Planet Money - Of oligarchs, oil and rubles

Episode Date: March 5, 2022

Three stories about how the sanctions imposed on Russia are playing out – for regular Russian people, for Russia's super-rich, and for Russia's energy exports. | Subscribe to our weekly newsletter here.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. Do you still have family in Moscow? I have parents in Moscow. Sergei Guriev is an economist who spent most of his life in Russia. He now lives in Paris. Before Russian forces invaded Ukraine, he started calling home and giving his parents advice. When did you start telling them, hey, something might be happening? Well, even before the war, I told them that I think there'll be a major assault on ruble. And so they should take dollars out of the bank.

He was worried about the ruble, Russia's currency holding its value. So he told them, exchange your rubles for something that will keep its value, euros or dollars. And then he told them, start stocking up on things, just in case. I also told them that they need to think about buying a stock of medicines because those may not be imported anymore. Precisely, we were talking about insulin. My mother has diabetes and so she needs insulin every day. It's a vital issue for my mother.

His parents followed Sergei's advice. They got dollars and euros out of the bank, called their doctors, got more medicine. Before long, what Sergei feared would happen did happen. Russia invaded Ukraine. The U.S. and Europe slapped harsh sanctions on Russia. And the effects have been pretty immediate. The ruble has lost about a third of its value.

Nobody would have predicted 2022 because it's just beyond belief what's happening. Hello and welcome to Planet Money. I'm Erika Barris. The U.S. and Europe are waging an economic war on Russia through sanctions. What effects are those sanctions having? The answer is different depending on where you look. Today on the show, three ways the sanctions are playing out for regular Russian people, for Russia's oil and gas exports,

and for Russia's super rich and their mega yachts. Sergey knew what to do and what to tell his parents to do, not only because he's an economist, but because he's seen this before. Russia has seen its currency collapse a couple of times in his lifetime, twice in the 90s and then again in 2014. That was right around the time Sergey was politely encouraged to leave Russia for speaking out against President Vladimir Putin. And for each of those collapses, Russians responded by doing exactly what Sergei told his parents to do. They got cash and exchanged their rubles for dollars or euros. They also started buying stuff, storing their money in goods that would hold value better than the ruble. They bought iPhones. they bought cars.

Richer people bought real estate. You can buy a toaster or a dishwasher, right? You see that you can protect your cash, which is losing value every day. This past week, Russian people lined up at ATMs. And when the Russian government saw that happening, it limited how much people could withdraw in dollars, euros or foreign currency and how much people could transfer out of the country. Meanwhile, the Russian bank doubled interest rates to 20 percent, essentially telling people, keep your money in your savings account. It's going to make a lot more in interest.

Just don't take it out. The central bank is worried that Russians will run away from rubles to dollars. So the banks are now taking your rubles and give you 20 percent per year instead of 10. And so that should prevent bank run. If you're all of a sudden going to make 20 percent interest just by keeping your rubles in the bank, that may prevent bank runs. But those high interest rates have other effects too. Like, say you want to borrow money to buy a house, or you're a small business owner who wants to make an investment in something.

You're not going to want to pay 20% on a loan. So chances are you decide not to go forward, not to borrow. And just like that, money stops moving. The economy flattens. That leads to recession. By one estimate, Russia's economy could shrink by 35 percent this quarter. That's terrible news for regular Russian people. How do you feel watching this happen? I think it's a tragedy. First and foremost, of course, I feel the human tragedy which is happening on the ground in Ukraine

when people are killed in thousands, both Russians and Ukrainians. By now, it's indeed a disaster. There'll be not just low growth, there'll be recession and lower quality of life. And in that sense, I feel sad as an economist. When Sergei called his parents a week and a half ago, he wasn't just checking in on their supplies of insulin and dollar bills. He also bought them one-way plane tickets out of Russia. Sergei hopes they'll leave the country within the next week.

Sanctions haven't just tanked the ruble. They've also caused fallout for Russia's energy exports, a big source of Russia's cash flow. Sarah Gonzalez picks it up from here with the story of what's going on with Russian oil. All kinds of things are happening with oil right now. So we called up Rachel Ziemba. She's a fellow at the Center for a New American Security. So Rachel, your whole thing is oil exporting countries and coercive economic policies like sanctions. So this is what you've been training for. Yeah, you don't want to have to

deploy those skills in a war. But these are definitely all the trends that I've been training for. Yeah, you don't want to have to deploy those skills in a war. But these are definitely all the trends that I've been studying for some time. Okay. Now, even though the US sanctioned Russian banks and its central bank, if you look closely at those sanctions, you see this one big exception. If you like really focus in on like which banks were sanctioned, and how they were sanctioned, it was sort of like, oh, but not when it comes to oil transactions. Yes, yes. All current energy transactions are not subject to sanctions. The Treasury Department actually reiterated that.

Yeah, the U.S. has been reassuring banks and insurance companies and shipping companies and any brokers that work with oil that they can keep doing oil business with Russia. They would not be violating sanctions. And the U.S. made these special exceptions for oil because hitting oil would be horrible for everyone. Russia is one of the top three oil producers in the world. Now, the U.S. makes all the oil it needs, and then some. It does not rely on Russian oil. But oil prices do. Oil prices are set in the global market. So any shock to Russia's oil affects prices in the U.S. and everywhere. So no one wanted to mess with that. But then, oil started getting hit in another way. We are seeing this buyer strike.

What in the marketplace we've been calling self-sanctioning, this reluctance to take on Russian barrels of oil. Big oil and gas companies like Exxon in the U.S., BP in the U.K., Equinor in Norway, they started self-sanctioning on their own, ending their partnerships with Russia, leaving billions in investments behind, just walking away. Rachel says companies are self-sanctioning for a few reasons. They see near-term risks, like maybe the sanctions could apply to oil or oil shipments or insurance in some way, so they just want to stay out of the mess. But also for moral reasons. They're saying the attacks on Ukraine are just too brutal. We can't support Russia. So now a whole bunch of oil buyers have stopped buying Russian oil.

We're now at a point where several million barrels of Russian oil are not being purchased. And that's pretty unique. Okay. Oil is usually sold at auctions. That's where utilities and refineries would normally bid for Russian oil. But right now, there are barrels and barrels of Russian oil up for auction that haven't gotten any bids. Russian oil ready to go through the pipeline that European buyers aren't purchasing. So Russia started cutting its oil prices. Like, come on, who wants this oil for cheap? Russian oil started being offered for like $20 and almost $30 less a barrel than all the other oils of the world. Rachel says it's a record discount.

Someone's going to buy that oil eventually, right? Someone will. Someone will. Yeah, India bought some and China. If you discount it enough, someone will buy it. Shell just bought a bunch. So Russia has found new buyers. But Russia has to redirect oil from pipelines, which are a super quick and easy way to move oil,

and put it in tankers and ship it across oceans. And they have to convince ships to move this stuff that they see as risky. It is a logistical pain for Russia. convince ships to move this stuff that they see as risky. It is a logistical pain for Russia. Is there the threat that Russia stops exporting oil to retaliate, to punish all of the Western countries that are sort of banning together against Russia? I think it's unlikely for a few reasons, right? One is that...

It would be suicidal? Yeah, it'd be pretty suicidal. Yeah, Russia wants to signal to the world that if you want to buy Russian oil long term, we're a reliable supplier. Also, Russia needs to fund a war now. And oil is their lifeline. Russia makes hundreds of billions of dollars a year in energy exports. Like literally every single day they make millions of dollars. And that's a big deal right now because lots of businesses are leaving Russia. Apple, Ford, BMW, Ikea, FedEx. So Russia's oil money is a pretty good cushion when they're under

so much economic pressure. Russia could survive with some of these revenues for a long period of time. I mean, we've seen other countries such as Iran and even Venezuela hold out for quite a long time on sanctions. Yeah, other countries with much smaller oil revenues have been sanctioned pretty hard and dealt. But getting by on energy money alone is not going to be easy. The Russian economy would shrink and it would be a much lower level of development and consumption. So they could survive, but it wouldn't look pretty. So, OK, sanctions are going to make the quality of life in Russia go down and the average Russian will feel the effects most. But Russia's main cash flow, its oil money, is largely going to be untouched. So now a bunch of countries are trying to get at Putin this other way.

Mary Childs tells us they are trying to bully him. Yeah, they are trying to turn all of his friends against him. That's after the break. So a ton of Russia's wealth is abroad. According to the estimates of some Berkeley economists, rich Russians held as much financial wealth outside of Russia as was held by the entire Russian population in Russia itself. So governments are saying they want to cut off access to all that wealth. So they're going to go after the oligarchs and take their stuff, their luxury condos, their yachts, their money. And it seems like the point of doing that is

destabilization. Like they're hoping to upset Putin's friends and the country's elite. So they like peer pressure him into stopping the war or maybe into stepping down like a social coup or maybe a regular coup. I don't know. Stranger things have happened. Also, there is a bill in U.S. Congress that would enable citizens to seize oligarch assets like individually. So if you stumble upon a yacht or a plane and you happen to know that the owner has been sanctioned, congratulations, you can keep the yacht. This bill is pretty unlikely to pass, but it does illustrate the degree to which all this has sparked the collective imagination. A substantial portion of my Instagram feed right now is memes about seizing oligarch yachts, which all sounds

really fun. But the reality is it's harder than everyone is making it sound. So we called somebody with a lot of experience seizing stuff. She's in South Florida, which is a great place for her to be. You know, people jokingly call it the fraud capital of the United States. Evalyn Sheehan was at the Department of Justice for years overseeing big cross-border investigations into things like corruption, bribery, drug trafficking, and money laundering. She did a lot of asset forfeiture. She seized everything from cash to pre-Columbian Peruvian artifacts. And she says we're talking about two different buckets here. There's the seizing stuff bucket, which is when your stuff gets taken. And that is a Department of Justice thing. And then

there's the sanctions bucket, which is when the U.S. says your assets, you can't use them. We're freezing them. That is a Treasury Department thing. So we're going to start with the seizing stuff. If the government wants to take very big expensive assets like yachts and all the luxury stuff that rich people own, the government has to prove that that asset was connected to some illegal action. So if it's the Department of Justice that has an open investigation and they know that it's, you know, proceeds of corruption, for example, and they can trace it to something, yes, they can seize your yacht, they can seize the jet. Basically, you have to show bank fraud or money laundering or tax stuff. And that can be pretty hard to do.

It requires combing through enormous databases to find proof of transactions and ownership, digging for any information that would tie this billionaire to that shell corporation, which holds that other shell corporation, which holds that asset. It's looking at social media like rich kids of Instagram to see who's posting from their dad's jet, which is not registered in his name. You have to follow the money and you have to prove up that the specific money that you're seizing is traceable to a crime. In the other bucket, the sanctions bucket, it's not about taking assets, but freezing them. Sanctioning a person like a Russian oligarch makes them immediately untouchable. They can't access their money in a bank. They can't buy anything on credit. It basically evaporates

all their connections to the U.S. financial system and to the system of any other country that wants to be on the U.S.'s side. Compared to seizing stuff, freezing is the fast track. They don't have to do the kind of tracing legwork that the Department of Justice has to do in order to affect their assets. The moment they're listed, all of those assets are deemed frozen. With sanctions, the government doesn't have to say if the oligarch did any crimes. They're just sanctioned. Which highlights the weirdness of these tools. Sanctions are not an instrument of the court system. They're extrajudicial. They're a blunt political tool. And the authority to do this comes from the International Emergency Economic Powers Act.

The justification is just national security and foreign policy interests. It's broad by design. So, if we want, we can skip the public due process part. We can just freeze a person and all their assets without ever having to prove that that person did anything illegal. And this is where Evelyn has a giant word of caution. After all her time at the DOJ, Evelyn switched sides. She's now representing the exact type of person she used to chase through labyrinths of LLCs and nested shells.

People can have a lot of ideas about everything that's wrong with the world. But I've seen from personal experience that innocent third parties are also being affected simply by association. And that's where you have to be very careful that even in a time when everybody wants to do as much as possible to help a very, very difficult, horrible situation, and everybody wants to do as much as possible to help a very, very difficult, horrible situation, that we don't undermine the rule of law, right? That we still protect ways in which people can say, hold on a second, even if you have it right with many other cases, my case is not like that.

My money is clean. I have a right to get my assets back. Now, there's not no recourse. Sanctioned people can appeal and get off the list. But that's after they've already been sanctioned. And Evelyn says these aren't just random rich people getting dinged. Multiple people we talked to said that for years, Russian oligarchs were able to buy their yachts and condos, and they didn't get a whole lot of questions about how they had accumulated that wealth. The people we talked to say the U.S. government has probably been investigating the oligarchs on this list for shady things for years. As evidence, this week President Joe Biden and the Attorney General announced a task force to track down these oligarchs and take their ill-gotten stuff. And that task force

is housed in the Department of Justice, the ones who can take stuff, not just freeze it. So we can reasonably expect some yachts will get seized. If there's something you think we should do a show about, you can email us at planetmoney at npr.org, or you can find us on social media. We are at Planet Money. Today's show was produced by Dave Blanchard, Emma Peasley, and Willa Rubin. It was fact-checked by Sam Yellow Horse Kessler and Taylor Washington. It was mastered by Josh Newell and edited by Jess Jang and Molly Messick. Planet Money's executive producer is Alex Goldmark.

edited by Jess Jang and Molly Messick. Planet Money's executive producer is Alex Goldmark. Thanks to Anna Bradshaw, Shereen Abadi, Alex Iftimi, Christy Ironside, Aidan Larkin, Peter Piatewski, and Louise Shelley. I'm Mary Childs. This is NPR. Thanks for listening. And a special thanks to our funder, the Alfred P. Sloan Foundation, for helping to support this podcast.