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Stephanie Baker: Punishing Putin
00:29:54
Mike Wallberg welcomes senior Bloomberg writer Stephanie Baker to discuss her new book, "Punishing Putin: Inside the Global Economic War to Bring Down Russia." The book offers an in-depth analysis of the West's response to Russia's full-scale invasion...
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- [00:00]
Mike Wahlberg
Get ready for cfa Institute Live 2025 with free power packed webinars designed to inspire and inform. Led by industry experts, these concise sessions tackle game changing topics like how AI is transforming investment strategies in emerging markets. Don't just show up, show up ready. Gain the insights you need to drive meaningful conversations this May in Chicago. Claim your spot now@cfainstitute.org Foreign welcome to the Enterprising Investor, the flagship investment podcast for CFA Institute. I'm Mike Wahlberg and I'm joined today by senior Bloomberg writer Stephanie Baker, who's here to talk about her fascinating new book, Punishing Putin Inside the Global War to Bring Down Russia, which hits shelves in mid September. I had an opportunity to read an advanced copy of the book this summer and I really enjoyed it, a sentiment I share with Red Notice author Bill Browder and Naseem Taleb of Black Swan fame, who described it as an authoritative and gripping investigation that reads like a detective novel. I can tell you he really nailed that quote. We are one of many stops on Stephanie's itinerary these days, so I'm grateful she made some time between the BBC, Squawkbox, NPR and of course Bloomberg TV to talk to us today. Welcome to the show, Stephanie.
- [01:21]
Stephanie Baker
Thanks for having me.
- [01:22]
Mike Wahlberg
So Stephanie, the book is, as you know, much more than just a timeline of the West's efforts to sanction Russia over the last couple of years and you were uniquely positioned to write what is effectively a very entertaining but a long form work of journalism. So can you talk about the focus of the book but also how your years of reporting came into play?
- [01:40]
Stephanie Baker
Right, so when Putin launched the full scale invasion in February 2022, I realized very quickly that this was the end of an era, one that began in the 1990s with the collapse of the Soviet Union and when I was based in Moscow as a reporter covering this phenomenal change, this incredible massive transfer of wealth. And I realized the invasion would bring Russia's 30 years of economic integration with the west to an end and it would not be over anytime soon. So I thought that gave me a little bit of road to run. And as the sanctions unfolded and I was reporting on them, I realized just the unprecedented nature of what was happening, that these were not just really dramatic, fascinating stories, but that we were undergoing a massive shift both in terms of geopolitical alliances as well as the global economic order and shifting trade patterns. And I thought this is finally a way to do a book on Russia where you can look at it with a beginning, middle and an end. Even Though we don't know what the end of this war is going to be. But we do know that the economic war and efforts to isolate Russia economically will continue for quite a while, given the death and destruction that Putin's invasion has brought to Ukraine.
- [03:05]
Mike Wahlberg
So one of the first things they did, as we know, is put these sanctions on a huge host of Putin's inner circle, the oligarchs. So I wonder if you could talk us through the anatomy of a sanction against an oligarch, like the who, what, why? And really what I'm trying to get at is what is the end game of targeting oligarchs to influence Putin?
- [03:23]
Stephanie Baker
I think there's been some degree of confusion and different approaches to this within both the US Government as well as the European and UK Governments. I think that the US in particular had started sanctioning some of Putin's inner circle going back to 2014, when Putin annexed Crimea. And they took a look at very specific circle of oligarchs who'd gotten rich off of Putin's presidency, either through contracts that he doled out to his friends and associates, or people he appointed to run state companies that took over swathes of the Russian economy. And I think there was a sense at that time that Putin would care about what happened to the people close to him. It turned out he didn't care too much. And I don't think anyone thought that this would cause those people to rise up and stage a coup. I think that's been a misconception. I don't think anyone seriously thought sanctioning any of these Russian billionaires would lead to a regime change. But that would. It would put mounting pressure on the Kremlin and Putin's ability to withstand power and create a certain instability and maybe align their interests, the Russian billionaires interest more closely with the West. Now, that didn't work out as planned. When these guys are sanctioned, they basically have all their assets in the west frozen. So if the US sanctions a Russian billionaire or the EU sanctions a Russian billionaire, any assets they have in those jurisdictions would be, would be frozen and they would be blocked from using the financial system in that country. There's a travel ban. Now, a lot of the sanctions did end up driving some of these guys back to Russia because their assets in the west were frozen. And there are some who say that this made some of them more dependent on Putin because they had fewer options. And I think it did engender a sort of anti Western sentiment which Putin played very effectively. That is a theme that Putin has followed throughout this economic war. He has positioned the sanctions as the west is against all of Russia, and we are at war with the West. We're not at war with Ukraine. We're at war with the West. We're at war with NATO, and these sanctions are uncompetitive, and we are being unfairly targeted. And I think a lot of the Russian elite have fallen into that, even despite the fact that they are obviously unhappy with the war. It has cut off their access to their playgrounds in the south of France or their mansions in London, what have you, their comfortable lifestyle where they could flip between, you know, luxury properties in Europe and back to Moscow, where they were making their money and following in the edicts of Putin. They all hold their assets with the blessing of Putin. They all live with the threat of having their assets seized. And there are some who argue that the west could have done a more subtle job of trying to split the elite by using sanctions a little bit more effectively and in a more targeted way. But I think that was very hard given the capacity constraints on the US Government as they rolled out these sanctions. And there remain certain people who have not been targeted. I mean, prime example, Alex A. Miller, the head of Gazprom, they haven't touched him for some reason, and that's because they don't want to mess with Russian gas supplies any more than they have to. But there are certainly gaps in terms of the people that they've targeted around Putin.
- [07:16]
Mike Wahlberg
So it seems to have kind of had the opposite effect of the desired effect in terms of sanctioning them, encouraging them to act in the West's favor, and instead, they've kind of driven them back into the arms of Mother Russia.
- [07:29]
Stephanie Baker
Well, look, I think that might have happened regardless. And I do think if you look at sanctions not as a vehicle for regime change, but as a way of slowing the Russian economy down and undermining Putin's ability to finance the war. The sanctions against many of these figures are totally legitimate. They control huge swathes of the Russian economy. You know, some control metals, critical metals supplies. So in that sense, I think the sanctions make sense and are coherent. Obviously, they've made exceptions for certain things that the West, Europe, and the US Are dependent on, namely critical minerals like titanium, for instance. But I think that going after them as part of a strategic attempt to slow Putin down I think does make more sense.
- [08:23]
Mike Wahlberg
And one of the other tools that they used was seizing Russia's foreign central bank assets. So how surprising was this move, and how effective has that been?
- [08:32]
Stephanie Baker
Yeah, I go into the details of this decision in my book. Both the decision that was taken within two days of Putin's full scale invasion to immobilize Russia's Central bank reserves in the West. A pot of $300 billion. This had never been attempted before. But when Russia's invasion ended up looking at the worst end of expectations, they weren't just pushing out from the Donbass, they were going all the way to Kyiv. They decided to take this extreme measure. It had been attempted before with Iran, Afghanistan, Venezuela. But the pot of money we were talking about with Russia was just so much bigger that it did raise the question of what would be the potential fallout in international markets. Would there be any sort of dry tinder that would, as one Biden administration official put it, that would ignite in global markets? And I think that was very crucial because Putin was not expecting it. He never thought that they would go that far. So in a war, you want the element of surprise. And I think that one ticked the box and it proved very important because now there is a big fight over whether or not we can go the next step and use that $300 billion pot of money for Ukraine, seize it. And the Biden administration has come along and finally agreed to, to back that plan. Congress enacted legislation authorizing President. The President to seize that money. But the problem is there's only $5 billion in the United States because Putin worried about this very prospect. But he. So he started reducing Russia's exposure to dollars after 2014, after the annexation of Crimea and after a wave of sanctions in 2018. Most of Russia's reserves are in euros. And he was betting that Europe would be too divided to act. They were united enough to freeze, to mobilize the assets, but they have been too divided to go the next step and actually seize the assets. I mean, there's been concern that going that next step would threaten the people's appetite for holding US Dollars and Euros. And there's been division within Europe, particularly from Hungary, which has been opposed and has frustrated measures to use those assets. The Biden administration came in in March and proposed an alternative plan, a kind of financial plumbing plan that would raise $50 billion backed by the interest on those reserves. But even that has been held up because of opposition from Hungary.
- [11:18]
Mike Wahlberg
Yeah, because Europe, if I recall, they. Yeah, that was the focus was because they have actually earned interest on some of these reserves and they don't actually owe that back to Russia in the first place. Right. If I remember reading that correctly. So they've been Debating using the interest that's been earned on the euro denominated reserves as well.
- [11:35]
Stephanie Baker
Right, Yeah. I mean, there's been quite a bit of debate of is the interest euro clear? A lot of the assets are at Euroclear, this settlement institution in Belgium, and there is no agreement between Euroclear and the Russian Central bank to pay them interest on any deposits. The money wasn't supposed to be sitting at Euroclear. That's why there was no agreement. So the EU decided it was fair game to go after the interest. And most recently, the EU has come up with a fix. They're approving a loan of 35 billion euros that is backed by the EU budget that will ultimately be repaid by the interest on those reserves. But, you know, it's been just incredibly hard to even get this far. But I do think ultimately they're going to have to use this pot of money. There's no way they can continue to finance Ukraine. And Ukraine's enormous reconstruction costs. $486 billion according to the World Bank. And that was six months ago. And we've had five far more damage since then that why should Western taxpayers be financing this when there's all this Russian money? There's agreement amongst lawyers that Russia is legally obliged to pay Ukraine war reparations and that that money is not going back unless Russia agrees to pay reparations to Ukraine. So I think eventually they'll have to get there, but it could take some time. And this has been the problem with Ukraine all along. It's been too slow, too little, too late.
- [13:05]
Mike Wahlberg
Yeah, and that's been a huge theme throughout the book, which is this difficulty in coordinating multiple different jurisdictions, lack of agreements specifically between Europe and the us, political goals, rule of law, all of these things kind of getting in the way. So you end up with a game of whack, a mole going on there. Can you talk a bit about that challenge that they faced?
- [13:24]
Stephanie Baker
Well, first of all, I would like to say that Certainly compared to 2014, the level of alignment between the US, Europe and the UK was remarkable, unlike anything we've seen before. There was equal appetite to go after Russia, and particularly in Europe, to pursue sanctions in a way that they have never done before, and in the UK for that matter. But, yes, there are different legal systems, there are different political traditions, there are different institutional capacities in each place. One of the key problems that did arise was that because the US had started sanctioning some of these people earlier on, they had a track record to look at for sanctions, evasion, and that allowed the Justice Department to go after a lot of people for sanctions evasion. The EU and the UK hadn't done that. So they had a much harder time trying to crack down on sanctions evasion. You know, they have been broadly aligned, not perfectly, but I think it has been remarkable, the level of policy coordination between the Brussels, London and Washington.
- [14:31]
Mike Wahlberg
Yeah. And it, it seems as well that, I mean, obviously you, you, the various different jurisdictions are struggling with the legal aspects of the legality of these sanctions and, and their right to, for example, seize, seize these assets, the big yachts floating out in the sea. There you open the book actually with a great story on the Ahmadea. And it's one example of many in the book where you talk through or write about the challenges of actually seizing these assets, keeping them, and in some cases, really surprising costs that there are borne by the Caesars. Talk a bit about that.
- [15:08]
Stephanie Baker
Right. So, yeah, I do open the book with this fascinating case of this super yacht called Amadea, which the US Government seized in Fiji and then sailed to San Diego with the aim of using it as a case of sanctions evasion by a Russian billionaire who'd been sanctioned in 2018 and then selling and forfeiting the proceeds for Ukraine. But it has turned out to be far more difficult because of the way Russians tend to hold their money through layers of shell companies. And I need to be careful how I say this, but in this case, there is a Russian billionaire who is the owner on paper, and the US Government is trying to argue that actually there is another Russian billionaire who is sanctioned who actually controls the vessel. And the US Government says he's just using this other oligarch as a front, as a clean, unsanctioned straw owner. And that is being fought out in the courts. There is a history of Russians using others to hold their assets. So that, that is a tradition, but that is, that makes it very hard to go the next step to actually seize those assets. And they've had similar problems in Europe. Europe doesn't have such a well developed sanctions law. It doesn't have such a well developed forfeiture law that it can go after these assets. You know, for a while, sanctions evasion wasn't even a criminal charge in many European countries. So it has been far more difficult. But what you've seen actually is the US exporting a lot of this economic warfare to Europe, both in terms of legal structures, legal approaches, as well as sanctions law. So in that sense, they've tried to become aligned, but obviously the European legal system is so much different than the US one.
- [17:01]
Mike Wahlberg
And the oligarchs themselves have had different approaches or responses as well to being sanctioned. Right, so you've got some that just went, as you mentioned, went back to Russia right away. Others who were willing to play ball a little bit, and, well, very few actually that were willing to actually be critical of Putin and the regime and the war. Can you talk about some examples of the oligarchs who were in the crosshairs and how they responded?
- [17:26]
Stephanie Baker
Right, so I go into detail of two oligarchs, three actually, who used London as one of their many bases and they were all sanctioned by the uk. One was a man called Michal Friedman, who lived in London and went back to Russia periodically, but really was basing his business. He had a private equity firm that he ran out of London after selling a major oil company to state controlled Rosneft. When he was sanctioned, he decided to fight those sanctions in the UK through the legal system. And he wanted to stay in London, he didn't want to leave. And he'd made some very qualified criticism of the war, but stopped short of criticizing Putin. The UK authorities tried to. They raided his mansion in North London. I go into the details in the book, it's quite an interesting story. They raided his mansion on allegations of sanctions evasion, but they didn't get the search warrant. Right. And he was able to win in court and win damages, actually. And as soon as he won in court, he left the country and went back, well, partly to Russia and living between Turkey and Georgia, Dubai and Israel. And so it was kind of an example of the way UK sanctions are still pretty new. They had to build the sanctions regime kind of from scratch. And the dramatic ramp up in the number of designations meant they were facing a capacity issue. And they don't have the kind of same experience as the FBI, for instance, of investigating white collar crime. I contrast him with another oligarch. He's not really an oligarch. He's just an entrepreneur really, called Oleg Tinkov, who was sanctioned by the uk. He was likened to the Richard Branson of Russia. He came up with a digital bank and he was sanctioned by the uk but he had come out very strongly against Putin was ranting on his Instagram account about the war and how stupid it was. And it took him over a year to get UK sanctions lifted. He renounced his Russian citizenship. He, after he was criticized the war, his assets were taken over in Russia. He told me he lost $9 billion. He eventually did get sanctions lifted. But I sort of contrast these two. I do think it took far too long for the UK to lift sanctions on him, and they could have done it more quickly as an example of how they could have encouraged some other members of the Russian elite to come out against Putin.
- [20:08]
Mike Wahlberg
So what we've been talking about is trying to sort of take some sniper shots, I guess, at Russia and Putin from the sidelines here. But the, you know, obviously the elephant in the room is the way that Russia finances itself through oil. So what has happened in terms of the West's efforts to limit those, the revenues that Russia is able to generate through its oil reserves and gas?
- [20:31]
Stephanie Baker
Right. So initially, Europe was very reluctant to do anything that would touch Russian energy because they were so dependent on Russian supplies, both natural gas as well as crude oil. But then when the atrocities at Bucha came to light in early April, there was a sea change in approach and there was a momentum for a full EU embargo on Russian oil. This had Biden administration, Biden administration officials worried that it would cause a huge spike in oil prices and potentially a global recession. And they were trying to persuade the EU to adopt a different approach. By the end of 2022, they'd come up with this plan to cap the price of Russian oil by denying Western services like insurance for any oil sold above $60 a barrel. And in the run up to this policy, and in the few months afterwards it worked, it really depressed Russia's oil revenues. But by the spring of 2023, Russia had managed to assemble its shadow fleet of oil tankers to transport oil outside of Western services. And Russia started earning hundreds of billions of dollars off of Russian off of oil revenue again. And it found new markets, particularly in India, which went from importing something like 1% of its oil from Russia to 40%. Opportunistically getting in there to buy Russian oil at a discount at part of that was what the us, The Biden administration officials wanted. They wanted oil to keep flowing, but at a discount. That policy has not been properly enforced. They have sanctioned. The US has sanctioned. The US, UK and the EU together, sanctioned something like 64 ships in Russia's shadow fleet. But enforcement has been weak up until recently. They sounds like they're. They're trying to crack down on some violations of this price cap. I think there's been a concern that if they really enforced it, that would cause oil prices to spike again. And so I think that's one explanation for why they haven't been more aggressive at enforcing it more recently. You see Oil prices coming down broadly, particularly Russian oil prices, because there is a softening demand in China. There's this economic slowdown. And Russian oil has traded below the price cap for the first time since, I think, first time since 2023. And it does seem to be slowing, slowing down Russia's revenues. However, they're still set to earn something like $180 billion from oil this year. They earned 17 billion in oil export revenue in July alone. So that just gives you a sense of the scale of what we're facing. And I detail in the book that this was a central challenge facing the U.S. europe, and the UK if they wanted to try to undermine Putin's ability to wage war, they had to figure out a way to go after oil revenues. And of course, the Ukrainians kept saying, you should be lowering the price cap. But it was so hard to get to this agreement at $60 a barrel that no one wanted to revisit it, particularly in Europe. There was so much division. But I think if they did lower the cap and they properly enforced it, I think that could help really drive revenues down, and that would really hurt Russia. That would be the one thing they could do to really make the whole sanctions strategy more effective.
- [24:05]
Mike Wahlberg
So, two and a half years in, what do you see in terms of the impact on the Russian economy and people? How well have the sanctions actually been working?
- [24:13]
Stephanie Baker
Right. So what you see is Putin has put the economy on a war footing. He has dramatically increased spending on defense and the military, and that has generated economic growth. But I don't think GDP figures are the right way of looking at the Russian economy. I think it's important to look at other factors. What you see is a combination of sanctions making imports more expensive and the lavish spending on defense factories and bonuses for soldiers going to fight. The meat grinder in Ukraine has pushed inflation up to 9%. That has forced the Russian central bank to hike interest rates to 19% to try to cool prices. So you have the Russian central bank working at odds with the Kremlin, which is pumping money out into the economy. And there is an expectation that there will be an economic slowdown next year. Our own brilliant economist at Bloomberg, Alexander isakov, is predicting 1.2% growth next year in Russia. And the sanctions are having an impact because they have burned through a lot of the. The reserves. They have a national wealth fund that they built up to help fight with oil revenues, to help finance the government in difficult times. They've burned through a big chunk of the liquid portion of that. And Putin is Facing a crunch, a labor crunch. In particular, there's massive labor shortages in Russia, both in terms of trying to staff defense factories as well as recruit for the Russian military. So I think it is facing some very strong headwinds. And one of the most marked signs of the effectiveness of sanctions is that recently Washington threatened to impose sanctions on banks that facilitate trade with sanctioned Russian entities, particularly the military industrial complex in Russia. And that actually really spooked Chinese banks, which were facilitating a lot of the flow of semiconductors into Russia, which it needs to build precision guided weapons. And what you find in Moscow right now is a shortage of Chinese Yuan and borrowing rates for Chinese yuan skyrocketing because the Chinese banks are thinking, we don't want to be cut off from the US Dollar with these sanctions for dealing with Russia. It's not that big of a business. So that is posing real problems. And you can see that just the threat of sanctions is having an impact. If they went ahead and actually sanctioned a Chinese bank, I think it would have an even more chilling effect.
- [26:58]
Mike Wahlberg
So, Stephanie, we're almost out of time here, but I did want to ask for your hot take on Trump versus Harris in terms of what the foreign policy might come from, from the two camps.
- [27:07]
Stephanie Baker
Oh, good one. Well, I think Harris would be much the same. She's got a few economic advisors that had worked on sanctions in the Biden administration. So I think she would be much the same. It's unclear if she would be more aggressive. Trump, we have to just go off of what he said. He. He has said he wants to end the war in a day, and he has not said whether he wants Ukraine to win. He just today had made some derogatory remarks about how Zelenskyy is such a great salesman, every time he comes to the US he walks away with 60 billion, which indicates he's not willing to continue financially supporting Ukraine. So I think a lot of Ukrainians are concerned that he may force them into a ceasefire deal where they cede territory, perhaps with sanctions relief. It's in his remit. It would be in the president's remit to do so because so many of the sanctions were imposed under executive order. And that would just give Putin a chance to regroup and rearm a little breathing room, just like he did in 2014. He used the Minsk Accords, which were these agreements, to try to stop the fighting. But he then came back, and I think that is the real concern in Ukraine is that you don't want to give Putin a ceasefire because he's just going to come back. His goal, his ultimate goals have not changed. And how Trump responds to that, in part depends on who he decides to staff his National Security Council and who his advisors are. And that's hard to predict. But the signs we're seeing and the words that are coming out of Trump's mouth indicate it could be difficult for Ukraine.
- [28:47]
Mike Wahlberg
Back down to our final question here, Stephanie. If you could go back to your early cub reporter days at Radio Free Europe or the Moscow Times and take yourself for coffee on your first day, what key piece of advice would you offer yourself?
- [29:00]
Stephanie Baker
That is such a good question. I think I would tell myself to follow the money. I was following the money anyway. But that looking at the massive transfer of wealth with a bigger picture lens, I was, I was too young to see the big picture at the time. And I think we were all a bit naive about the level of corruption that was going on and the backroom dealings that were happening. So I would focus on a few key figures that maybe I didn't realize how important they were at the time. And, yeah, look at the big picture, that Russia was setting itself up to fail with the way it decided to privatize the economy.
- [29:47]
Mike Wahlberg
I've been speaking today with Stephanie Baker, senior writer at Bloomberg and author of Punishing Putin Inside the Global War to Bring Down Russia. Thank you so much for coming on, Steffi. I really enjoyed our chat today.
- [29:58]
Stephanie Baker
Thanks for having me.
- [29:59]
Mike Wahlberg
I'm Mike Wahlberg, and this is me, the enterprising investor.