The Cipher Brief spoke with Robert Dannenberg, former Managing Director and Head of the Office of Global Security for Goldman Sachs, about the business climate in Russia. Dannenberg, who also worked at CIA for 24 years, discussed key challenges facing Western firms.
TCB: Companies that operate in frontier markets like Russia are used to dealing with uncertainty. To what extent is what we are seeing in Russia right now—sanctions and a prolonged period of tension with the West—the ‘new normal?’
RD: I think we’re absolutely seeing a new normal, at least as long as Putin and the small set of advisors that he has around him continue to run Russia. These guys have been setting the stage for a broad confrontation with the West for 15 years, maybe even earlier. But since that time, Putin, Chief of the Russian National Security Council Nikolay Patrushev, Russian Federal Security Service Director Alexander Bortnikov, Chief of the Russian Presidential Administration Sergey Ivanov and the others that are of that KGB generation that grew up in the 80’s, 90’s, and early 2000’s, have been nursing a grudge against the West and have been waiting for the time when they perceive that Russia is relatively strong enough and the West distracted or relatively weak to really begin to reassert Russian influence. And this is certainly what we’re seeing today. It is the ‘new normal’ as long as these guys are running Russia.
They make no bones about the fact that they are rejecting the West strategically, economically, and culturally, so it’s absolutely the ‘new normal.’ The sanctions environment is the geopolitical tool of preference of the current U.S. administration. That’s not going to go away anytime soon. The Europeans are a little bit softer on the rationale for and efficacy of sanctions. But clearly as far as Russia is concerned we’re in a period of confrontation. Look at the burning of western foodstuffs in Moscow. They have literally taken cheese and bread and piled it up and burnt it in bonfires. This is lunacy! But it’s reflective of the mindset of Russia’s leadership today, and its not about to change anytime soon.
TCB: How has the business climate changed since the escalation of tensions between Russia and the West and particularly since the invasion of Ukraine?
RD: The biggest change is that if you’re thinking about doing business in Russia today, you need to make sure that you’re checking with the Department of Treasury to make sure that you don’t have any risk of running afoul of sanctions law. You have both individuals, enterprises, and intermediaries that are potentially subject to sanctions. A couple years ago you could do business in Russia and your worry was about what could happen to you inside of the Russian Federation. Now, you have to worry about what could happen to you in the United States because you’ve got crosswise with OFAC.
TCB: How would you advise companies trying to open operations in Russia? What would you tell them to be prepared for?
RD: We used to always say, anything you bring to Russia you should consider a consumable and you should be prepared to leave it there if necessary. I think if I’m talking to businesses about potential risk in Russia, that’s one of the principles that I leave with them. You need to understand if you’re going to invest in Russia, you need to be prepared to lose your entire investment, because there is no rule of law and you could be the target of a punitive action by the Russian government in retaliation for a perceived action against Russian taken by the West. You’ve got a ruling clique in the Russian government that is increasingly paranoid and vindictive and is looking for western conspiracies under every rock. Look at the anti-subversion laws that the Duma has passed in the last three months. They are really empowering the FSB, the Russian internal security service, to be able to do almost anything it wants to on national security grounds against western enterprises in Russia— whether targeting NGOs, businesses, or individuals. The FSB now has almost limitless power to arrest, confiscate, and prosecute under the anti-subversion legislation that has been passed. And you won’t get a fair hearing in a Russian court. That is something I would absolutely keep in mind if I was getting ready to do business in Russia.
TCB: So it is fair to say that Putin’s aggression outside of Russia has been matched by an equal amount of aggression against western interests within Russia?
RD: Even the MacArthur Foundation pulled out of Russia last month. It’s just too risky. Their people could end up in jail, their offices raided, their assets confiscated. That’s an NGO. There is no shortage of examples, even in the past 20 years, where western enterprises have come under risk because they got crosswise with one oligarch or another, organized criminal groups had no recourse under Russian law, and lost their entire investment in Russia. There’s no shortage of examples of western businesses that just got so frustrated with doing business in Russia that they pulled out. And it's only worse now as Putin feels empowered based on sanctions and his broad belief of a US-led conspiracy to affect regime change in Russia.
TCB: Are there any opportunities people are missing through the all the bad news coming out of Russia? Any bright spots around the corner that aren’t being talked about?
RD: Well I think that if there’s a bright spot it’s the fact that more people are aware of the types of risk that the Russian market poses at the moment. So they are either limiting their exposure or preparing a reasonable exit strategy. They’re not naïvely rushing into the Russian market as they might have been in the late 90’s or early 2000’s. So smarter is better. I think that’s a bright spot.
I also think reasonable people believe that the course of action that Putin has undertaken in the geopolitical sense and in the management of the Russian economy is not sustainable—that the seeds are being sown for meaningful change in Russia— maybe 24, 36, 48 months from now. That’s kind of an optimistic view that I’m not sure that many people would find credible at the moment. But I think you could make a reasonable case that there are some underlying fundamentals in Russia right now that suggest to me that Putin’s staying power is shakier than many people might think.
