How U.s. Sanctions Take a Hidden Toll on Russian Oligarchs

Documents show how sanc­tions afflict Putin insid­ers — and how far they go to evade them

As U.S. sanc­tions bit into Russia’s bil­lion­aire class in 2018, an account­ing firm in Singapore issued a secret appraisal of a $200 mil­lion debt owed by one of the tar­get­ed oligarchs.

The ver­dict was brac­ing. The mon­ey was owed by a com­pa­ny con­trolled by Oleg Deripaska, accord­ing to a copy of the appraisal, at a time when his ener­gy and min­ing empire was reel­ing from sanc­tions the United States had imposed on Russian oli­garchs in response to “Russia’s world­wide malign activity.”

Now Deripaska’s assets were at “risk due to the unsta­ble polit­i­cal sit­u­a­tion, demon­strat­ed by the lat­est round of sanc­tions,” the account­ing firm wrote. Recovering more than a small frac­tion of the $200 mil­lion, the firm con­clud­ed, “would be dif­fi­cult if not impos­si­ble.”Read key take­aways from the Pandora Papers investigation

This meant a loss of tens of mil­lions of dol­lars, as the impact of sanc­tions rip­pled across a hid­den cor­ner of what crit­ics call Russia’s kleptocracy.

U.S. offi­cials involved in sanc­tions pol­i­cy say vis­i­bil­i­ty into the pri­vate ledgers of tar­get­ed oli­garchs is rare, even in clas­si­fied set­tings. Details of the Deripaska debt-gone-bad, how­ev­er, are revealed in a mas­sive trove of finan­cial records obtained by the International Consortium of Investigative Journalists (ICIJ) and shared with The Washington Post and oth­er news orga­ni­za­tions. The Pandora Papers, as the trove is called, pro­vide insights into the reach of U.S. and European sanc­tions tar­get­ing a range of Russian elites at a time when these puni­tive mea­sures serve as the over­whelm­ing weapon of choice in Washington’s com­bat­ive rela­tion­ship with Moscow.

Over the past sev­en years, the United States and Europe have imposed sanc­tions on more than 800 Russian indi­vid­u­als and enti­ties for alleged “malign” behav­ior includ­ing Russia’s annex­a­tion of Crimea, armed incur­sions into Ukraine, attempt­ed assas­si­na­tions of polit­i­cal dis­si­dents, cyber­at­tacks on Western insti­tu­tions and dis­rup­tions of U.S. elections.

The Pandora files show sanc­tions not only hit­ting their Russian tar­gets but then trig­ger­ing loss­es that spread across their inter­con­nect­ed finan­cial networks.

The doc­u­ments con­tain mate­r­i­al on at least 46 Russian oli­garchs who appear on the Forbes list of bil­lion­aires. Among them are Deripaska and Gennady Timchenko, who amassed a for­tune through oil trad­ing. There are also peo­ple excep­tion­al­ly close to Russian President Vladimir Putin, includ­ing Peter Kolbin, a child­hood friend sus­pect­ed by U.S. offi­cials and oth­ers of hold­ing hun­dreds of mil­lions of dol­lars in assets for him.

Pandora doc­u­ments show that Timchenko and Kolbin changed the reg­is­tered own­er­ship of off­shore com­pa­nies as sanc­tions hit.

But the files also under­score the lim­its of sanc­tions, mak­ing clear that vast quan­ti­ties of Russian mon­ey con­tin­ue to slosh through secret glob­al accounts while Moscow’s actions beyond its bor­ders seem unde­terred. Russia remains in con­trol of Crimea, a promi­nent crit­ic of Putin was poi­soned last year, and U.S. intel­li­gence agen­cies accused Moscow of mount­ing a new attack on a U.S. pres­i­den­tial election.

Current and for­mer U.S. offi­cials said the loss­es and reac­tions depict­ed in the doc­u­ments demon­strate the reach of the West’s finan­cial arse­nal. The offi­cials said these puni­tive mea­sures influ­ence the Kremlin’s cal­cu­la­tions if not always change its course.

“What it shows is that these net­works don’t feel untouch­able,” said Julia Friedlander, who served in senior posi­tions at the Treasury Department and the White House dur­ing the Obama and Trump admin­is­tra­tions. “Although sanc­tions have often failed to deliv­er on larg­er polit­i­cal goals,” she said, they dis­rupt adver­saries who “rely on our finan­cial mar­kets as an ele­ment of their own power.”

A losing $200 million shuffle

Deripaska, 53, was among sev­en Russian oli­garchs sanc­tioned in 2018 by the U.S. Treasury Department. Several of his com­pa­nies, includ­ing Rusal, one of the world’s largest alu­minum con­glom­er­ates, were also tar­get­ed in an effort to put more pres­sure on the Kremlin.

The impact of such mea­sures can be severe. Treasury des­ig­na­tions all but lock tar­gets out of glob­al mar­kets, where the U.S. dol­lar is the dom­i­nant cur­ren­cy, and bar U.S. banks and com­pa­nies from doing busi­ness with them.

Treasury cit­ed Deripaska’s close ties to the Kremlin and not­ed that he had been “inves­ti­gat­ed for mon­ey laun­der­ing and … accused of threat­en­ing the lives of busi­ness rivals, ille­gal­ly wire­tap­ping a gov­ern­ment offi­cial, and tak­ing part in extor­tion and racketeering.”

In 2016, Deripaska had used a com­pa­ny called A‑Finance Ltd. to issue a promis­so­ry note for $200 mil­lion, accord­ing to records relat­ed to that trans­ac­tion in the Pandora files. The doc­u­ments do not explain why the Russian bil­lion­aire took on that debt, which required inter­est pay­ments of $10 mil­lion a year.

A spokes­woman for Deripaska dis­put­ed the U.S. alle­ga­tions against him and dis­missed ques­tions about the promis­so­ry note. “None of the alle­ga­tions of ille­gal activ­i­ty made against him … have ever been upheld in court,” Larisa Belyaeva said in an email response to writ­ten ques­tions from The Post.

[Documents tie woman alleged­ly in secret, years-long rela­tion­ship with Putin to lux­u­ry Monaco apart­ment]

Belyaeva said that “Deripaska did own A‑Finance Limited” but “denies alle­ga­tions that would sug­gest any ille­gal activ­i­ty by this company.”

The Pandora records show that the note was held by Saffron International Assets Ltd., a shell com­pa­ny con­trolled at the time by anoth­er Russian oli­garch, Evgeny Novitsky, a bil­lion­aire who has held shares in one of Russia’s largest cell­phone networks.

But the promis­so­ry note changed hands in 2017, accord­ing to Pandora records, when Saffron was acquired by a promi­nent Russian financier, Kirill Androsov, as part of what one doc­u­ment describes as an “off­set­ting agree­ment” between Androsov and Novitsky. Androsov had served as senior aide to Putin, dur­ing his tenure as prime min­is­ter between 2008 and 2012, before leav­ing gov­ern­ment, set­ting up invest­ment funds and estab­lish­ing a pres­ence in Singapore.

The trans­ac­tions are record­ed in the inter­nal files of a Singapore-based firm, Asiaciti Trust, which helped Androsov, 49, and oth­er clients set up com­pa­nies, includ­ing in the British Virgin Islands, where Saffron was registered.

In November 2018, Androsov expressed con­cern about col­lat­er­al dam­age from the sanc­tion­ing of Deripaska. Through an inter­me­di­ary, Androsov told Asiaciti that the Deripaska note “posed a cer­tain rep­u­ta­tion­al risk to the entire struc­ture” of his off­shore com­pa­nies, accord­ing to an inter­nal Asiaciti account of the call.

At the time, Saffron was part of a col­lec­tion of com­pa­nies Androsov con­trolled in an inter­lock­ing struc­ture, accord­ing to dia­grams in the Pandora files. His rep­re­sen­ta­tive asked Asiaciti to remove Saffron from that web and move “the entire issued shares in Saffron to his per­son­al name,” doc­u­ments show.

Asiaciti offi­cials at first seemed skep­ti­cal, call­ing the request “slight­ly abrupt,” but ulti­mate­ly agreed that “it would be pru­dent” to iso­late Saffron from Androsov’s oth­er com­pa­nies, accord­ing to notes of Asiaciti offi­cials’ inter­nal discussion.

In a writ­ten state­ment, Asiaciti denied any wrong­do­ing but declined to dis­cuss its inter­ac­tions with Androsov, cit­ing its desire “to main­tain con­fi­den­tial­i­ty and pro­tect per­son­al data.”

A month lat­er, in December, Abacus Capital, a finan­cial ser­vices firm based in Singapore, issued the grim appraisal of this prob­lem­at­ic asset on Androsov’s books.

View doc­u­ment

In its report, Abacus not­ed that the promis­so­ry note’s val­ue had already been down­grad­ed sub­stan­tial­ly because Saffron had failed to secure any col­lat­er­al or a guar­an­tee of repay­ment from Deripaska. Abacus then delved into the dis­tressed state of his assets, with charts show­ing shares of his com­pa­nies, includ­ing En Plus Group, plung­ing on glob­al exchanges as sanc­tions kicked in. In the end, Abacus con­clud­ed that Androsov and Saffron were unlike­ly ever to col­lect more than 10 per­cent of what was owed. Just two years after the $200 mil­lion note was issued, it was worth bare­ly more than $18 million.

Abacus did not respond to requests for comment.

The records leave some ques­tions unan­swered, includ­ing why Androsov was will­ing to take on Deripaska-relat­ed debt with no col­lat­er­al. The files do show that Asiaciti was sus­pi­cious about this and oth­er aspects of Androsov’s business.

Asiaciti ulti­mate­ly con­clud­ed that Novitsky was actu­al­ly in con­trol of com­pa­nies reg­is­tered to Androsov and cit­ed a “lack of eco­nom­ic sense” behind trans­ac­tions involv­ing the two men.

In an April 2019 board meet­ing, Asiaciti exec­u­tives decid­ed that con­cerns about the mat­ter exceed­ed the firm’s “accept­able risk appetite” and moved to sev­er its rela­tion­ship with Saffron and oth­er Androsov com­pa­nies, accord­ing to an account of that meet­ing. The doc­u­ment indi­cates that Asiaciti also planned to file “sus­pi­cious trans­ac­tion reports” with authorities.

An audit of Asiaciti by the Monetary Authority of Singapore ques­tioned its han­dling of accounts relat­ed to Androsov, Novitsky and oth­ers, con­clud­ing that the firm’s com­pli­ance prac­tices “were assessed to be weak,” accord­ing to a copy of the report in the Pandora trove.

[Trove of secret files details an opaque finan­cial uni­verse where the glob­al elite shield their rich­es]

In response to a let­ter sent to the firm by the ICIJ and The Post, Asiaciti said it is “com­mit­ted to the high­est busi­ness stan­dards, includ­ing ensur­ing that our oper­a­tions ful­ly com­ply with all laws and reg­u­la­tions.” The firm said it “found many inac­cu­ra­cies and instances where impor­tant details were miss­ing” in the let­ter sent to it enu­mer­at­ing details found in the Pandora doc­u­ments. Asiaciti pro­vid­ed no specifics.

Belyaeva, the spokes­woman for Deripaska, reject­ed any sug­ges­tion that there was hid­den or nefar­i­ous pur­pose to the A‑Finance-relat­ed trans­ac­tions. “It sim­ply defies belief that com­pa­nies [Deripaska] found­ed — that gen­er­ate bil­lions of dol­lars in rev­enues and com­ply with the high­est stan­dards of cor­po­rate gov­er­nance — would engage in this sort of pet­ty schem­ing,” she said.

Androsov, whose résumé lists a master’s degree in busi­ness from the University of Chicago, did not respond to requests for com­ment sent to his per­son­al email account or an address pro­vid­ed by Altera Capital, a Moscow-based invest­ment firm where Androsov serves as man­ag­ing partner.

In a recent inter­view with the Australian Broadcasting Corporation, Androsov denied that sanc­tions had ham­pered his busi­ness prospects and down­played their over­all impact. The mea­sures are “much less an eco­nom­ic tool” and “much more polit­i­cal instru­ment,” he said. “Most of the Russian com­pa­nies are quite suc­cess­ful oper­at­ing, even under the sanc­tions, in oth­er parts of the world, like China and Southeast Asia.”

For Putin insiders, evasive maneuvers

Another case in the Pandora trove focus­es on two close asso­ciates of Putin who have known him for decades.

Timchenko, 68, has been accused by crit­ics of using Kremlin con­nec­tions to amass an oil-trad­ing for­tune esti­mat­ed at near­ly $20 bil­lion. U.S. author­i­ties have alleged that Putin was a secret investor in Timchenko’s Gunvor Group, which became one of the largest oil-trad­ing com­pa­nies in the world. Timchenko in 2014 denied that Putin “had any own­er­ship, ben­e­fi­cial or oth­er­wise, in Gunvor.”

Kolbin and Putin were child­hood friends whose fathers met in the 1950s, the elder Kolbin once told a Russian news­pa­per. The younger Kolbin spent years work­ing as a butch­er in a St. Petersburg deli before his mete­oric rise in net worth.

Current and for­mer U.S. offi­cials say they sus­pect that Kolbin has served as one of many “wal­lets” for Putin — trust­ed asso­ciates enlist­ed to secret­ly hold mon­ey and prop­er­ty in their names on his behalf.

As the United States tar­get­ed Timchenko and Kolbin for sanc­tions, the two men moved to recon­fig­ure their off­shore accounts, sev­er­al doc­u­ments in the trove show.

Timchenko and Kolbin had both been tied to a petro­le­um ven­ture called LTS Holdings based, at least on paper, in the British Virgin Islands, accord­ing to the documents.For years, own­er­ship of LTS had been split between two shell com­pa­nies. One, called Lerma Trading, was list­ed by the U.S. Treasury Department in 2015 as a Timchenko front. The oth­er, Southport Management Services Ltd., is not explic­it­ly named as a Kolbin com­pa­ny in the doc­u­ments, but the sequence of events depict­ed in the files sug­gests that it was under his control.

That split-own­er­ship arrange­ment was sta­ble for near­ly a decade until Timchenko was sanc­tioned in 2014 for “pro­vid­ing finan­cial, mate­r­i­al or tech­no­log­i­cal sup­port” to the Russian gov­ern­ment as it annexed Crimea, accord­ing to the Treasury Department announcement.

Within months, Timchenko’s shell com­pa­ny was no longer list­ed as co-own­er of LTS Holdings in Pandora doc­u­ments. Instead, Southport Management sud­den­ly held all the out­stand­ing shares.

A spread­sheet list­ing Kolbin as the “ulti­mate ben­e­fi­cial own­er” of LTS Holdings indi­cates that Southport Management was prob­a­bly his shell com­pa­ny all along.

The maneu­vers didn’t shield LTS Holdings or Kolbin. Both were sanc­tioned by the Treasury Department the fol­low­ing year for their asso­ci­a­tion with Timchenko.

After Timchenko and Kolbin were sanc­tioned, Alcogal, the Panamanian law firm that had han­dled the trans­ac­tions for LTS Holdings, filed a sus­pi­cious activ­i­ty report with author­i­ties in the British Virgin Islands, flag­ging that Kolbin and Timchenko held accounts in the islands’ juris­dic­tion and had been sanc­tioned by the United States. Alcogal also resigned as agent to LTS Holdings, accord­ing to the doc­u­ments, cit­ing a “high­er risk to our office” than the firm could tolerate.

In a detailed writ­ten state­ment, Alcogal did not specif­i­cal­ly address ques­tions about its han­dling of accounts linked to Kolbin and Timchenko but said, “We resign in cas­es where we sus­pect that the client is involved in mon­ey laun­der­ing, ter­ror­ism financ­ing or oth­er illic­it activ­i­ties,” or where the firm fails to get “full coop­er­a­tion” from a client or can­not “car­ry out the required cus­tomer due diligence.”

Rather than dis­solve, LTS Holdings moved to anoth­er off­shore reg­istry, accord­ing to anoth­er Alcogal doc­u­ment that does not pro­vide addi­tion­al details.

[The world reacts after secret doc­u­ments show how the elite shield their rich­es]

Registration doc­u­ments that are sep­a­rate from the Pandora files show that LTS Holdings was reg­is­tered in Cyprus in 2017, and that Kolbin’s daugh­ter, Tatiana Kolbina, was the sole share­hold­er. Some Russia experts and jour­nal­ists in Moscow believe that Peter Kolbin died in recent years. No obit­u­ary has appeared.

Kolbin’s rel­a­tives did not respond to requests for com­ment. A London law firm rep­re­sent­ing Timchenko declined to answer ques­tions about the trans­ac­tions involv­ing Kolbin and LTS Holdings. The firm, Carter-Ruck, said that “our client’s unequiv­o­cal posi­tion is that he has always act­ed entire­ly law­ful­ly through­out his career and busi­ness dealings.”

In recent years, U.S. sanc­tions have repeat­ed­ly prompt­ed Russians to take eva­sive steps.

In 2014, the Treasury Department tar­get­ed Arkady Rotenberg, a child­hood friend of Putin whose con­struc­tion com­pa­nies won con­tracts esti­mat­ed at $7 bil­lion for projects asso­ci­at­ed with the 2014 Winter Olympics in Sochi.

When Rotenberg then passed con­trol of his com­pa­nies to his son, Igor, Treasury respond­ed by sanc­tion­ing the younger Rotenberg. Italian court doc­u­ments shared with the ICIJ as part of the Pandora project show that the son’s com­pa­nies sud­den­ly faced dif­fi­cul­ties pay­ing bills.

Rotenberg sub­or­di­nates in Moscow and Spain trad­ed emails in 2018 in which they dis­cussed revis­ing con­tracts to swap out the names of com­pa­nies under scruti­ny and send­ing invoic­es to a new com­pa­ny still able to send money.

One of the employ­ees joked about what col­leagues should do if they got caught. “Remember guys, should they arrest me, don’t bring me oranges,” the employ­ee wrote, accord­ing to the doc­u­ments. “Go for choco­late cakes.”

The Rotenbergs did not respond to requests for comment.

‘Safe option,’ limited deterrence

U.S. offi­cials and experts believe that sanc­tions have tak­en a cumu­la­tive toll on Russia’s econ­o­my, sap­ping its gross domes­tic prod­uct by as much as 1.5 per­cent annu­al­ly. Even so, the past few years have been marked by new waves of alleged Russian aggression.

Last year, the Kremlin was accused by the United States and oth­er Western gov­ern­ments of poi­son­ing polit­i­cal activist Alexei Navalny, wag­ing anoth­er assault on an American pres­i­den­tial elec­tion and car­ry­ing out a mas­sive cyber­at­tack known as SolarWinds on U.S. tar­gets includ­ing fed­er­al agen­cies and Microsoft.

Then, this year, Russia moved forces to the bor­der of Ukraine as part of a mil­i­tary buildup that rat­tled nerves in the region and raised fears of an inva­sion. U.S. offi­cials say they believe Putin backed away from esca­lat­ing Russia’s armed incur­sions into Ukraine in 2014 when his gov­ern­ment and many of his clos­est asso­ciates were hit hard by U.S. and European sanctions.

The Biden admin­is­tra­tion announced two waves of sanc­tions against Russia with­in months of tak­ing office and has threat­ened more.

The repeat­ed reliance on sanc­tions reflects a belief in the coer­cive pow­er of the U.S. econ­o­my and cur­ren­cy — but also a lack of palat­able alter­na­tives for con­fronta­tion with anoth­er nuclear-armed pow­er, offi­cials and experts said.

Sanctions rep­re­sent a “safe option” on the menu of retal­ia­to­ry mea­sures against Moscow, said James Nixey, head of the Russia-Eurasia pro­gram at the Chatham House pol­i­cy insti­tute in London.

“You can’t ignore out­right medieval-style” behav­ior by Russia, Nixey said. But “we don’t want to invade. We don’t want to start a war. We don’t want to endan­ger any­body any more than we have to.”

Stung but still maneuvering

Early on, Timchenko was cav­a­lier about the puni­tive finan­cial mea­sures tak­en against him, say­ing he had no siz­able assets in the United States and didn’t expect to feel a pinch. But costs accrued in unex­pect­ed ways. In 2014, Timchenko told the Russian news agency ITAR-Tass that because of sanc­tions, his wife “was unable to pay in Germany for a com­plex surgery on the spine.” When she tried to set­tle the bill with the clin­ic that per­formed the oper­a­tion, he said, “the pay­ment did not go through.”

Timchenko said the bill was ulti­mate­ly paid, but expressed annoy­ance, call­ing the com­pli­ca­tions cre­at­ed by sanc­tions “a great stupidity.”

[While his coun­try strug­gles, Jordan’s King Abdullah secret­ly splurges]

Four years lat­er, Timchenko sold a pri­vate jet, accord­ing to air­craft reg­is­tra­tion records obtained by the Reuters news ser­vice. He did so after telling ITAR-Tass that Gulfstream, the U.S.-based air­craft man­u­fac­tur­er, would no longer ser­vice his plane.

For Deripaska and Androsov, the impact of U.S. sanc­tions and their fall­out has been mixed.

Earlier this year, a U.S. fed­er­al court dis­missed Deripaska’s law­suit seek­ing to have the sanc­tions against him lift­ed. Derispaska’s appeal of that rul­ing is pend­ing. In 2019, he suc­ceed­ed in get­ting the mea­sures against sev­er­al of his com­pa­nies, includ­ing Rusal and En Plus, waived when he agreed to reduce his own­er­ship stakes in them.

Several for­mer U.S. offi­cials said the U.S. gov­ern­ment agreed to lift the penal­ties against his com­pa­nies in part because of eco­nom­ic reper­cus­sions beyond Russia. Thousands of jobs were threat­ened at an alu­minum plant in Ireland, for exam­ple, when Western com­pa­nies faced pun­ish­ment for doing busi­ness with Rusal, offi­cials said.

Androsov, whose net worth is list­ed in the tens of mil­lions of dol­lars in doc­u­ments includ­ed in the Pandora trove, sur­faced in media reports ear­li­er this year as the buy­er of a cas­tle-like hotel in Lucerne, Switzerland. Androsov acquired the his­toric Château Gütsch from anoth­er Russian oli­garch, Alexander Lebedev, who oper­ates news­pa­pers in London and pre­vi­ous­ly served as a lieu­tenant colonel in the Soviet spy agency, the KGB.

“It’s my pri­vate and per­son­al invest­ment,” Androsov said in the inter­view with Australian broad­cast­ers, adding that it is “kind of a tro­phy asset that could be inher­it­ed by your kids.”

By Greg Miller

Original source: WASHINGTON POST