukraine crisis intensified following the ouster of President Viktor Yanukovych, and March 14; a subsequent rally has roughly halved those losses as of April 2. By comparison, the Micex index of Russian stocks dropped 16.9 percent from its peak before recouping about half of its losses. Analysts see no long-lasting upturn until international political tensions ratchet down, however. “Sberbank shares particularly should revive if the news dies down out of Ukraine. But for now it is really impossible to give any outlook,” says Natalia Berezina, a banking analyst with UralSib Financial Corp. in Moscow.

After Obama huddled with European leaders March 24 for an emergency G-7 meeting in the Netherlands, they tacitly admitted there was little they could or would do about Russia’s annexation of Crimea. Obama called it “not a done deal,” while Mark Rutte, prime minister of the Netherlands, said the issue “can’t be solved overnight” — diplomat-speak for “lost cause.” Such statements have provoked predictable howls for a tougher line from critics far from executive responsibility. A snap CBS poll found that 46 percent of the U.S. public disapproves of the president’s response to Crimea, whereas 38 percent approve. But the sanctions against Bank Rossiya and related persons show that the administration understands the Russian elite’s structure and vulnerabilities. Putin, who despite much huffing and puffing has halted at the eastern border of Ukraine, secretly may have more respect for Obama’s gesture than do U.S. voters.

From the Archives: For more on VTB Bank, see our February 14, 2005, feature “Putin’s Bank.”

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