Today, Explained - The shadow war on Russian yachts

Episode Date: February 27, 2023

Bloomberg's Stephanie Baker and the New Yorker’s Evan Osnos explain the fight to seize (and maintain) billionaire boats. This episode was produced by Miles Bryan, edited by Matt Collette, fact-checked by Laura Bullard, engineered by Patrick Boyd and Paul Robert Mounsey, and hosted by Sean Rameswaram. Transcript at vox.com/todayexplained Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

It's been one year of full-scale war in Ukraine. It's been costly and messy and bloody, but there's another front on this war. And it too has been costly, it's been messy, but not at all bloody. It's the fight to seize Russian yachts. Seizing Russian super yachts is really kind of the most tangible symbol that we have for what is a much larger issue, which is that Western governments have sanctioned and frozen hundreds of billions of dollars worth of Russian assets in response to the war in Ukraine. Coming up on Today Explained, you're going to seize a bigger boat. The super yachts are really the things

that have captured everyone's imagination because they're such an opulent, outrageous example of Russian wealth. Get groceries delivered across the GTA from Real Canadian Superstore with PC Express. Shop online for super prices and super savings. Try it today and get up to $75 in PC Optimum Points. Visit Superstore.ca to get started.

Explained. Stephanie Baker at Bloomberg knows this boat business back and forth. So to help us understand their importance to this one-year-old war in Ukraine, we asked her to tell us about just one. One boat in particular that the U.S. went after is called Amadea. It is a super yacht worth about $325 million. It's enormous, 348 feet long, six decks. It has two baby grand pianos, one of which is hand-painted, a large mosaic-tiled pool. I'm sorry, all of those things sound fancy, but I still don't hear $325 million. How does a boat cost $325 million?

Well, if you think about it, a naval destroyer is about 500 feet long. I mean, these are huge vessels. And they're decked out with incredibly luxurious finishings as well. Silk carpets, incredibly rare fabrics for furnishings. They're massive vessels that require a huge amount of steel to construct. They have very sophisticated engines and aircon systems. So these are high-tech vessels that take years to build. And who was this vessel built for? The U.S. government alleges Amadea is owned by a sanctioned Russian oligarch named Suleiman Karimov,

who the U.S. sanctioned in 2018. Now, he denies that he's the owner. Another little-known tycoon named Eduard Kudanatov came forward saying he was the actual real owner on paper. The U.S. government countered saying, that's not correct. He's actually just a straw owner. He's just holding it on behalf of Karimov, who was sanctioned and was severely restricted in his movements and ability to move money around the world. So, I guess irrespective of who owns this vessel, what happens to it when the war begins last year? Okay, so when the war began last year, Amadea was in the Caribbean. And it began a very long voyage sailing through the Panama Canal

to the Pacific island of Fiji, where it was supposed to refuel and swap out crew. Now, the U.S. government was tracking it and had obtained evidence that Karimov had engaged in sanctions violation. So the U.S. government decided that he had evaded sanctions and that gave them the grounds to seize the vessel, even as far away as Fiji. So it sent FBI agents and the U.S. Marshal Service to Fiji to seize the vessel. At that point, the owner on paper, Mr. Kudanatov,

objected and tried to stop the seizure in the courts in Fiji. Now, there was a several-week-long battle in Fiji courts. The U.S. government won. The U.S. Marshal Service hired a company, which in turn hired a crew, to sail it to U.S. waters, and they took it to the port of San Diego, where it has been sitting ever since June, awaiting the process that the Justice Department is trying to go through to actually sell it. Today's action should make clear that there is no hiding place for the assets of individuals who violate U.S. laws.

And there is no hiding place for the assets of criminals who enable the Russian regime. Hmm. Why does the U.S. have jurisdiction here? Why do they get to sort of litigate this whole case? Right. That's the really interesting thing about U.S. sanctions. It really gets at the heart of what's happening now, which is the long arm of the U.S. Justice Department. When the U.S. Treasury imposes sanctions on a Russian oligarch or anyone, for that matter, that basically bars them from using the U.S. dollar. So anything that touches the U.S. financial system, any U.S. dollar transactions tend to go through U.S. correspondent banks, and that gives the U.S. government jurisdiction. Because the dollar is so dominant, it's used for sort of 60% of transactions, savings, what have you, around the world. That gives them this enormous reach to go after assets far and wide if they have touched the U.S. dollar.

And it's really hard to own a super yacht and not transact in U.S. dollars. So the U.S. is basically policing use of U.S. dollars in order to support Ukraine in this war effort. Basically. We will leave no stone unturned in our efforts to investigate, arrest, and prosecute those whose criminal acts enable the Russian government to continue this unjust war. And so it seems kind of like a win-win here. The U.S. gets to collect a bunch of fancy boats and help Ukraine. What's the drawback?

Right. So the goal of doing this, as one Biden administration official told me, was to show to the Russian people that they'd been getting ripped off by the government for years. It was to disrupt the Russian elite. Whether or not that message is getting through to ordinary Russians, given Putin's control of the media, is another question. But it turns out that seizing and freezing a superyacht is a lot more complicated than you might think. Even that has surprised administration officials. But you know what the craziest thing is when we seize one?

We have to pay for upkeep. That's right. The National Security Advisor, Jake Sullivan, was caught on a live mic last year expressing his own surprise. So, like, some people are basically being paid to maintain Russian super yachts on the Gulf of the United States. That's awesome. And it's complicated because it's not like, you know, seizing or freezing a bank account

or a mansion. You can't just, you know, lock up a super yacht, turn off the lights, and wait until the war ends. You know, these are vessels that sit in salt water and humidity. It's a very hostile environment. They degrade very quickly without maintenance. The air conditioning needs to be on to prevent rust from appearing.

They need staff on board for insurance reasons and to make sure that the yacht is safe in port. And the U.S. government has a duty to maintain the yacht so that it doesn't lose value. And they have an interest in doing that because their goal eventually is to sell the yacht for as much as they can get for it. So that means upkeep, and that can cost an enormous amount of money. How much does that cost just for this one 300-something million dollar yacht, the Amadea? Do we have any idea?

So I spent a lot of time trying to come up with a figure that was accurate. And I talked to a lot of people, including people who were familiar with this very vessel. And the number I came up with was roughly 10 million a year. Oh, no way. I mean, of course, it would be more expensive if you are sailing it around the world and you've got the cost of fuel, but you need to keep running the engine. You need to keep running the systems to make sure that it doesn't degrade in value. The insurance costs alone are enormous. So, it's a costly endeavor.

It's just funny to think about the current fight over the debt ceiling in Congress. Where exactly is a financing operation for a, you know, Russian oligarch super yacht getting rubber stamped? And how many of these things are getting rubber stamped? Do we have any idea? There was an allocation as part of a spending review last year that gave them some funding for this. The U.S. government, the Justice Department, needs to go through a complicated legal process called forfeiture, which means going to a judge and proving that the assets are proceeds of a crime. And in this case, the crime would be sanctions

evasion. Now, we're not the Bolsheviks. We don't just seize assets without due process. And the most comparable analogy is seizing the assets of a drug lord. They go through a process called forfeiture to get the mansion of a drug lord and sell that. And those funds go into an account. Now, Congress has just passed legislation enabling the Justice Department to divert those funds to go to help Ukraine. Previously, those funds would just go into a Justice Department account that would be used for other types of maintaining other forfeited assets. And in the cases in the U.S. where they've gone after Russian-linked super yachts, they've only gone after the yachts where they could prove that a crime had been committed and sanctions had been violated. And that means going after Russian oligarchs who were sanctioned four years ago because they were able to build up a body of evidence that showed that they were using the U.S. dollar system in violation of U.S. sanctions. So where does this end exactly?

I mean, do we for sure know that these boats will be able to be sold to benefit Ukraine? And do we for sure know that the United States government will continue to shell out tens of millions of dollars to maintain them until that point? I think in the case of the U.S., the super yachts that they've gone after and seized, they have a pretty solid case with a body of evidence that should be able to back up any forfeiture claim that they pursue. I think in the case of Western European governments, it's going to be much more difficult. Italy, for instance, has frozen a handful of super yachts, including one linked to Putin. It is paying the cost of maintaining them. And, you know, they told me that the way this ends is that one day sanctions get lifted.

And if the oligarchs want their boats back, they have to pay back those maintenance costs. Now, that seems like a pretty unlikely scenario. So, you know, it looks in the current situation and the current environment that sanctions are going to be on in place for many, many years. So a lot of these boats are in legal limbo. Stephanie Baker, reader reporting on seizing Russian yachts at Bloomberg.com. But it's not just the Russians. The rest of the boats are on the horizon at Today Explained. Support for Today Explained comes from Ramp. Ramp is the corporate card and spend management software designed to help you save time and put money back in your pocket.

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This is your yacht? That's right. I'm the owner. The captain. El Capitan. Evan Osnos, staff writer at The New Yorker. We've been talking about how Russian oligarchs love their super yachts, but according to reporting you did last year, it's not just the Russians, right?

No, not at all. It's sort of everybody in a certain income bracket. They've become, in effect, the final frontier of wealth. I think they're the thing that if you get rich enough these days, eventually you begin to be tempted by a yacht. And they've sort of gone across all of these different communities. And as they have become more popular, they've also just become bigger. I mean, I think there's an inevitable arms race that sets in among neighbors of a certain kind, sociologically speaking, if not geographically, that once your peer or your competitor gets a boat of a certain size, then you feel a sudden overwhelming urge to get a bigger boat. We're going to need a bigger boat. We're going to need a bigger boat. I think maybe for a lot of people who can still recall the early days of COVID, they might remember this tweet or Instagram that David Geffen, the billionaire, posted being like,

you know, everyone stay safe. I'm out here on my boat. And he just got roasted. Is this sort of ultra rich competition that's going on something that happened because of COVID? People wanted to retreat to boats, or does this predate COVID? There was a COVID effect in the sense that all of a sudden, one of the places you could go if you had the means to do it was your boat. And then you could take your boat out into the Caribbean or the Mediterranean and you'd be safe. And I think there was this

sudden surge in the market and you saw it actually reflected in the sales data that all of a sudden there were waiting lists to get super yachts made. These are waiting lists for people who are not accustomed to being on waiting lists. And so there was also this tendency to want to pay extra in order to get it sooner. I think there was a kind of merger of the consumer instinct and then also something that was slightly more abstract, a kind of sudden awareness of mortality. I mean, some yacht owners described to me this feeling that the COVID pandemic, as it did for a lot of other folks too, made people say, well, I guess my time is short.

And if you're somebody who is waiting to buy a superyacht, that means you're willing to throw in an extra $15 million to get his boat sooner. As he said, if that'll save me three years of waiting, I think a year of my life is worth about $5 million, so I'll pay it. At a certain point, you encounter what a Silicon Valley CEO described to me as more or less the limits of what you can spend. He said that if you're buying a house on land, he said you're not going to spend $250 million on a house because it looks weird and it sends awful messages to the public and to your staff, your employees. And he said, but actually, a boat, you can more or less buy a boat for $250 million, and the public generally doesn't know anything about that. This is the Azam, the 500 million euro, 180 meter long boat

is probably the largest privately owned yacht and belongs to the Emir of Abu Dhabi. Few play in the mega yacht owner league. He described it actually as the best way to, in his words, absorb excess capital. Huh. There was a time when it was mostly oil money from Saudi Arabia and the Gulf. And then there was this big surge of interest in the 90s after the collapse of the Soviet Union from Russian and

Eastern European oligarchs, because there was all of a sudden all of this money flooding through their economy, and they began to compete for visible demonstrations of their own fortunes. And then, of course, we had the rise of Silicon Valley, and that became one of the domains in which people in Silicon Valley, partly because it was an intersection of luxury and engineering, there was this real obsession with building the fastest or the most luxurious yachts. At the moment, I mean, it's probably not a huge surprise, but Jeff Bezos, founder of Amazon, is in the position of building, he's believed to have probably the world's biggest sailboat. So the boat being built for Bezos is a 127-meter or 416-foot sailing yacht. It was a controversy because he was building it in the Netherlands

and it was going to have to be brought out through Rotterdam. And in order to get it through, they were going to have to dismantle a bridge that had survived Nazi bombing. Rotterdam Council said it would never be dismantled again. But now they've told the people there's no other way for the multi-billionaire superyacht to make it from this shipbuilder's yard in Alblasserdam to the open seas. And people in Rotterdam were sort of incensed by this. The more monies you have, the more power you get, even though it goes against principles of the city.

And eventually they found a way of getting his boat through with the masts down. And so it sort of diffused the crisis. But for a moment it was this fairly acute demonstration of the collision of these different values. And is that how you have the most impressive boat? Is it just bigger and bigger or is it also what's on board? Well, part of it are the somewhat esoteric distinctions that, of course, mean very little to the general public, but mean a tremendous amount to the people who are spending their money on these things. So, for instance, a Dutch boat is considered more prestigious than an Italian boat. It'll hold its value over time. You know, if you want to have a fully custom yacht, that's considered better than a

quote-unquote series yacht, which I guess we would think of as a kind of off-the-shelf yacht. And if you really want to make fun of somebody or disparage their yacht, well, then you just say it looks like a wedding cake. That's really dogging on somebody. In the end, though, I think the truth is, Sean, that even though you can put on a lot of these other accessories, people come up with all kinds of ways of spending on helicopter pads or even a second boat to follow your main boat, which you carry all the accessories on. But actually, in the end, it comes down to what's known in the industry as LOA, which stands for length overall. That's the coin of the realm. So it's literally a bunch of rich guys measuring how long their boats are.

That's one way to put it. Actually, one owner said to me, there is an element, let's be honest here, of phallic sizing. I think, though, there's another element of this, which is that the length of the boat becomes this critical factor in the overall luxury of the thing for a very specific reason. And it's a fact of history, which is that pleasure boats of this kind are allowed by law to carry no more than 12 passengers. This is a rule that was set by the International Convention for the Safety of Life at Sea. This was something that was imposed after the sinking of the Titanic, actually. And those limits on the number of passengers, the number of people who can stay overnight, doesn't apply to crew. And so you can have, as one yacht broker put it to me, he said, you can have anywhere between 12 and 50 crew members looking after those 12 guests.

And the result of that is this ratio of attention, of luxury, of service that is kind of beyond anything you would ever find beyond the 19th century. But it happens every day out on these yachts. Has the West's attempts to confiscate the super yachts of Russian oligarchs chilled the market at all? No, it hasn't really. I mean, there is some concern among yacht makers and buyers that the visibility and the attention on them is going to be uncomfortable. I mean, as one of them said not too long ago to a film crew, he said, if the world knew what it's like actually on some of these super yachts, they would revive the guillotine. I think that there is now, as a result of the war in Ukraine and because of the greater public attention around these yachts,

you're beginning to see more of these yachts spending more time at sea and less time in view. So it's actually getting a little harder to find them sometimes. But it sounds like even if we can't see them, we should at least know that they're out there. They are out there. They're always out there. And they're kind of prowling around. One of the things that happened actually after the invasion of Ukraine was that some of the sanctioned Russian oligarchs, in order to avoid having their yachts seized, they just flipped off the transponder system, the thing that makes these boats visible on the high seas, and just sent them out kind of wandering

the oceans, these kind of strange ghost ships. Is that allowed? Are you allowed to just flip off your transponder? No, the rules are that you're supposed to always have that thing on. But, you know, I guess what happens on the high seas sort of stays on the high seas. It's a bit of a lawless terrain out there. Evan Osnos, his piece on the yachts, the super yachts, the giga yachts, is titled The Habs and the Have Yachts. Find it at newyorker.com.

Our program was produced by Miles Bryan. He got some pointers from Jonathan Geyer at Vox. We were edited by Matthew Collette, fact-checked by Laura Bullard, and mixed by Patrick Boyd with help from Paul Robert Mounsey. I'm Sean Ramos-Firm. This is Today Explained. you