Russia’s biggest businesses are caught between opposing forces: While confronted externally by international sanctions, domestically they are waging a full-fledged battle to escape the clutches of nationalism.Some studies estimate as much as 70% of the Russian economy is already run by the state. While others find that this ratio is likely a good bit lower, the fear of nationalization hovers constantly over businessmen and investors.
In June, the U.S. Treasury’s Office of Foreign Assets Control said it would give investors another four months -- until Nov. 8 -- to cut ties with GAZ, a major Russian vehicle producer. It was the fourth time the Office pushedthe deadline back. GAZ, which makes vans and was once a point of Soviet pride, is now run by Oleg Deripaska, the Russian billionaire who was sanctionedby Washington over accusations of “malign activity” and was allegedly a client of Paul Manafort.
The company ranks as one of Russia’s largest car manufacturers. It sells more than 60,000 vehicles annually, and it indirectly employs more than 400,000 people. GAZ previously enjoyed strong ties with Daimler and Volkswagen. The German giant even soughtto purchase a stake in the company, but later haltedits plans because of the sanctions. According to Bloomberg, Deripaska saidthat “GAZ was bombed during the war and Nazis couldn’t destroy it. Now American sanctions may do it instead.”
Earlier in June, the company’s board recommendednot paying dividends on ordinary shares for 2018, and in March, it appealed to the government for state aid of $480 million. Russian Industry Minister Denis Manturov saidthat “nationalization hasn’t yet been discussed.” But the fear of putting so many jobs in peril, with the newly unemployed blaming the Kremlin for their misfortunes, would likely outweigh other considerations.
If sanctions remain in place, the company will probably not survive in its current form. Nationalization is its surest path to survival, and if it is struggling indeed to survive, the Kremlin won’t stand back. In 2009, Avtovaz, another Russia’s largest carmaker, consideredlaying off more than 27,000 workers. With fears of street protests running high, Vladimir Putin, then Prime Minister, stepped in with a $600 million bailout that rescuedthe company.
Avtovaz later became a partof Renault-Nissan's alliance, something barely possible now in light of sanctions. The Russian government may try a similar maneuver with GAZ. Such a bailout would probably receive wide coverage throughout the state-run media to once again allege “Western aggression” and justify the Kremlin’s efforts to protect Russian businesses and workers from foreign influence.
According to a 2016 report by the Russian Federal Antimonopoly Service, the Russian state controlled70% of the economy in 2015, a twofold increase in the space of a decade. The surge of nationalization was likely caused by both the need to maintain high levels of employment regardless of a low productivity rate, and a desire to maintain a tight grip on businesses that are still viewed as a threat. In a recent interview with the Financial Times, Putin announced,“We do not have oligarchs anymore.” What he meant is that Russia’s remaining large businesses are either controlled by the Kremlin, or in close cooperation with it.
The Russian business climate continues to suffer as officials and power groups close to the Kremlin try to lay hands on lucrative assets at the expense of other investors, who become targets. In March, Michael Calvey, the founder of Baring Vostok and one of Russia’s most well-known foreign private-equity investors, was arrestedand then put under house arrestto await trial on embezzlement charges. He denies the accusations and says that the criminal case is a weapon in a corporate dispute over control of a major Russian bank. In June, David Yakobashvili, one of the founders of the largest Russian dairy companies, refusedto return to Russia after security services searched his art gallery. Later on, Sergei Petrov, the founder of a major car dealership and a former outspoken Member of Parliament known for his anti-Kremlin views, also refusedto return after investigators searched his offices in Moscow and St. Petersburg.
While the Kremlin’s grip on the economy tightens, the Russian public seems to be souring on meager economic growth and corruption. In May, Russia’s state pollster, VTsIOM, showed trust in Putin falling to 31.7% - the lowest in 13 years. During Putin’s annual televised question-and-answer session, an event meant to showcasehigh levels of public trust, a number of embarrassing questions to the president popped up on the screen, including, “Only one question: When will you go away?”
The Russian economy will likely continue to stagnate in the years to come, meaning the Kremlin will continue to tighten the screws. In effect, sanctions targeting such companies as GAZ, or other businesses that have not yet been nationalized, could turn them into easy targets of the state’s domestic policies. Eventually, European countries that benefit from strong commercial ties with Russia may question the wisdeom of keeping sanctions in place.
Sanctions may have cut as much as 6% off Russian GDP since 2014, but there are growing concerns about their effectiveness, and especially about those targeting private businesses.
Despite transatlantic solidarity on the need to contain Russia, more European businesses are growing concernedabout punitive measures that fail to achieve political goals. Rainer Seele, President of the German-Russian Chamber of Commerce (AHK), recently went so far as labelingU.S. sanctions against Russia as “counterproductive” and adding that “German companies expect sales and profits to increase in Russia.” Seele’s view is expressed privately with growing frequency in European business and diplomatic communities.
In June, German Economic Minister Peter Altmaier signed a pledge to improve economic ties with Russia when attending St. Petersburg International Economic Forum. This was the first such bilateral agreement since sanctions were introduced.
With Donald Trump seeking to reset relations with Washington’s traditional allies in the European Union, controversial aspects of sanctions might appear as a stumbling block. Their effectiveness should be assessed very carefully in order to sustain a unified policy on Russia’s influence.
The views expressed are the author's own.
