Could the EU reverse the personal sanctions against certain Russians?

The European Union is in talks to lift sanctions against around 40 Russians. The individuals were sanctioned on the basis of their alleged involvement in Moscow’s invasion of Ukraine, but according to sources cited by Bloomberg, the European Council’s legal service said some of the sanctions were imposed on weak grounds. .

Besides well-known oligarchs who are closely linked to President Vladimir Putin, several senior leaders associated with Russia’s so-called “new economy” are among those who would challenge their designation.

Dmitry Konov, Tigran Khudaverdyan and Alexander Shulgin – former leaders of Sibur, Yandex and Ozon, respectively – are widely regarded by international markets as relatively Western technocrats, albeit with ties to Putin’s power vertical, who have become collateral damage in the sanctions war.

Yandex, which is often described as Russia’s answer to Google, started as a search engine in 1997. Since then, it has expanded into different areas and touches on everything from carpooling to online groceries.

Khudaverdyan’s sanctions have caused some consternation in the international business community due to his public criticism of the war, although he has yet to condemn the actions of the Russian military or Putin himself. Several weeks after Russian troops launched their bloody invasion of Ukraine on February 24, Khudaverdyan wrote a vaguely general comment on Facebook, stating, “What is happening is unbearable. War is monstrous.

Khudaverdyan later resigned after the EU announced he had been included in its sanctions list.

John Boynton, the US chairman of Yandex’s board, released a statement saying the company was “shocked and surprised” by Khudaverdyan’s appointment.

Dmitry Konov, the former CEO of petrochemicals maker Sibur, is also said to be challenging the sanctions against him. Brussels ruled that Sibur, under Konov, provided revenue to the Russian government, part of which was used to fund Moscow’s army; the same claim made against Khudaverdyan.

Konov, however, continues to insist that Sibur’s tax contribution has nothing to do with the war in Ukraine. “We are a private company and the arguments […] that the company provides a substantial source of income to the government responsible for destabilizing Ukraine are invalid,” he told Agence France Presse, insisting that the majority of his taxes were paid at the regional and not federal level.

Konov tried to point out that he had strong ties to Europe, saying he was heavily influenced by European management practices after attending university in Switzerland.

Dmitry Konov and Vladimir Putin

Indeed, it is true that Konov has a deep imprint in international circles. He has been a governor of the World Economic Forum’s Chemistry and Advanced Materials Committee since 2016 and was appointed Commander of the Order of the Star of Italy in 2020 for advancing Russian-Italian trade relations.

Alexander Shulgin, the former CEO of e-commerce company Ozon, is also challenging the sanctions. The EU cites his attendance at a meeting of business leaders at the Kremlin on the day the war began as evidence that Shulgin and the other CEOs present were members of Putin’s “inner circle”, according to the Financial Times.

But those attending the meeting say it was scheduled months in advance and their attendance was not an endorsement of the day’s events. Indeed, some have hinted that their attendance at the meeting was “not optional”.

“We were surprised and saddened by the news and justification for the sanction of Alexander Shulgin,” said Elena Ivashentseva, chairwoman of the board of Ozon in a statement. “Ozon has always pursued the highest standards of business conduct with the aim of providing the best services to our customers and merchants, while creating maximum value for our investors,” she added.

The Icarus effect

A common theme among executives who have fallen under sanctions is that of relative success in growing their businesses. Under Shulgin, Ozon’s business grew twentyfold in just four years. After becoming CEO in 2017, he took Ozon to the Nasdaq IPO, where he raised $1.2 billion. It has now grown into a hugely successful business, often described as Russia’s answer to Amazon.

Yandex went public on NASDAQ in 2011 in the biggest IPO of any internet company since Google in 2004. The company undertook a successful corporate governance restructuring when Khudaverdyan became deputy chief executive in 2019 , helping it avoid a ban on foreign ownership and reconcile competing shareholder pressures. and regulators.

Likewise, Sibur went from a minnow to an industry leader under Konov. When he joined the company in 2004, it was a post-Soviet industrial asset on the verge of bankruptcy. By 2021, Sibur’s annual revenue had increased by $12.9 billion.

The corollary of successful business growth is an increase in your business debt burden. It is no coincidence that these particularly successful executives risk sanctions. The European Council justifies the sanctions against the leaders by pointing out that their companies contribute to the budget of the Russian Federation through tax revenues.

Individuals under sanction argue that the success of their businesses should not be blamed on them and that much of their tax revenue goes to local governments, not the federal budget that funds the military.

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The European Union has already sanctioned 1,158 Russians and 98 Russian entities through seven wide-ranging sets of sanctions. The European Commission says the sanctions “hit Russia where it hurts”, but if the individuals in question win their case, it wouldn’t be the first time the sanctions have been lifted.

The EU’s most recent round of sanctions has been described as a ‘maintenance and alignment’ package – designed to modify established sanctions to make them as effective as possible without harming European interests or food security. and global energy.

Importantly, the EU’s seventh package also lifted the ban on providing certain technologies and services to the Russian aviation sector. Brussels explained that some technical assistance and technologies were still “necessary to safeguard the technical industrial standardization work of the International Civil Aviation Organization”.

The established ban on aviation technology endangered Russian aircraft by depriving them of necessary checks and renovations. By reversing the decision, the EU hopes to maintain safety standards and avoid liability in the event of an accident.

But the decision will also be welcomed by European airlines like Airbus, which will avoid the potential reputational damage inflicted by incidents on planes that have not been serviced.

An Airbus A320-200 of the Russian airline Aeroflot.

A similar logic has underpinned the reversal of US sanctions against the Russian aluminum industry. In 2019, the Treasury Department rolled back sanctions against the world’s second-largest aluminum maker, Rusal, over concerns the sanctions could cut off a crucial source of the metal.

The reversal was widely seen as a success not only for Rusal, but also for global metals markets and US economic interests – with the company agreeing to corporate governance changes and greater transparency in response to concerns from Washington.

In the cases of the air services and Rusal, the cancellation of the sanctions was considered the most responsible option, and the parties that applied the sanctions recognized that their unintended consequences risked overshadowing their geopolitical influence.

People sanctioned by the EU will be keen to demonstrate that their cases are similar. While lawmakers have done their best to avoid penalizing companies that play a structurally important role in global supply chains, leaders could say they crafted new sanctions at record speed and inevitably implicated some companies that help Europe as much as Russia.

Although Yandex, Sibur and Ozon were not sanctioned directly, which raises questions about the decision to sanction their management, the effect of sanctioning their managers is still detrimental. The reputational damage inflicted means that European companies do not want to do business and have had to find other sources for similar products – be they polymers or software.

The question that now seems to cross the minds of European policymakers will be how they can strike the right balance between exerting intense political pressure on the Kremlin while minimizing disruption to European trade and global supply chains.

The seventh EU sanctions package will add up to 48 new entities to the list of sanctioned Russians. The results of ongoing court cases will show how rigorous the EU has been in selecting candidates for the Designated Persons List.

One thing is certain: Europe has no intention of slowing down anytime soon.

Mary I. Bruner