Why Sanctions Failed to Restrain Russia’s Oligarchs

The U.S., the EU, Japan, and other nations slapped economic sanctions on Russia after it annexed Crimea in 2014 and again when it invaded Ukraine in 2022. The idea was simple: By freezing the foreign assets of Russia’s oligarchs and cutting off their access to international capital, the Russian government would be pressured to change course.

But did these measures really inflict much pain on Russia’s economic elites? A recent paper co-authored by Jinhwan Kim, an associate professor of accounting at Stanford Graduate School of Business, suggests not. Russia’s oligarchs appear to have blunted the effect of sanctions by playing an elaborate corporate shell game that enabled them to maintain their global footprint and access to international investors.

“The sanctions are not as effective as we think, because the oligarchs have ways to mitigate those punishments,” Kim says.

Kim has long been interested in how companies and investors allocate and reallocate capital across countries in response to various incentives. In this case, he and his coauthors at the University of North Carolina at Chapel Hill, the London Business School, and the University of Cambridge investigated how companies affiliated with Russian oligarchs responded to sanctions — and how international investors reacted in turn. (Oligarchs were defined as politically connected elites who “control major companies through coercive ties to key politicians, supporting autocrats in advancing objectives deemed illegal by other governments and the international community.”)

To understand the effects of the sanctions over time, Kim and his colleagues used an algorithm to cross-reference several sources of data on sanctioned oligarchs and corporate structures, particularly the beneficial owners who really control companies even though their names don’t appear on the legal paperwork. The researchers identified 71 oligarch-controlled companies that continued to operate through approximately 1,800 affiliated entities spread across 100 different countries — a sign that sanctions had not clipped their wings. They also identified 432 international investors that continued to pump money into oligarch-affiliated firms. And not just any investors, but large institutional ones: “Big, big players; the largest investment managers and asset managers in the world,” Kim says.

Those numbers far exceeded what regulators could have turned up using strictly local data and public corporate disclosures. Judging by its own annual report, for instance, the oligarch-controlled oil giant Rosneft has only 22 subsidiaries, three of which are located in tax havens. Using its novel data set and algorithmic search method, however, Kim’s team identified 632 Rosneft subsidiaries, with 71 located in tax havens. “This could be useful data for regulators,” Kim says.

Fleeing Into the Shadows

Digging even deeper into the data, the researchers discovered that this vast offshore network of oligarch-controlled subsidiary companies and deep-pocketed global investors had something in common: a taste for relocating to tax havens that don’t require the disclosure of beneficial owners.

In 2009, only 5% of oligarch-affiliated companies were incorporated in a string of tax havens stretching from Switzerland to the Seychelles. By 2023, that share had jumped to 30%. What’s more, sanctioned firms operating in EU countries with beneficial ownership disclosure rules increased their number of tax-haven subsidiaries by anywhere from 55% to 200% compared to sanctioned firms that weren’t subject to such rules — a clear sign that they were abandoning more transparent regulatory environments were seeking more opaque ones.

If Russia’s oligarchs were keen to shift operations to places where they could hide their fingerprints, the global investors who supplied their foreign capital were just as keen to follow them. Over the same period, the number of international institutional investors in oligarch-affiliated firms stayed roughly the same, but the fraction of those investors incorporated in tax havens with weak disclosure rules roughly doubled.

In effect, Kim says, both oligarchs and their financial backers engaged in regulatory arbitrage, fleeing countries that would reveal their connections. Consequently, Russia’s oligarchs were able to maintain their formidable offshore networks despite the imposition of international sanctions.

“Transparency laws are designed to avoid precisely this kind of thing,” Kim says. “But it doesn’t work if just some countries do it and the rest don’t, because that incentivizes companies and investors to move toward countries where it’s not as regulated.”

Kim and his colleagues acknowledge that there are political and economic obstacles to effective sanctions enforcement. EU member states, for example, might be hesitant to enforce sanctions too zealously for fear of alienating oligarch-affiliated firms that supply them with crucial goods. (The Russian energy firm Gazprom cut off natural gas supplies to Poland and Bulgaria in 2022, in what was widely regarded as retaliation for EU sanctions imposed following the invasion of Ukraine.)

Nonetheless, Kim and his coauthors believe that one of the best ways to strengthen sanctions enforcement would be for countries to adopt the same corporate ownership disclosure requirements, effectively shutting down the oligarchs’ escape routes. “A harmonization of disclosure regulations would be a very effective policy solution,” Kim says. “It would constrain their ability to do these sorts of things.”