The UK announced new sanctions yesterday relating to the Russian invasion of Ukraine, targeting
seven oligarchs with links to Vladimir Putin.
Among them is Roman Abramovich, a Russian Oligarch who grew wealthy following the collapse
of the Soviet Union in Russia's controversial loans-for-shares privatization program.
Abramovich was a confidante of former Russian president Boris Yeltsin, and is reported to
have been the first person to recommend to Yeltsin that former KGB agent and Taxi driver
Vladimir Putin be his successor as the Russian president.
When Putin formed his first cabinet in 1999, Abramovich allegedly interviewed each of the
candidates for cabinet positions before they were approved.
This is the first time any Western government has targeted Abramovich.
His trophy assets, including Chelsea Football Club, expensive homes in London and mega yachts,
have helped turn him into one of the highest-profile Russian Oligarchs who are now facing additional
scrutiny from officials in the wake of Russia’s invasion of Ukraine.
Abramovich has denied being close to Putin and says he has done nothing to deserve being
sanctioned, but the U.K. alleges that he is closely involved with several Russian individuals
and entities that have played a role in destabilizing and undermining Ukraine, and they say that
he benefited financially from that involvement.
Abramovich announced earlier this month that he was transferring stewardship and care of
the club to the trustees of its charitable foundation, later announcing that he would
sell the club and put the proceeds into a charity that would benefit "all victims" of
the war in Ukraine.
These new sanctions bring an end to that plan, as they effectively freeze his assets and
prohibit him from any transactions with U.K. individuals and businesses.
The government officials acknowledged that this would impact the soccer community, saying
that they are taking steps to protect it.
Nadine Dorries - the culture secretary tweeted "We have been working hard to ensure the club
& the national game are not unnecessarily harmed by these important sanctions."
So, we have a few questions to answer here.
Who owns Chelsea right now?
What happens with the other Russian assets being seized around the world?
And, what happens with Russian financial assets that westerners may own that have stopped
trading due to the new sanctions?
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Well, the sanctions that western countries have imposed on Russia in the wake of this
invasion are the most restrictive sanctions ever imposed against a major economic power.
So, to a certain extent, a lot of this is unprecedented.
The measures target Russia’s financial system, the assets of powerful Russian individuals,
and Russian oil and gas assets, and they are designed to punish Putin and the influential
Russians who both support and depend on him, making it close to impossible to conduct business
as normal in Russia.
In the short term, that means a massive economic slowdown in Russia, and we are seeing just
that: The Russian stock market has been shuttered since the invasion, and many Russian companies
with shares listed abroad have seen their equity values all but wiped out.
The Russian ruble, which plunged as the war began and sanctions were rolled out, is now
near an all-time low.
Putin and 11 other top Russian government officials have been hit personally with sanctions
by the US Treasury Department.
Their names have been added to the Specially Designated Nationals list, effectively meaning
that any assets owned by them and held in the global financial system are frozen and
Americans are legally prohibited from doing business with those individuals.
Several Russian oligarchs are also facing sanctions, and the US Justice Department and
some European law enforcement agencies are working to confiscate non-financial assets
like real estate and yachts from those billionaires.
The financial sanctions go well beyond individuals, the US has placed sanctions on Russia’s
central bank and “immobilized” the reserves it held in the US financial system.
The European Union put in place similar sanctions, meaning it has been impossible for Russia
to use its reserves to defend the ruble, or to make purchases to further the war effort.
Notably, the Swiss government has also said it will drop its long-held neutral stance
and join in the sanctions by freezing Russian assets, including bank accounts.
Governments that have seized the yachts and homes of Russian oligarchs, or frozen the
assets of Russia's Central Bank now face a more difficult question: What do they do with
them?
The US President warned Russian Oligarchs “We are joining with our European allies
to find and seize your yachts, your luxury apartments, your private jets.
We are coming for your ill-gotten gains.”
Officials impounded a 213-foot yacht in Imperia, Italy, a 280-foot yacht in France and an $18
million resort compound in Sardinia all owned by Russian oligarchs.
But freezing the assets is the simple part.
Deciding what to do with them is more challenging and will likely start court battles that drag
on for decades.
Laws vary by country, but generally, sanctions don’t allow countries to simply take ownership
of private property.
Under the sanctions announced by the U.S. and Europe, members of the Russian elite who
“enriched themselves at the expense of the Russian people” and “aided Putin” in
his invasion of Ukraine will have their assets “frozen and their property blocked from
use.”
But, assets that are frozen, do still remain under the ownership of the sanctioned individual,
they just can’t be transferred or sold.
Russian oligarchs will continue to own their yachts, but they will be secured by national
authorities and prevented from being used or from sailing to safer locations.
To actually take ownership of property, government prosecutors have to prove the property was
part of a crime.
Under U.S. civil forfeiture law, an asset “used to commit a crime” or that “represents
the proceeds of illegal activity” can be seized, but only with a warrant.
The government has to prove both the crime and the connection of the property to that
crime, and doing so may be difficult.
The oligarchs will have good lawyers who will make arguments that they acted reasonably
within the laws that were in place in Russia and that no criminal activity occurred.
Proving criminality like this can take years.
The U.S. helped retrieve more than $300 million stolen from Nigeria by the former military
dictator Sani Abacha after more than five years of proceedings.
A case against former Ukrainian Prime Minister Pavlo Lazarenko, who was convicted in the
U.S. of money laundering, dragged on for more than 15 years due to Lazarenko’s well-funded
defense.
A government can potentially take ownership only if a prosecutor can prove a crime, prove
the connection of the asset to the crime and the identity of the owner, and Russian Oligarchs
are not new to the world of asset protection.
They use shell companies, trusts, offshore jurisdictions, and a web of family members
and associates to hide the true owner of many of these assets.
Liz Truss, the UK foreign secretary, promised another wave of sanctions once an economic
crime bill comes into law.
The bill, fast-tracked through parliament, will make it easier for the government to
apply sanctions, and make them harder to challenge.
The Bill puts forth three key proposals: Establishing a register of overseas owners of UK property;
strengthening the unexplained wealth order regime; and Strengthening the civil financial
sanctions regime.
But the bill is filled with loopholes: overseas ownership rules for example can be bypassed
by property being held by a UK nominee, or by owning your offshore company in equal shares
with five close relatives so that no individual shareholder reaches the 25% ownership level
required to count as a person of “significant control”.
With regard to Chelsea, the UK government issued a special license to the club on Thursday
from the Office of Financial Sanctions Implementation.
According to the license, Chelsea can’t sell any more tickets for games, they can’t
sell team merchandise, and they won’t be able to buy or sell players on the transfer
market.
Games can however go ahead, staff can be paid and existing ticket holders are allowed to
attend matches.
Existing player transfer agreements and broadcasting deals with Chelsea can go ahead and the team
can spend money to travel to games, but that is capped at 20,000 pounds per game.
Most importantly, if you are attending a match, you can buy refreshments under this license,
even though that involves giving money to a sanctioned entity.
Basically the British can’t be expected to put up with not being allowed to buy a
beer at a football game, no matter where the money goes.
These rules allow football fans to see their team play while, as Nadine Dorries – The
Secretary for Culture put it "depriving Abromovich of benefitting from his ownership of the club."
Dorries acknowledged that this development "brings some uncertainty," but promised the
government would keep working with clubs and the league to keep them in play.
"Football clubs are cultural assets and the bedrock of our communities," she added.
"We're committed to protecting them."
So, Governments can’t just seize property from individuals without going through the
courts and as we have said, sanctions are more about freezing assets than taking ownership
of them, which can only be done if you can prove that they are ill gotten gains.
In theory the sanctions are temporary, and the frozen assets will eventually be returned.
It might be argued that letting the team run as normal without passing any money on to
Abramovich would work, but if that happened and the business generated wealth which would
eventually be passed on to the owner once the asset was unfrozen, it is not really much
of a punishment to the owner.
It is not like he was relying on Chelsea for his income anyhow.
The sanctioning bodies don’t want him to accrue wealth, even inaccessible wealth, while
he’s sanctioned.
So, we end up with this situation where the business can operate, but badly.
The long run expectation is probably that the frozen businesses slowly collapse, and
to avoid this the various Oligarchs pressure Putin to end the war.
The likely outcome of this is that Abramovich will negotiate a sale, which does not benefit
him financially.
The sanctions can’t take the business away from him, but they can have the same overall
effect.
Shares in Evraz, the London-listed steel company where Roman Abramovich is the largest shareholder,
were also suspended on Thursday.
The company is accused by the UK government of having been involved in “supplying steel
to the Russian military which may have been used in the production of tanks”.
That leads us to the final question of what will likely happen to the stocks and bonds
issued by Russian companies that foreign investors currently own?
A large group of global investors, from pension plans, to hedge funds, to sovereign wealth
funds to private individuals, hold Russian assets that were worth almost $170bn at the
end of 2021.
Moscow’s equity markets are currently suspended and trading in many Russian companies listed
abroad is halted.
Russian bonds are almost impossible to trade.
That leaves investors facing the prospect of deep losses.
There are all sorts of complications around these securities that will likely take years
to work their way through the court systems around the world.
In extreme situations, when a country faces significant political or economic uncertainties,
it’s not unheard of for a stock exchange to temporarily shut down to limit the damage
from panic-selling.
In the midst of the Greece debt crisis in 2015, the Athens stock market was shut down
for five weeks.
During the mass protests of the Arab Spring in 2011, the Egyptian stock market was closed
for nearly two months.
It’s hard to say when or if trading will resume in many of these assets.
A lot depends on how the Russia-Ukraine negotiations pan out and how long the Western sanctions
stay in place, it could be weeks or even years before investors can access their funds in
Russian companies again.
While it’s nearly impossible to trade Russian stocks now, many index and active funds will
likely bring further selling pressure once the market reopens.
That’s because MSCI and FTSE Russell, two of the major index providers, said earlier
this week that they would remove Russian stocks from their widely followed emerging-markets
indexes.
That means all the funds that replicate these indexes or use them as a guide––with trillions
of dollars in assets––would need to follow that change and unload their Russian holdings.
Although Russia only accounted for a small slice of the emerging-market benchmarks, the
sheer amount of assets in the affected funds could bring a new round of selling for Russian
stocks.
People who were short Russian stocks find themselves in a strange position too.
While they are sitting on gains given the collapse in Russian stocks, they can’t actually
exit their positions until trading reopens and they are paying expensive stock borrow
rates, in some cases as high as 20% on positions that they can’t close out.
Russian Government dollar bonds that are due to be repaid in 2027 are now trading at 8
cents on the dollar.
A default may come as soon as April 15th this year, which will mark the end of a 30-day
grace period if payments worth $107mn due next week are missed.
While extremely likely, a default on these bonds is not guaranteed.
Gazprom successfully made payment on a dollar-denominated bond this week.
There is also a chance that some of Russia's frozen overseas assets — including the hundreds
of billions of dollars in foreign reserves — could be impounded to repay defaulted
debt, and there is the hotly debated question of whether payment in rubles on dollar debt
constitutes a default.
The bond prospectuses for Russia’s sovereign securities are quite unusual.
They lack a waiver of sovereign immunity, and while they are nominally governed by UK
law, they don’t appear to submit to a jurisdiction.
If Russia fails to pay, it is unclear how the country could be taken to court.
It is not obvious either right now how Credit Default Swaps will work with regard to Russian
debt.
You typically turn in the bonds that have been defaulted upon to receive a CDS payment,
but right now those bonds are not transferable, possibly providing a loophole for CDS sellers.
We have also seen a lot of news about International companies who own stakes in Russian joint
ventures, who no longer want to own them.
But they are not really able to sell them either.
BP and Equinor have talked about selling or just writing down these assets on their balance
sheets.
Citigroup, who have been trying to sell their Russian retail bank for over a year, are now
stuck in legal limbo, raising the odds they will just have to wind down the operation.
On top of this, Putin has warned international companies that have halted operations in Russia
that he could seize their assets following the exodus of big western brands such as McDonald’s
and Unilever.
It’s easy to believe that this economic assault will bring the Russian economy to
a screeching halt, but a badly damaged economy can still stagger along in a diminished state
for quite a while.
We have seen this already with places like Iran, Venezuela and North Korea.
For sanctions to work as intended, Western governments need to lay out clear conditions
for the removal of sanctions to encourage de-escalation and an end to the war.
It’s not yet clear what outcome would be considered acceptable to end the sanctions
— either the official sanctions or the voluntary actions taken by businesses that now range
from Visa to McDonald’s.
Anyhow, I hope you found this interesting.
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