Who are Putin’s corporate collaborators?

Two years after Russia’s war of aggression against Ukraine began, many people in the West are suspended between indifference and despair. This mood of pessimism took an even darker turn with the murder last month of Alexei Navalny.

The Western reaction to his death in an Arctic penal colony, most likely at the hands of FSB agents acting on the orders of Vladimir Putin, was a universal howl of outrage and indignation. At the Munich Security Conference, world leaders gave a standing ovation for his widow, Yulia Navalnya. President Biden ordered sanctions against those implicated in this foulest of murders. The thousands who turned out for Navalny’s funeral in Moscow last week, along with the countless others who have shown solidarity with him elsewhere, have demonstrated remarkable defiance of the Kremlin.

But what has been Putin’s response? He has promoted to colonel-general the official responsible for Navalny’s sadistic treatment in prison. His propagandists have threatened Yulia with the same fate, meanwhile humiliating his mother Lyudmila over the release of her son’s corpse. Next week Putin will win his elections, equipping himself with a facade of legitimacy. The regime is pulling out all the stops to deny Navalny a posthumous victory.

So what about Putin’s war of conquest in Ukraine? Is he winning that too? Plenty of people in the West would like to think so. There are the overt or covert Putin sympathisers, of course: the populist parties of Right and Left in France, Germany, Italy and other EU member states. Some of these countries are led by such Russophiles, most notably Hungary, Austria and Slovakia. And Russia is in effect backed by a large proportion of Republicans in the US: Donald Trump’s MAGA faction, who are apparently determined to starve Ukrainian forces of arms and ammunition. Trump himself has openly talked about imposing a Carthaginian peace on Ukraine and even encouraging Russia to attack “delinquent” Nato allies. Tucker Carlton’s notorious interview with Putin last month reinforced the impression that Russia has survived sanctions and is invincible on the battlefield.

But there are also many other, less extreme voices which, by undermining the Ukrainians, are spreading the idea that a Russian victory is, if not inevitable, at least more likely than a defeat. While professing to oppose Putin’s war, they insinuate that the Ukrainians no longer know what they are fighting for. A case in point is the long essay “Democracy in darkness: What Ukraine has already lost in its fight against Russia”, which appeared on February 5 in the New Yorker. In her reportage, the magazine’s highly acclaimed Russian-born staff writer Masha Gessen wove together quotes from Ukrainians to make her case. As the title implies, she suggests that Ukraine is not only losing the battle to regain its lost territories, but in the process is sacrificing the democratic cause which justifies Western aid. Gessen’s article has infuriated most Ukrainians, but it reflects a growing scepticism in elite American circles about Kyiv’s war aims.

In Ukraine, meanwhile, the removal of General Zaluzhny as their commander has prompted a spate of articles speculating about an imminent coup, or at least serious discord, in Kyiv. For elite opinion in the West, President Zelensky has gone from hero to zero; at the very least, he is passé. In a digital world of truncated attention spans, our insatiable appetite for lurid stories has a direct impact on the morale of an embattled nation. As the US Congress sits on its aid for Ukraine and Germany withholds potentially game-changing Taurus missiles, Moscow’s leaks and disinformation promote its narrative that Kyiv cannot prevail.

Worst of all: the war is increasingly ignored. Our forces are not engaged and neither are our minds. Even the sanctions for which we are responsible are becoming a marginal story, relegated to the nether regions of the news schedule. We have many marches for Palestine, which is not yet a state, but none for Ukraine, which already is one. Parliament has torn itself apart over Gaza, but Ukraine excites far less passion. For how much longer will Ukrainians be able to fight for their existence? Slowly but surely, their ordeal is becoming invisible.

One of the most egregious lies that Putin told Tucker Carlson was this: “Russia was the first economy in Europe last year, despite all the sanctions and restrictions.” The truth, as Mikhail Khodorkovsky immediately pointed out, is that the Russian GDP per capita ranks 32nd in Europe (using PPP). Russian propaganda seldom says much about the impact of sanctions because the truth is that they are extremely damaging both to living standards and to the war effort. A recent IMF report claimed that Russia’s GDP growth in 2023 was 1.1 per cent and in 2024 will be over 2.5 per cent, surpassing any G7 nation. Yet the switch to a war economy means that perhaps 40 per cent of Russian public spending is now on defence. So consumers are suffering falls in living standards that are unprecedented since the chaotic era just after the Soviet Union collapsed. Wages contracted last year, inflation was in double digits and interest rates have hit 16 per cent. Of course, when Putin’s apologists visit Moscow or St Petersburg, they do not see the hardships of ordinary Russians. As Jay Nordlinger, one of the sharpest conservative critics of these useful idiots, writes: “The Western Putinistas report back that everything is hunky-dory in Russia. And in the Bolshoi or Marinsky theatre — it is.”

Nevertheless, the Kremlin has made prodigious efforts to disguise the true state of the Russian economy by evading sanctions on many levels. In the military sphere, this includes such notorious imports as Iranian drones and North Korean missiles, but also sanctioned equipment that enables Russian troops to make covert use of the Starlink satellite system, manufactured in the US by Elon Musk’s SpaceX, to coordinate attacks on Ukraine. Despite sanctions, Starlink equipment is easily available online and the Russians are reported by the Sunday Telegraph to have been able to turn the Ukrainians’ secret weapon against them. While Bloomberg reported that Russia imported more than $1 billion of advanced US and European microchips, the Kyiv School of Economics found that the total figure was $8.77 billion of electronics and other high tech equipment. As much as 44 per cent of Russian battlefield goods came from the coalition of countries bound by sanctions, including the US (26 per cent) and EU (6.1 per cent). Among the biggest offenders were such famous brands as Intel and Texas Instruments.

Writing in the Financial Times, the former Nato Secretary-General Anders Fogh Rasmussen argued that the West has failed to step up its sanctions in response to largely successful Russian attempts to circumvent them. More than 2,800 components imported from abroad have been found in destroyed or captured Russian equipment, according to the Kyiv School of Economics. This is an indication of the scale of the problem, not an exhaustive list — and it is significant that we have to rely on Ukrainians for such information, rather than on our own regulatory or intelligence agencies. Russian heavy and hydrocarbon industries, essential to the war effort, are vulnerable to Western sanctions and diplomatic pressure on third countries that are allowing themselves to be conduits for sanctioned military components or are importing Russian oil and gas. Since Navalny’s death we have heard a chorus of demands for the $300 billion of Russian central bank currency reserves and many billions more in private assets frozen by the West to be used to finance Ukraine. Yet governments have been reluctant to act on such demands. There are genuine doubts about the legality of such confiscations. But the West has also been persuaded by (possibly self-interested) experts that this would cause other countries to lose confidence in the security of their own reserves, perhaps precipitating instability in the global financial system.

Most Russians are still not feeling the full consequences of Putin’s war of conquest and extermination. For example: the Russian banking sector made record profits of $37 billion last year — a 16-fold rise on 2022 — despite supposedly tough financial sanctions, including being isolated from international capital markets and cut off from the SWIFT interbank payments system. Thanks to huge state subsidies, the domestic mortgage market has roared ahead, with a 34.5 per cent increase in loans. For a nation reeling under the impact of mass casualties, this feelgood factor, fuelled by an artificial property boom, is just what the doctor ordered. Ironically, sanctions have also enabled Russian banks to capitalise on fire-sales of Western assets. Long term, such wartime profiteering at the expense of foreign investment does not bode well either for ordinary Russians or for the siege economy that is now emerging. But those financiers who enjoy favour with the Kremlin have seldom done better.

At the consumer level, the problem is that major Western companies are simply refusing to sell their businesses in Russia to protect their shareholders from write-downs. Perhaps the most prominent example is Unilever, which has faced only minimal criticism for continuing to sell its products in Russia, which include everything from Hellman’s mayonnaise to Magnum ice cream. Unilever’s CEO Hein Schumacher has refused to be transparent about its current tax payments, which go directly into the Kremlin’s war chest, but in 2022 it paid £30 million. Nor, despite the firm’s excuse that “we do not think it is right to abandon our people in Russia”, has he been able to protect his 3,000 Russian employees from being called up for military service. The company insists that it is no longer investing or advertising in Russia and that all of its products on sale are manufactured there, not imported or exported. Though Unilever has suffered reputational damage — Ukraine has called the firm a “sponsor” of war — its board has decided to weather the storm. Unilever claims that to exit Russia would mean that its business and brands “would be appropriated by the Russian state”. Of course, this would also hit Unilever’s bottom line — and for Mr Schumacher and his colleagues the bottom line seems to be the main, if not the only, thing that matters. “I understand why there are calls for our company to leave the country and therefore we will simply continue to look at our options,” he declared, oblivious of the non sequitur. Trading in Russia in wartime has helped to boost Unilever’s stock market valuation above £100 billion.

Of course, it isn’t only chief executives who turn a blind eye to ethics. The CEO of the snacks business Mondelez, Dirk Van de Put, told the FT that “there has been no shareholder pressure whatsoever” to leave Russia. Investors don’t “morally care”, he claimed. Exiting the Russian market would mean a “huge hit” — and that matters more than the fate of Ukraine. In The Times Edward Lucas responded to Van de Put by proposing a “no-fly” ban on executives of companies that continue to do business in Russia: “The plutocratic elite is accustomed to frictionless globetrotting but only because we allow it.” Still, penalising shareholders would be much more difficult.

It would, of course, be possible to force companies such as Unilever or  Mondelez to stop trading in Russia — but they are anyway in the minority. The Yale School of Management’s Chief Executive Leadership Institute (CELI) has compiled a list of more than 1,500 corporations involved in Russia, graded from A to F according to the extent of their withdrawal. About 1,000 of them have either curtailed most of their operations in Russia or completely exited. Yet the Russian economy has not collapsed. The task of bringing home the true cost of the war to the Russian people is therefore more intractable.

Among the companies that are listed by the Yale CELI as having withdrawn from Russia is Inditex. This Spanish-based, largely family-owned firm happens to own some of the most popular brands on our high streets, including Zara, Massimo Dutti and Bershka. Inditex is, by some measures, the biggest fashion retailer in the world, with nearly 6,000 outlets in dozens of countries. Until Putin’s armies marched into Ukraine, Russia was Inditex’s second biggest market after Spain, accounting for 8.5 per cent of the group’s total earnings. It also had some 9,000 employees there.

The company reacted to the invasion by “temporarily” suspending its Russian operations in March 2022. It reassured investors that its 502 outlets there were all leased and therefore “not financially significant”. In October 2022 it announced a deal to had over its Russian business to the Lebanese-owned firm Daher, which is based in the UAE. But it was not until April 2023, more than a year after the invasion, that Inditex finally sold its 502 outlets in Russia, of which 86 were Zara stores. The deal gives Inditex the option of re-entering the Russian market through a franchise agreement with Daher “if the situation changes”. Like many of the companies listed by Yale CELI as having “exited” Russia, Inditex is keeping its options open.

Meanwhile, Inditex was expected by experts to take a hit from its exit, given the relative size of the Russian market for the group. However, in 2023 Inditex posted a healthy rise in profits of 20 per cent to £7.5 billion — as if nothing had happened to its Russian ventures. How was this possible?

A Reuters report quotes Andrii Onoprienko of the Kyiv School of Economics: “While it looks like Inditex is doing its best to withdraw from the Russian market, question marks remain.” Onoprienko, who is deputy director of the Kyiv School’s Monitoring Project, says that Inditex appears to be allowing Zara stock to be imported to Russia by companies and individuals with which it is not directly involved. While the sale of Inditex outlets expressly precludes its products from being sold by Daher, Reuters reports that the rebranded stores are still operating with “identical stock”.

There certainly seem to be plenty of Inditex goods available on the Russian market. Unlike many other Western corporates, Zara still operates in Belarus, Putin’s closest ally. Russian retailers could easily be sourcing new stock from there. Onoprienko says: “I definitely assume that the supply chains are the same.” Many Inditex garments are manufactured in Turkey and China, neither of which belong to the sanctions coalition. Indeed, both countries, have been accused of facilitating sanctions evasion. Exports from China and Turkey to Russia have soared to record levels over the past two years. According to Ed Conway of Sky News, exports of sanctioned goods from the UK to Kyrgyzstan, Uzbekistan, Georgia and Armenia have increased by 500 per cent over the past two years and other exports by even more. Most of these goods, sanctioned or not, are destined for Russia.

With the rise of online retail, it is even easier to for importers to cover their tracks. In April 2023 Reuters reported that the Russian internet giant Wildberries, for example, had as many as 17,000 items in its Zara catalogue. A source close to Inditex told Reuters that Zara clothes on sale in Russia are only old leftover stock from the sale of its shops. Nearly a year later, that claim seems even more questionable. But I too heard only denials from such a source that Inditex was trading either in or with Russia, directly or indirectly. So far, however, Inditex has failed to comment officially on the suggestions made by the Kyiv School of Economics. Rather than respond to scrutiny, this secretive Spanish company apparently prefers to stonewall. While nobody is suggesting that Inditex has done anything illegal, it would be good for the brand, as well as a service to corporate transparency, to find out and tell us how Zara goods find their way into the Russian marketplace.

However these goods are reaching Russia, the taxes they generate are helping to replenish the Kremlin’s coffers. While high street garments are not sanctioned goods, they play a big role in keeping up Russian morale on the home front.

So are sanctions nevertheless working? Yes, according to evidence presented by Tymofiy Mylovanov of the Kyiv School of Economics to the Council of Europe in Strasbourg last month — but only if they are enforced. He and his colleagues calculate that Russia has lost a total of $113 billion in lost oil exports, plus $55 billion in lost gas exports. Between 2022 and 2023, Russia’s trade surplus plummeted by 63 per cent and its current account surplus by 79 per cent. Capital outflows between the first quarter of 2022 and the third quarter of 2023 were a colossal $275 billion. Imports of critical components for the Russian military have declined by 29 per cent and the price paid per unit for some of these has risen by 100 per cent.

Nevertheless, this year military spending is planned to increase by 68 per cent — an additional $100 billion. That’s a lot of tanks, artillery, missiles and drones. And it means that tens of thousands more Ukrainian men, women and children will not live to see peace, whenever that may come. Sanctions can do a lot, but they cannot prevent Putin from turning Russia into a Soviet-style war machine.

What the West can do is to mobilise every resource we have to ensure that our sanctions are as watertight as possible. With the notable exception of Yale’s Chief Executive Leadership Institute, there is a lack of Western interest in sanctions on Russia as a field of academic research. Why is it left to a cash-strapped institution in Ukraine such as the Kyiv School of Economics to collect and analyse the data on the impact of sanctions — and on their evasion? Why isn’t the London School of Economics — or any of the hundreds of incomparably wealthier, world-class universities in the West — doing that kind of research?

Once the anything but transparent operation of sanctions is exposed to the light, the public will be able to see which companies are still making money in Russia. Even those who are not breaking sanctions and no longer have a presence there, but who are helping to sustain the illusion that everything is normal, should be held accountable. Companies that prove to have been acting as Putin’s corporate collaborators — whether in Russia or in the West — should be named, shamed and ostracised.

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