The Chilly Fallout Between Putin and His Oligarch Pals

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Vladimir Putin during the 2014 Winter Olympics in Sochi.

Vladimir Putin during the 2014 Winter Olympics in Sochi.

Photographer: Pool via Getty Images

Vladimir Putin isn’t just angering leaders from Berlin to Washington. He’s irking some of his richest friends, too, by snubbing their pleas to end the conflict in Ukraine and ostracizing all but a handful of hardliners.

The ruble’s plunge has heightened opposition to Putin’s backing of the rebellion in Ukraine among his wealthiest allies, prompting the president to shrink his inner circle from dozens of confidants to a small group of security officials united by their support for the separatists, two longtime associates said.

Putin is increasingly suspicious of men who owe their wealth to their ties to him and who are being hurt the most by U.S. and European sanctions, according to the people, who spoke on condition of anonymity to avoid reprisal. The 21 most affluent people in the country lost a total of $61 billion last year, a quarter of their combined fortune, according to the Bloomberg Billionaires Index.

Businessmen who have long been close to Putin are “on the periphery now,” said Sergei Markov, a political consultant who helped monitor the referendum in Crimea that led to Russia’s annexation of the peninsula in March.

The core group around Putin is led by Security Council Secretary Nikolai Patrushev, Federal Security Service head Alexander Bortnikov, Foreign Intelligence Service chief Mikhail Fradkov and Defense Minister Sergei Shoigu, according to Markov.

Liberals, Hawks

Putin’s been increasingly consumed with foreign policy since his Ukrainian ally, Viktor Yanukovych, was forced to flee the country in February amid bloody protests in the capital Kiev that Russia accuses the U.S. of orchestrating.

Ministers and other functionaries tasked with countering the country’s economic slowdown complained in November of having to wait months to present their recommendations to the president, who has final say on all major initiatives.

“It’s a very difficult time for Putin,” said Olga Kryshtanovskaya, a sociologist who’s chronicled the rise of the security services under Putin and a former member of the ruling United Russia party. “He’s being criticized from both sides, the liberals and the hawks. Many people in the Kremlin believe Russia should adopt an even tougher stance.”

It may already have.

Fighting in the mainly Russian-speaking regions of Donetsk and Luhansk has intensified since a push to restart peace talks failed, presenting a “grave danger” to the country, according to Ukrainian President Petro Poroshenko.

Tanks, Troops

“The situation is getting worse, because we now have information about more than 2,000 additional Russian troops crossing our border, together with 200 tanks and armed personnel carriers,” Poroshenko said in an interview Wednesday with Bloomberg TV in Davos, Switzerland.

Russia’s Defense Ministry denied sending soldiers over the border amid heavy fighting for control of Donetsk’s airport this week. At least 5,000 people have already died in clashes, which flared after Putin’s annexation of Crimea, according to the Organization for Security and Cooperation in Europe.

Putin today accused Ukraine of starting “large-scale” military operations against the rebels and shelling densely populated areas indiscriminately, in televised remarks during a meeting with his Security Council. Ukraine reported more than 100 attacks by pro-Russian separatists in the past 24 hours.

With no end to the fighting in sight, there’s growing alarm being voiced among the elite in Moscow about the political and financial costs of staying the course.

‘Full-Fledged’ Crisis

While Putin’s approval rating remains near an all-time high and most Russians support aiding the rebels, the collapse of oil prices and a looming recession have led two prominent former officials to call on the Russian leader to find a way to end the fighting -- rare public prodding in a country where the Kremlin controls every major media outlet.

Yevgeny Primakov, a former premier, foreign minister and spymaster, said Russia must avoid “self-isolation” over Ukraine and keep the door open to cooperation with the U.S. and its allies in the North Atlantic Treaty Organization.

“We lose our country as a great power” without such collaboration, Primakov said in an article published last week in Rossiyskaya Gazeta, the state newspaper. Primakov, who was born in Kiev in 1929, said that while Crimea is non-negotiable, Putin should now respect Ukraine’s territorial integrity and avoid sending troops to support pro-Russia militias.

Another longtime Putin ally, Alexei Kudrin, a former finance minister who sits on the president’s Economic Council, an advisory body, said last month that Russia faces a “full-fledged” economic crisis if it doesn’t repair ties with the U.S. and Europe.

Easily Crushed

Such comments show “a very high level of concern among a fairly wide circle of people,” said Gleb Pavlovsky, a political analyst in Moscow who advised the Kremlin during Putin’s first two terms as president.

“There is a group of people in the upper echelons trying to protect themselves from losses,” Pavlovsky said. “They are critical of Putin but they can’t challenge him because he can easily crush them. That makes them even more unhappy.”

The arrest of billionaire Vladimir Evtushenkov in September and the subsequent renationalization of his oil company OAO Bashneft, once worth more than $7 billion, shows how easy it is for authorities to assert their power. Charges of money laundering were dropped when Evtushenkov agreed to give up Bashneft. He acquired the company after it was sold by local authorities in what prosecutors call a fraudulent scheme.

Dog Worries

Among the people hit with sanctions for their ties to Putin are billionaires Gennady Timchenko and brothers Arkady and Boris Rotenberg, who have known the president for decades and were blacklisted by the U.S. in March. Arkady Rotenberg was also sanctioned by the EU in July, which led to the seizure of Italian luxury properties worth 28 million euros ($32 million).

Timchenko, 62, last year said he was “suffering” for the president and his policies, even though he supported them. The businessman, who is also being investigated by the U.S. for money laundering, which he denies, last year said the fear of arrest was keeping him from visiting his family and pet Labrador at their home in Switzerland.

Timchenko’s wealth fell to $4.1 billion from $11 billion in 2014, while the Rotenbergs’ dropped to $2.1 billion from $5.3 billion, according to the Bloomberg Billionaires Index.

Putin’s spokesman, Dmitry Peskov, said by phone he was unaware of any dissatisfaction among the president’s associates with the current policy on Ukraine.

Timchenko declined to comment on Putin’s Ukraine stance through his press service. Arkady Rotenberg’s spokesman, Andrei Baturin, said it would be untrue to suggest Rotenberg is critical of the president’s policies. Boris Rotenberg’s press service didn’t respond immediately to questions sent by e-mail.

Power ‘Scrub’

Businessmen close to Putin realize their debt to the president and will avoid publicly criticizing him, but they don’t want his personal ambitions to destroy their fortunes, one of the two people familiar with the matter said.

Since absorbing Crimea, Russia’s economic output has started to contract, inflation has accelerated to 11.4 percent, the most among the world’s 10 largest economies, and the ruble has weakened about 45 percent against the dollar, more than any of the 174 currencies tracked by Bloomberg.

EU sanctions over Crimea are up for renewal in March, a process that requires the approval of all 28 members states. The U.S. is also working with key EU allies to persuade the bloc’s members to prolong wide-ranging penalties on Russia’s energy and financial industries expiring in July, a U.S. official said.

A former billionaire and senator once close to Putin, Sergei Pugachyov, said the president moved to tighten his hold on power soon after the uprising in Ukraine started. The intention, Pugachyov said, is to “scrub the elite,” to weaken the network of businessmen and officials who’ve been allied with Putin since he was deputy mayor of St. Petersburg in the 1990s.

Chessboard Clearing

Pugachyov, who said he feels betrayed by Putin, spoke in an interview in London, where he’s fighting a lawsuit by Russia’s Deposit Insurance Agency, which claims he embezzled $2 billion from his Moscow-based International Industrial Bank before it collapsed.

He said the president started to “remove pieces from the chessboard” in May, when he fired Vladimir Kozhin, a close confidant from St. Petersburg who had run the Kremlin’s powerful property department since Putin came to power in 2000. Kozhin, who has called Timchenko a good friend since the Soviet era, was also sanctioned by the U.S. for his ties to the Russian leader.

Kozhin was replaced by Alexander Kolpakov, a department head in Russia’s version of the U.S. Secret Service. He was demoted to presidential aide for military cooperation, making him a “nobody” now, Pugachyov said. Kozhin couldn’t be reached for comment through the Kremlin’s press service.

“Today, personal friendship and loyalty don’t mean anything,” Pugachyov said. “Why does Putin need friends when 85 percent of Russians support him?”

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