Putin’s Powerful Friends Rally Around Russian President Despite Sanctions

On Friday morning, Dmitri Kalantyrsky, the president of a large Russian bank called SMP, got word of what he later called “an anomaly” in his clients’ transactions. The money had stopped flowing. The bank’s clients were getting their cards declined. Russia’s other banks were cutting off all operations with SMP, isolating it from the financial system. By the end of that day, more than $200 million would be withdrawn from SMP’s accounts as a run on the bank began. At the central office in Moscow, says Kalantyrsky, “we also became victims of the panic.”

Around lunch time, SMP’s controlling shareholders, Boris and Arkady Rotenberg, arrived at their bank’s headquarters to assess the damage. They understood where it was coming from. Both of the Rotenberg brothers are childhood friends of Russian President Vladimir Putin, and the previous day, they had been placed on a U.S. sanctions list along with 18 of Putin’s other friends and associates. It was part of the Obama Administration’s response to the Russian annexation of Crimea last week, and even though the sanctions did not target SMP directly, the freeze placed on the Rotenberg brothers’ U.S. assets were apparently enough for Visa and Mastercard to stop processing the bank’s transactions on Friday and Saturday. “There was no joy on their faces,” Kalantyrsky tells TIME about the brothers’ reaction. “All of us were hurt that these sanctions affected the bank.”

No matter how hard Putin has tried to shrug off these sanctions, they did inflict painful and immediate damage on members of his inner circle, and they spread panic among the business empires these men have built under Putin’s rule. But will they force Putin to rethink his strategy in Ukraine or to toe the Western line?

Probably not—at least according to some of his former confidants and top advisers, the sanctions have already made his inner circle close ranks behind the Russian President. In the coming months and years, these Russian elites will only deepen their antagonism toward the West and strengthen their ties with Asian powers.

But for now, the U.S. seems to have no other recourse. “As President Obama has made clear,” wrote David Cohen, the U.S. Undersecretary of State for Terrorism and Financial Intelligence, in explaining last week’s sanctions, “we will continue to impose costs in direct response to Russia’s provocative acts.”

Those costs are not only meant to be financial. They are also political and personal for Putin. As the thinking goes in Washington, Putin’s support among the Russian elite depends on his ability to protect their interests in the West. Many of them send their children to study in the West. They keep their fortunes in Western banks. They ski in the Alps, sunbathe in Miami and go shopping in Milan. All of these privileges are at risk after Putin’s adventure in Crimea, and if faced with a choice between keeping their wealth or supporting Putin, many of them will at least begin to question their loyalties, says Mikhail Kasyanov, who served as Russia’s Prime Minister during Putin’s first term as President.

“This is a cold shower for Putin,” Kasyanov tells TIME. “I saw a few of the sanctioned lawmakers the other day, and they were very worried. They did not see this coming. They’ve been named and shamed in front of the entire world by this blacklist.”

Kasyanov knows many of the sanctioned individuals personally. Though he now heads a Russian opposition party, he was the number two man in the Russian state hierarchy between 2000 and 2004, just as Putin’s clique of friends from St. Petersburg was migrating to Moscow with ambitious plans. Even then, a joke was going around the capital about a Muscovite meeting a stranger in the streets. “Where are you from?” the man asks. “St. Petersburg,” says the stranger. The Muscovite recoils: “Why do you have to threaten me right away?”

What unites all of the key figures on the U.S. blacklist is not their official rank or ever their wealth. It is their ties to Putin’s St. Petersburg circle. Some of them grew close to Putin decades ago through a shared affinity for martial arts. (Putin and the Rotenberg brothers, for instance, are all experts in judo, having sparred and trained in the same gym since they were teenagers in the 1960s.) Others were Putin’s neighbors at the Ozero Dacha Collective, a gated community that Putin and his friends established on a lakeside near St. Petersburg in 1996. Still others worked with Putin before he moved to the Kremlin, either at the Leningrad (now St. Petersburg) branch of the KGB or at the office of the city’s mayor.

These men formed the core of Putin’s power base when he moved to the unfamiliar capital, and even as Putin was promoted to lead the FSB secret police in 1998, then to the post of Prime Minister in 1999, and finally to the presidency in 2000, he kept them close. In the words of Anatoly Rakhlin, who was the judo coach to Putin and the Rotenberg brothers when they were kids, the President “has maintained that healthy sense of being one of the guys.” Through his decades of mentoring, Rakhlin had encouraged Putin not to forget his old friends, and last summer, when Rakhlin passed away, Putin and the Rotenberg brothers attended his wake at a judo school in St. Petersburg. “He didn’t take the Petersburg boys to work with him because of their pretty eyes,” the coach had said about them in an interview with the Izvestiya daily in 2007, “but because he trusts people who are tried and true.”

In Moscow, the Kremlin elites once used that same term to describe the newcomers – the Petersburg boys, or pitertsy – usually with mild derision. When they showed up in Moscow at the turn of the millennium, real power was still in the hands of a clan known as the Family, the circle of oligarchs and power brokers around President Boris Yeltsin. In late 1999, as his health succumbed to the effects of alcoholism, Yeltsin entrusted Putin, an outsider, with the presidency. But he was still wise enough to hedge this gamble by surrounding Putin with officials close to the Family. Chief among them in the state hierarchy was Prime Minister Kasyanov, who held the keys to Russia’s budget.

In 2000, within six months of Yeltsin’s late-night transfer of power to Putin on New Year’s Eve, various strangers started coming to Kasyanov claiming to be Putin’s friends. “They’d come asking me to sign some papers, saying it was the President’s wish,” Kasyanov recalls. “So I’d pick up the phone to Putin and ask him, ‘Are these guys with you?’ And he’d say, ‘No, tell them to take a hike.’”

One of these early arrivals was Arkady Rotenberg, who set up SMP bank along with his brother in 2001. The previous year, just before Kasyanov was installed as Prime Minister, Rotenberg and one of his business partners managed to get a major concession from the state: control over the production of vodka and other spirits across the country. That was one of Putin’s first decisions as President – the formation of an alcohol monopoly called Rosspirtprom (the name means Russian Spirit Industry) – that incorporated the country’s biggest distilleries and put them in the hands of two obscure businessmen. Putin did this behind the backs of all the Kremlin’s key economic officials, says Andrei Illarionov, who was serving as Putin’s top economic adviser at the time.

“This went radically against all of the economic reforms we had been working on with Putin for months,” Illarionov tells TIME. “The ideas of competition, entrepreneurship, transparency, rule of law, all of that had been violated. It was a slap in the face.” When he read about Putin’s vodka decree in the press, Illarionov called around to other members of his economic team, and none of them knew anything about it. So they decided to confront Putin with their objections. “He cut us off immediately,” Illarionov recalls of that meeting. “He said it was none of our business and that we should stay out of it.”

For Illarionov, who resigned soon after, that marked a crucial split in Putin’s approach to Russian finances. In the sphere of economics, he drove forward reforms and imposed “rules of the game” for the country as a whole. But in business, he granted “exclusive economic privileges” to his friends, says Illarionov. “These issues ran in parallel, and in Putin’s mind they did not intersect.”

Like other members of their St. Petersburg circle, Arkady Rotenberg has long denied that his success is linked in any way to his relationship with Putin. “Acquaintance with a state official of such a high rank has never hurt anyone yet in our country, but it hasn’t helped everyone,” Rotenberg said in a rare interview with the daily Kommersant in 2010. “It is no guarantee.”

But his soaring wealth in the Putin era is hard to deny. Before Putin came to power, Rotenberg was a judo coach with a hand in a few average businesses in St. Petersburg. Today Forbes magazine estimates his fortune at around $4 billion, much of it made through deals with Russia’s state-run firms, such as the natural gas giant Gazprom. In 2008, that corporation began to sell Rotenberg its subsidiaries, particularly the ones that supply and construct pipelines, and then placed huge orders with these companies once they were in Rotenberg’s control. In 2009 alone, Rotenberg’s has said that his firm won 19 of these tenders with Gazprom. In the lead up to the Winter Olympics in Sochi last month, Rotenberg’s construction companies won at least 21 separate contracts to help prepare for the Games, a set of deals worth around $7 billion in total, according to Bloomberg News.

More broadly, Putin’s reign over the Russian economy has been defined by one core trend – the creation of huge, state-supported corporations that are run by his friends from St. Petersburg. The state natural gas monopoly Gazprom is run by Alexei Miller, who worked with Putin in the St. Petersburg mayor’s office in the 1990s. Another one of their colleagues back then was Igor Sechin, who now heads the state-run oil giant Rosneft. Russian Railways, the state railroad monopoly, is run by Vladimir Yakunin, who was Putin’s neighbor in the gated community they set up outside St. Petersburg in 1996. Another co-founder of that community was Yuri Kovalchuk, who now has indirect control over the National Media Group, a sprawling conglomerate of media assets. Kovalchuk’s son Boris is chairman of Russia’s electricity export monopoly. Kovalchuk’s brother Mikhail is head of Russia’s main nuclear research center. The list goes on.

But while Yakunin and Kovalchuk now find themselves under U.S. sanctions, the energy titans Miller and Sechin have been conspicuously spared. In the coming days and weeks, they could be next in line to join the blacklist if the U.S. makes good on its threat to increase the pressure. But that would also put American allies at risk. Europe depends on Russia for about 30% of its energy needs, and a handful of E.U. and NATO members, such as the Baltic States and Poland, get practically all of their oil and gas from Russia. Jeopardizing those supplies by sanctioning the men who control them is therefore a double-edged sword.

More importantly, it wouldn’t do much good. If the goal of these sanctions was to inflict pain on Putin and his friends, then the U.S. can pronounce its mission accomplished. SMP Bank had to call in an emergency cash infusion on Friday worth one billion rubles (about $30 million), which the Central Bank provided in violation of its own rules, says Kalantyrsky, SMP’s president. “Changing and interpreting its internal rules…is the concern of the Central Bank, in part to support the stability of the banking sector as a whole,” he explained. Because of U.S. dominance over the global financial system, “they could just as easily have imposed sanctions on the whole Russian banking system, shutting it down in the course of an instant,” he says, looking exhausted on Monday after a sleepless weekend of damage control. “We got the message.”

But if the U.S. hopes to make Russia stop bullying its neighbors, and to return Crimea to Ukraine, these sanctions are practically worthless. “It’s like poking a bear in the paw with a needle,” says Illarionov, Putin’s former economic adviser. “Will that cause him pain? Definitely. Will it prevent him from ransacking your cooler? Probably not.”

Apart from continuing to paint the U.S. as an evil empire on state TV, the Kremlin’s reaction will be to band together, and to speed Russia’s strategic turn toward China, as it has already been planning to do for years. In 2012, Putin called Asia “the most important factor for the successful future of the whole country,” and last year, Russia signed a deal to sell $270 billion in oil to China over the next ten years.

Nor will the sanctions hurt Putin’s popularity. As recent polling has shown, his approval ratings are now higher than at any point in the last five years – a stunning 80% – and that trend has been the same among the Kremlin elites. “What I’m seeing among my acquaintances in the last few days is a desire to rally around the leader, as is common at a time of foreign aggression,” says Gleb Pavlovsky, a Kremlin-connected political consultant in Moscow. “Even people who had grown cool to Putin before this now want to help him in any way they can. The elites are outraged at this foreign attack, and in effect, it has helped mend the tensions that had emerged over the years.” Whatever the White House was hoping to achieve with these sanctions, that was definitely not its goal.