Kleptocracy and War: The Kremlin Seizes Assets of ‘Unfriendly’ States

Kleptocracy & WarThe Kremlin Seizes Assets of ‘Unfriendly’ States

Zarina Zabrisky explains how Putin’s seizure of foreign company property is just a continuation of his state-sponsored looting which began 30 years ago in St Petersburg

Russian President Vladimir Putin signed an executive order ‘On the Interim Management of Certain Properties’ last month. The Kremlin stated that the measures contained in it aim to respond urgently to the “unfriendly actions” of the US and other countries and international organisations. This is a euphemism for the international economic sanctions imposed on Russia and its legal entities or individuals in response to the Ukraine war.

The economic sanctions began as the international community’s response to Russia’s illegal annexation of the Crimea peninsula in 2014. Eight years later, Putin launched a full-scale invasion of Ukraine, seizing more territories of a sovereign country and announcing occupied parts of Donetsk, Luhansk, Kherson, and Zaporizhzhia regions to be part of Russia in a major land grab. 

The sanctions have been designed to deny or restrict Russian entities’ property rights abroad. In retaliation, the Kremlin has sought “to protect the national interests of the Russian Federation” by temporarily taking control of Russian assets of foreign companies.

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Punishing the ‘Unfriendlies‘

Putin ordered Russia’s Federal Agency for State Property Management to take interim management over movable and immovable property, securities, shares in the capital, and property rights of two companies – German Uniper SE and Finnish Fortum Oyj.

According to the Russian state news agency TASS, the agency announced that the decree does not “concern ownership issues and does not deprive owners of their assets” and that “external management is temporary in nature and means the original owner no longer has the right to make management decisions”.

Notably, it said it “will not be engaged in managing foreign assets”.

Russian companies “that have suffered from the unfriendly actions of the West” will manage the seized assets, according to Russia’s Deputy Minister of Finance, Alexei Moiseev.

Both companies will be managed by executives from Rosneft, the Moscow-based integrated energy company that has itself been subjected to sanctions from foreign governments.

German Düsseldorf-based Uniper is an international energy company with activities in more than 40 countries, specialising in power generation in Europe, global energy trading, and a broad gas portfolio. According to its online profile, Uniper procures gas, including liquefied natural gas, and other energy sources on global markets. It owns and operates gas storage facilities with a more than seven billion cubic meters capacity. 

Uniper owns an 83.73% stake in the Russian subsidiary Unipro, a company with more than 4,000 employees in Russia. It supplies natural gas to Germany. Uniper has stated that the subsidiary has already been deconsolidated from an accounting perspective since the end of 2022. Uniper had found a buyer for its stake in the subsidiary, but the Russian Government has yet to approve the sale. Uniper is currently reviewing the legal situation and has said it “has de facto no longer been able to exercise operational control over Unipro since the end of 2022”.

Finland’s Fortum Oyj, another energy company, delivers CO2-free power and electricity, and district heat to private and business customers. 98.23% of Fortum’s shares in the Russian subsidiary PAO Fortum (Fortum JSC) were transferred to the Federal Agency for State Property Management last month.

“At this point, Fortum has not received official confirmation from the Russian authorities, and the company is currently investigating the situation,” said Ingela Ulfves, vice president of Fortum Corporation.

“Fortum’s current understanding is that the new decree does not affect the title (registered ownership) of the assets and companies in Russia. However, it remains unclear how this affects e.g.: Fortum’s Russian operations or the ongoing divestment process.”

The book value of Fortum’s holdings (including holdings in TGC-1) in Russia was €1.7 billion as of 31 December 2022.

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Looting State Assets

Putin’s decree comes as no shock to observers. The Kremlin is notorious for its ‘eye-for-an-eye’ policy, and both Germany and Finland have demonstrated solidarity with Ukraine in action.

Last year, the German Government seized local branches of Russian energy companies Gazprom and Rosneft and transferred them to external control. In January, Finland froze €187 million worth of Russian assets, including “real estate, stocks, cars, yachts, airplanes”, according to the sanctions department of the Finnish Foreign Ministry. Finland also joined NATO in April.

Putin’s Russia has often been labelled as a kleptocracy. The current president of the Russian Federation started his political career by stealing Russian raw materials intended for a food barter deal with the West in St. Petersburg in 1991.

The barter deal required export companies to obtain licenses, and Putin, the Chairman of the Committee for External Relations of the City Hall, was responsible for issuing these licenses. The following investigation revealed that various businesses received $122 million for their exports, but the city never imported foreign food. The files testify Putin and his deputy exported raw materials at a low price and without paying customs taxes.

Putin later denied the existence of these licenses despite the existing copies of the licenses bearing his signature. In 1992, the scandal was silenced. After Putin came to power in 1999, the documents disappeared from the archives. Other eyewitnesses revealed that at the start of his career, Putin didn’t shy away from getting kickbacks from funeral bureaus.

Furthermore, according to the court materials of the 2015 Aleksander Litvinenko trial in London, in the late 1990s, Putin had ties with the Tambov organized crime group. Litvinenko was poisoned by Polonium for investigating the ties between the Tambov gang and the St. Petersburg city administration, and their involvement with Colombian cocaine trafficking and money laundering.

In 2016, The Guardian reported that “high-placed officials”, for whom Spain had issued arrest warrants, “are thought to have helped one of Russia’s best-known mafia groups, the Tambov gang, infiltrate state structures, police, port authorities, and private banks and corporations. The Tambov and Malyshev gangs, which made their names smuggling heroin in St Petersburg when Putin was deputy mayor in the 1990s, allegedly laundered money through Spanish real estate.”

The acts of stealing and looting come in many shapes and forms. In Ukraine, the occupying authorities illegally appropriate and transport to the Russian Federation grain, agricultural equipment, medical equipment, cultural heritage from art to monuments, and even remains of historical figures and animals.

Retreating from Kherson, the Russian occupiers stole 18th Century military leader Prince Potemkin’s bones from a church and several racoons from the zoo. The Russian military is infamous for stealing domestic appliances such as microwaves and washing machines. Not much has changed. Before his presidency, Putin is reported to have smuggled a washing machine from East Germany.

In an even more bizarre turn of events, Russian soldiers looted radioactive toilet seats and lab equipment from the Exclusion zone around the Chornobyl nuclear power plant station in March 2022.

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Corporate Raiding, Russian Style

Putin’s criminal past and the collective kleptomania come hand-in-hand with the Russian organized crime tradition: reiderstvo, or corporate raiding.  

As Thomas Firestone writes in his 2008 International Lawyer article ‘Criminal Corporate Raiding in Russia’, this illegal takeover of businesses “relies on criminal methods such as fraud, blackmail, obstruction of justice, and actual and threatened physical violence.” Russian reideri “rely on court orders, resolutions of shareholders and boards of directors, lawsuits, bankruptcy proceedings, and other ostensibly ‘legal’ means as a cover for their criminal activity.”

Rosimushchestvo has threatened that more foreign companies may have their assets seized and put under temporary Russian control, according to the Russian Federation state news agency TASS. The list of “unfriendlies” offers vast opportunities for external management practices.

Poland has imposed external management on Gazprom and Novatek companies. The US and EU banks have frozen more than $300 billion worth of Russian financial assets. Plans for transferring the assets to Ukraine are under discussion. 

In October 2023, European Council President Charles Michel said the EU was considering using seized Russian assets to help rebuild Ukraine. In November 2022, the UN adopted a resolution calling for Russia to pay reparation to Ukraine. In February 2023, US Treasury Secretary Janet Yellen said Russia should bear the costs of damage caused by its war on Ukraine, but emphasised that there remain “significant legal obstacles”  to confiscating major frozen Russian assets.