Russian tycoons see glimmer of hope for EU sanctions relief

Hello! This is your weekly guide to the Russian economy — brought to you by The Bell. Our main story this week is about whether the EU could lift sanctions on some Russian tycoons. The European Council is expected to rule on Sept. 15 whether to continue Ukraine-related sanctions on 1,473 Russian individuals. Until this week, not a single Russian tycoon looked like they could have European sanctions lifted — but this appears to be changing. The EU's General Court on Wednesday removed Alexander Shulgin, ex-head of Russian e-commerce giant Ozon, from the sanctions list. And there are good grounds to assume that on Sep. 15 others will find themselves in a similar position. However, Russian businessmen who spoke to The Bell are not holding their breath.

What’s happening?

The European Council must decide on Sep. 15 whether to renew sanctions against Russians that the EU has linked to Kremlin aggression in Ukraine. Unlike U.S. sanctions, which can be imposed indefinitely, EU sanctions must be renewed every six months.

Extending sanctions against 1,473 Russians on the EU list has previously happened without any particular discussion. The European Council has never removed anyone from the list. Until this week, only one individual had successfully challenged sanctions in court – Wagner leader Yevgeny Prigozhin’s 83-year-old mother. The court ruled that family ties alone are not a reason for sanctions, and Violetta Prigozhina had the restrictions lifted.

Now, though, it seems that this is changing. A week before a decision on the next extension is due, the ECJ has ruled sanctions should be lifted from one person on the list — Shulgin (although they remain in place for the moment). This was not unexpected. A Brussels source told Radio Liberty last month the European Council was worried about losing the Shulgin case.

And that is exactly what happened. Shulgin’s was one of eight cases on which the court ruled earlier this week. The other seven appeals from Russians attempting to get sanctions lifted, however, were all dismissed. They included:

• Gennady Timchenko, billionaire and friend (or at least, former friend) of President Vladimir Putin
• Timchenko’s wife, Yelena Timchenko
• Dmitry Pumpyansky, founder of the TMK pipeline manufacturing company
• Pumpyansky’s wife, Galina, and his son, Alexander.
• Co-owner of Russneft oil company Mikhail Gutseriev (unlike the others, he was sanctioned not for his connections to events in Russia or Ukraine, but for his support for the Belarusian regime)
• Tigran Khudaverdyan, ex-head of Russian tech giant Yandex

The Shulgin case

For Russian businessmen, the ECJ decision on Shulgin is the most significant. Shulgin is one of a small group who can genuinely be said to have been unlucky to be sanctioned. His company’s business had nothing to do with the war. No other CEO at a Russian e-commerce company was sanctioned. Shulgin himself is a professional white collar manager with a very technical skillset. Prior to Ozon, he worked for 13 years with Coca-Cola in Russia and then spent seven years at Yandex.

Nothing in his background suggests any close ties with the Kremlin. So, we can confidently conclude that the key evidence against Shulgin was his presence at Putin’s meeting with business leaders on Feb. 24, 2022, just hours after the start of the invasion of Ukraine. Everyone who attended that meeting was quickly hit with EU sanctions (likely something Putin himself was seeking — i.e. to bind business interests to the Kremlin by making them complicit in the invasion).

As a result, Shulgin was sanctioned under two paragraphs of article three of EU regulation 269, which determines the process for imposing sanctions against Russians.

(a): “Natural persons responsible for, supporting or implementing actions or policies which undermine or threaten the territorial integrity, sovereignty and independence of Ukraine.” In the case of Shulgin, the European Council regarded his presence at Putin’s meeting as proof of his support of Kremlin’s politics.

∙g): “leading businesspersons operating in Russia <...> involved in economic sectors providing a substantial source of revenue to the Government of the Russian Federation.” This point could apply to any director of any major Russian company. It is the most common reason for sanctioning Russian business executives by the EU.

The court has decided that Shulgin’s resignation from his position as Ozon CEO is sufficient to free him from sanctions. This implies that prolonging sanctions against the businessman this month would be unlawful because the European Council cannot prove that, after his resignation, Shulgin remained a “leading businessperson,” nor that he supported policies that threatened stability in Ukraine.

Key takeaways

More than 70 Russian businessmen are suing the European Council over sanctions. They include former Chelsea Football Club owner Roman Abramovich, aluminum magnate Oleg Deripaska, metals moguls Alisher Usmanov and Alexei Mordashov, Russia’s richest man Andrei Melnichenko (you can read about his recent revealing interview here), and Alfa Group co-owner Mikhail Fridman.

They can all draw the following key conclusions from the court’s ruling:

• The 36 businessmen who attended Putin’s Feb. 24 meeting now know that simply being at that gathering is not sufficient cause for sanctions. In both the Shulgin and Khudaverdyan’s verdicts, the ECJ ruled that Putin’s meeting was not a gathering of his inner circle.
• Resigning from a corporate position that justifies the EU designating you as “a leading businessperson” remains the easiest way to get out of sanctions. Both Prigozhin’s mother and Shulgin have got off the list on this basis.
• However, any resignation must be genuine, full and final. This important point was illustrated by the ECJ’s refusal to grant Khudaverdyan’s appeal. Immediately after he was sanctioned last year, Khudaverdyan formally left his post at Yandex — but the court found he retained his influence at the company (and specifically mentioned a The Bell article as a piece of evidence in its verdict).
• The Pumpyansky case raises another important point. The businessman tried to use the fact that he earned his fortune without state help to sway the judges. This is a popular line among Russian businessmen — it has been used by Melnichenko, Fridman and others. Even Mordashov (who owns a state in the Rossiya bank owned by a personal friend of Putin) was happy to spread the story that he had “kept the Kremlin at arm’s length.” But the court did not find that argument compelling for Pumpyansky.

What Russia’s tycoons think

The first aim of sanctions is to diminish Russia’s military capacity, while the second is to punish those involved in the invasion. However, the EU’s logic is difficult for most Russian businessmen to understand. In Russia, there is a dividing line between regular businessmen and people from Putin’s inner circle who are either personally indebted to him (like Yury Kovalchuk, Timchenko, and Arkady Rotenberg), or those who made transactions at the Kremlin’s behest (such as Abramovich, who purchased TV channels from Putin’s foe Boris Berezovsky to hand them over to Kremlin loyalists). Many in the first group are unhappy that they are under the same sanctions as the second.

“All [the European Council’s arguments] are simply nonsense,” one top Russian businessman on the EU sanctions list told The Bell. He said he had not attempted to appeal the EU’s decision. “Until the political situation changes, there is no chance of lifting sanctions,” he said.

A businessman, who is taking the European Council to court but has not left his company, told The Bell that “I’ve already lost interest: life goes on, and it’s better to focus on my work and my family.”

Another source told The Bell that he is “happy for Shulgin” but he has no expectations of getting a similar decision. He argued that the foreign policy situation can change quickly, and it’s impossible to predict what will guide EU foreign policy in as little as six months from now. “We can only hope for a general turnaround in sanctions policy, but this could be in the direction Russian businessmen need, or in the opposite direction,” he said.

One Russian tycoon said that the appeal to the ECJ filed by Yandex owner Arkady Volozh will be particularly interesting — whether the verdict will be swayed by Volozh’s recent anti-war statement. “Your personal opinion about the war is not a legal category,” said the tycoon. “It’s completely unclear how it could be used in court.”

Why the world should care

As sanctions on Russian individuals will likely be in place for many years to come, the argument over whether they should be used as a punishment or as a means to accelerate the end of the war will also continue. Ways of getting sanctions lifted are crucial in this debate. Shulgin’s case showed one route. Next week, we will see whether the strategies of other sanctioned billionaires will work — from Volozh’s condemnation of the war to the PR-campaigns waged by the likes of Melnichenko and Fridman.

Russia’s YouTube alternative becomes a family business

Kremlin control over the Russian Internet grew even deeper Monday when Stepan Kovalchuk, the relative of a close Putin ally, became the head of VKontakte, Russia’s largest social network. Stepan is the great-nephew of Yuri Kovalchuk — a billionaire who is a close friend of Putin’s and owns several top TV channels.

A few months before the war, Yuri Kovalchuk took effective control of VK, which manages VKontakte, after billionaire Alisher Usmanov sold his stake to state-owned Gazprombank and insurance company Sogaz (which Kovalchuk co-owns). A few months later, the son of Yuri’s close ally, Sergei Kiriyenko, Vladimir, became VK’s CEO. Sergei is the deputy head of the presidential administration and a former prime minister.

For years, the Kovalchuk family and Kiriyenko have been instrumental in helping the Kremlin consolidate its power over the Internet. The 2021 purchase of VK was part of an attempt to make VKontakte an online analogue of state-owned Channel One. The picture was complete when Stepan Kovalchuk took over VKontakte this week. Importantly, he’s also now head of all its content projects, including messaging and video.

Video is the next major frontier for Kremlin propaganda. Russia has blocked Twitter, Facebook and Instagram, but there is one Western service it can’t block: YouTube. It’s just too popular among Russians. Previous attempts to clone YouTube by Russian state-owned companies have ended in failure. Now, the Kremlin hopes that Stepan Kovalchuk can create a better alternative with VK Video.

To learn more about how the Kovalchuks and Kiriyenkos took control over the internet in Russia, read our story on the 2021 VK sale.

Further reading

• Caution and embrace: How Europeans should treat exiles from Putin’s Russia. Kadri Leek of the European Council on Foreign Relations debunks myths about the Russian refugee community
• Black Tulips and the Russian war in Ukraine. Authors analyze statistical connections between casualty announcements and various forms of political protest in Russia