How the Kremlin rewards loyalty with beer and dairy
A friend of my cousin has a brick-sized bundle of pre-revolutionary Russian rubles, which he gets out and shows off occasionally. The story goes that the friend’s ancestor made a sizable business deal with a Russian aristocrat during World War I and got paid in cash. But then, well, one thing led to another, the monarchy fell, the aristocracy was scattered, the Bolsheviks came to power, and there were some significant alterations to Russia’s constitutional arrangements and economic policy. And those rubles have sat in the safe ever since, not worth the paper they were printed on.
Occasionally, visitors ask if they could have a banknote as a souvenir, but he has preferred to keep them together, perhaps because a lump of them together serves as a reminder to be careful who you do business with. However, some years ago, he did separate out a single 200-ruble bill, which he framed and hung in the downstairs toilet, with these words printed on the glass: “In the event of the restoration of the Russian monarchy, break glass.”
Now, in 2023, the Kremlin has decided to expropriate the assets of Carlsberg and Danone and to distribute them to people who I would call loyalists — except the concept of “loyalty” shouldn’t really require being bribed with spectacularly cash-generating assets such as these. A nephew of Ramzan Kadyrov is now really big in dairy products, and an associate of a close Putin ally is back in charge of Baltika breweries, which he helped to run in the past.
This feels like a full circle for me. I used to drink Baltika beer when I first moved to Saint Petersburg in 1999: It only cost 12 rubles a bottle, unlike imported brews or the local super-premium beer, and although it didn’t taste of much, you could at least rely on it not to leave you feeling like death in the morning or, in a worst-case scenario, turn you blind. In 2000, Carlsberg — presumably attracted by that same combination of reasonable pricing and stolid reliability — bought a stake in the company, which it eventually took over outright. It was not a glamorous business deal, but it was the kind of investment that typified the predictable business climate Vladimir Putin sought to create and that underpinned the prosperity of Putin’s first decade in charge.
But then came February 2022. Carlsberg pledged to divest itself of its Russian assets after Putin’s full-scale invasion of Ukraine and signed a deal to sell Baltika in June 2023, with Danone having done the same in October 2022. These sales would have come at a significant discount to the assets’ true price but look at it from the oligarchs’ point of view: Why get companies for cheap when you can have them for free?
- “It shows that Russia is prepared to take countermeasures against Western companies in order to curry favour with the new elites. The redistribution of wealth is reminiscent of the 1990s, when the oligarchs emerged,” said Maria Shagina, a senior research fellow for economic sanctions at the International Institute for Strategic Studies (IISS).
The Kremlin had already made it exceptionally hard for companies from unfriendly countries to realize anything like the value of their investments in Russia and, even if they could, they had to pay a hefty exit tax. There is a technocratic logic to that plan, particularly at a time when so many Russian assets are frozen in the West, but you can see why the oligarchs don’t like it. Kremlin insiders want cash flow. And with the economy squeezed by sanctions while an increasingly large portion of state spending goes to the military, their grift has lost much of its profit. The few surviving consumer firms are going to look increasingly attractive when it comes to squabbling over what’s left of the Russian economy.
There is an argument — made here by Ekaterina Kurbangaleeva — that this policy of expropriation could help Putin restore his compact with Russia’s middle classes, who could gain ownership stakes and management roles in these formerly Western-owned companies. That seems to me absurdly optimistic and suggestive of a Kremlin focused on the next year, rather than one that’s mainly worrying about how to get through the next month.
The Prigozhin revolt is indicative of an elite that badly wants its tummy tickled, and the oligarchs have always been the constituency Putin worries about the most. Faced with the option of plumping out Russia’s squeezed middle or just chucking money at anyone with a private army, there’s only going to be one winner.
Incidentally, if any oligarchs out there are looking for companies to expropriate, Yale Professor Jeff Sonnenfeld has compiled a helpful list of everyone who’s said they’ll leave Russia but not quite gotten around to it yet, including Heineken, Unilever, Philip Morris International and Oreo maker Mondelez. Considering that this war has been going on for more than 500 days and that any taxes paid in Russia support the war effort, I’m not sure I’d have much sympathy for any of these firms if they lost everything.
In response to their particular travails, Carlsberg has said it will take “all necessary actions,” while Danone will take “all necessary measures,” to which my response is…Good luck with that. In the meantime, they could separate out one title deed from the bundle of ownership documents for their lost assets and hang it, in a glass frame, in the executives’ toilets to read: “In the event of the restoration of sanity in Russia, break glass.”
BUT WHAT ABOUT?
But what about the oligarchs’ assets in the West, I hear you ask. Surely, this aggressive and possibly illegal act of theft means we should do the same to Russians’ mansions, yachts, financial assets and so on? Well, quite a lot of wealthy Russians would argue that Western governments have already gone beyond the law in their sanctions policies, including Russian-born businessman Eugene Shvidler, who is currently challenging U.K. sanctions in the London High Court.
Shvidler, who has British and U.S. citizenship, appeared by video link to say that the sanctions had shattered his reputation, forced two of his children to leave their English schools and made it impossible for him to conduct his business. The U.K. government defended the sanctions, which were imposed because of Shvidler’s close relationship with Roman Abramovich.
- They will “incentivise him to put pressure on Mr Abramovich to encourage President Putin to cease or limit” the war, the government’s lawyer said, while sending a message that “there are negative consequences to having implicitly legitimised the government of Russia’s actions.”
The result will be closely watched by other sanctioned businessmen and, if Shvidler is successful, I suspect a flood of legal appeals will follow.
Anyone who has read my newsletters in the past will know I have my reservations about sanctions. In my opinion, they are a useful adjunct to a concerted diplomatic and law enforcement response to a challenge, but they shouldn’t be the whole response. Besides, if we engage in permanent sanctioning, we are undermining the basis of the Western “rules-based” order, which is supposed to be what makes us admirable in the first place.
- “Sanctions have become the all-purpose tool of statecraft, meant to convey opposition to everything from military invasions to human rights abuses to nuclear proliferation to corruption, irrespective of whether they help or undermine long-term U.S. interests. They are a means of virtue signalling that allow politicians to show that they are doing something when faced with a given issue,” as this forceful piece by Christopher Sabatini puts it. It’s definitely worth a read.
I sincerely hope all Western governments are thinking about how to move on from sanctions, though I worry that they aren’t. The U.K. and the U.S. have just launched a “strategic sanctions dialogue,” which suggests that they intend to keep relying on this tool, rather than investing in the laborious but important work they should be doing instead.
So, on that note, I was glad to see that Britain has lifted its sanctions on Oleg Tinkov after he spoke out forcefully against Russia’s war and lost many of his assets in the country as a result. If oligarchs are to be sanctioned for doing the wrong thing, there should at least be the theoretical possibility of them being de-sanctioned if they do the right thing. I hope this gives other tycoons courage to oppose the war. We need to lure Russian oligarchs away from Putin, and that means offering them an exit.
Incidentally, Tinkov made that Russian super-premium beer I referred to earlier. “Tinkoff,” spelled in the French manner for added sophistication, began its life at a bougie microbrewery in Saint Petersburg, which opened in 1998, though I could rarely afford to visit it at the time. Its commercials (which are definitely NSFW or for watching in any vaguely sensitive environment) are a pretty stark example of how sophisticated marketing wasn’t in Russia in those days: Superyachts, sports cars, naked women, beer!
UNCLE SAM STOMPS ABOUT
The U.S. Federal Reserve has fined Deutsche Bank $186 million for “unsafe and unsound practices,” which date back to the German lender’s role as the primary correspondent bank for Danske Bank (on whose behalf it cleared $267 billion). Since the Danske Bank scandal remains the biggest money laundering scheme ever uncovered, it’s not surprising that Deutsche’s role as a major enabler should have attracted attention.
What’s interesting here is that the Federal Reserve is intervening in what is, by any measure (apart from the use of U.S. currency), a European affair: A German bank was clearing money for a Danish bank’s Estonian branch, originating in accounts whose ownership was obscured behind British shell companies. That’s not to say that the Europeans are doing nothing. Germany’s BaFin made a stern warning last year, on top of previous stern warnings made in 2019 and 2018, and perhaps Deutsche Bank will listen to them at some point. Denmark opened cases against a handful of Danske Bank individuals, although it subsequently dropped the charges and fined the bank itself 470 million euros (about $520 million). But that was only after the Americans fined it four times as much. The point is, when the Americans do something, they really do something, and that something tends to stay done.
This is why the Foreign Corrupt Practices Act (this is a good resource on all FCPA matters) remains a cornerstone of global efforts to stop corruption and why I like the sound of the recently proposed Foreign Extortion Prevention Act, which would make it a crime for a foreign official to demand a bribe from an American. At present, U.S. law only criminalizes the paying of bribes (unlike similar legislation in other countries), and this would give it far greater heft.
- “(It) would protect Americans from bribe demands, create a level economic playing field for American companies operating abroad, and incentivize foreign governments to clean up corruption in their own backyards,” notes this coalition of anti-corruption organizations that is pushing the idea.
Unleashing the U.S. Department of Justice on kleptocrats is a good idea, and I hope it gains momentum.
WHAT I’M WATCHING
Most of my time is taken up with researching money laundering and the struggle against it for my new book. Since a lot of this dates back to the peculiarities of Florida in the 1980s, I have been watching “Miami Vice” (for research purposes only, you understand). Huge hair, an alligator named Elvis, baddies with attitudes, designer stubble, fast cars…This show’s got it all, and there are still many episodes for me to watch.
In a more serious moment, I really appreciated the sober approach to corruption taken by the first installment of the Carnegie Endowment’s Behind Closed Doors podcast, and I am looking forward to the remaining two episodes.