Russian Billionaires in ‘Horror’ as Putin Risks Isolation

Russia’s richest businessmen are increasingly frantic that President Vladimir Putin’s policies in
Ukraine will lead to crippling sanctions and are too scared of reprisal to say so publicly, billionaires and analysts said.

If Putin doesn’t move to end the war in Ukraine in the wake of last week’s downing of a Malaysia Air (MAS) jet in rebel-held territory, he risks becoming an international outcast like Belarus’s Aleksandr Lukashenko, whom the U.S. famously labeled Europe’s last dictator, one Russian billionaire said on condition of anonymity. What’s happening is bad for business and bad for Russia, he said.

“The economic and business elite is just in horror,” said Igor Bunin, who heads the Center for Political Technology in Moscow. Nobody will speak out because of the implicit threat of retribution, Bunin said by phone yesterday. “Any sign of rebellion and they’ll be brought to their knees.” 

The downing of the Malaysian airliner, which killed 298 people, led to renewed threats of deeper penalties by the U.S. and the European Union, who’ve already sanctioned Russian individuals and companies deemed complicit in fueling the pro-Russian insurgency in Ukraine. U.S. Secretary of State John Kerry said yesterday the available evidence suggests Russia provided the missile used by the rebels to down the airliner. U.K. Defence Secretary Michael Fallon was cited by The Mail on Sunday as accusing Putin of “sponsored terrorism.”

State Terrorism

Branding Russia, like Iran or Libya under Muammar Qaddafi, a “state-sponsor of terrorism,” as the
British defense minister suggested, would be a major move that would have “a very significant impact on Russia and companies dealing with Russia,” Timothy Ash, an emerging-market economist at Standard Bank Plc in London, said by e-mail.

Russia isn’t concerned about the possibility of being labeled as a sponsor of terrorism, Putin’s spokesman, Dmitry Peskov said by text message yesterday.

The 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland, which killed 270 people and was blamed on Libya, was among other attacks that led to international sanctions in the 1980s and 1990s, cementing Libya’s status as an outcast until the end of the century.

Putin’s Circle

While the EU has so far imposed less punitive measures against Russia than the U.S. because of
opposition from countries such as Italy and Austria, the U.K. and the Netherlands are leading the push for bolder action at a meeting of foreign ministers tomorrow. Most of the victims aboard the plane, 193, were Dutch; 10 were British.

The U.S. has already imposed penalties on state-run companies and members of Putin’s inner circle, including billionaires Gennady Timchenko and Arkady Rotenberg. The latest sanctions, announced a day before the Malaysia Air attack, barred OAO Novatek (NVTK), a gas producer partly owned by Timchenko, from using U.S. debt markets for new financing with maturities longer than 90 days. Novatek’s London shares fell 8 percent over two days, cutting its market value by almost $3 billion.
Amid market turmoil provoked by the Ukraine conflict, the 19 richest Russians lost $14.5 billion since the start of the year, compared to an increase in wealth of $56.5 billion for the richest 64 Americans, according to the Bloomberg Billionaires Index.

Pariah Risk

“Russia risks becoming a pariah state if it does not behave properly,” U.K. Foreign Secretary Philip Hammond said on Sky News yesterday. “We now need to use the sense of outrage that is clear to get a further round of sanctions-tightening against Russia.”

Additional U.S. measures may be imposed in the next few weeks, with industry-wide sanctions probable in September if investigators determine the rebels carried out the attack and Europe taking less wide-ranging steps because it has closer business ties with Russia, Eurasia Group, a research and advisory firm based in New York, said in a research note.

“The threat of sanctions against entire sectors of the economy is now very real and there are serious grounds for business to be afraid,” Mikhail Kasyanov, who served as Russia’s prime minister during Putin’s first term as president, from 2000 to 2004, said by phone from Jurmala, Latvia. “If there will be sanctions against the entire financial sector, the economy will collapse in six months.”

Resisting Encroachment

Andrey Kostin, head of state-run lender VTB Group, signaled last week that the sanctions already in
place may harm Russia’s $2 trillion economy and may cut Russia off from globalization. Putin, who has repeatedly denied arming the separatists in Ukraine, won’t back down because he is determined to resist U.S. and European encroachment, according to Eurasia Group.

“He will still view Russian influence over east Ukraine and a Russian veto over Ukrainian NATO membership as vital Russian national interests,” Eurasia Group said. “Military aid to the rebels will continue.”

Putin, a 61-year-old former KGB colonel, is bolstered by a surge in his popularity since he annexed the Black Sea peninsula of Crimea from Ukraine in March to a near record of 86 percent, according to Moscow’s independent Levada Center.

‘Criminally Negligent’

On the day of the Malaysian Air tragedy, Putin blamed the government in Ukraine, saying the state over whose territory the craft was traveling is responsible. His ally, Sergei Naryshkin, speaker of parliament’s lower house, said Ukrainian authorities are “criminally negligent” for letting the Amsterdam-Kuala Lumpur flight cross a war zone.

After speaking with world leaders, Putin today said that the tragedy shouldn’t be used for “selfish political aims,” while calling for safe access to the crash site for international investigators and promising to do everything possible to end the fighting in Ukraine, according to a video address posted on the Kremlin website.

Putin’s inner circle, most of whom have a background in the intelligence services, “completely rule out the possibility that Russia is responsible for this and point the finger squarely at the Americans,” said Olga Kryshtanovskaya, a sociologist who studies the country’s elite at the Russian Academy of Sciences in Moscow.

One longtime Putin ally who runs a major state company said Ukrainian forces shot down the plane with U.S. connivance. This amounts to a war against Russia without a formal declaration, the executive said, asking not to be identified because of the sensitivity of the matter.

It’s War

All this war and talk of war has the country’s business elite “living in a state of fear” and trying to get their money out of the country, Kryshtanovskaya said by phone.

Alexander Lebedev, a former billionaire who owns the U.K. Independent and Evening Standard newspapers, said he’s deeply pessimistic that Russia will ever repair its relationship with the U.S. and its European allies.

“The clock has moved back to the 1980s,” the height of the Cold War, Lebedev, who served as a Soviet intelligence officer in London, said by phone. “But in the 1980s, the two sides contained each other. Now we have a war, so it’s worse.”

To contact the reporters on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net; Irina Reznik in Moscow at ireznik@bloomberg.net; Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net
 
To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Brad Cook, Torrey Clark, Scott Rose

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