With Vladimir Putin’s troops massed on the Ukrainian border, governments in the US and Europe have vowed to retaliate by imposing harsh economic restrictions. The British foreign secretary, Liz Truss, has warned of “the toughest sanctions regime against Russia we have ever had”.
Of all the countries threatening economic retaliation, the UK has an outsized ability to inflict damage. There is thought to be more Russian gold in London than in any other city in the world. Not only in the Chelsea mansions that house the families of oligarchs, but on the London Stock Exchange (LSE).
Since the 1990s, companies whose shares are traded in Moscow have turned to London to raise money through what are known as secondary listings. They range from state-backed oil and gas producers Rosneft and Gazprom, to state-run banks VTB and Sberbank, to independent mining companies like Norilsk Nickel that have no state ownership.
In total, 31 Russian companies are listed on the LSE, with a combined market value of £468bn, according to the data company S&P Global.
The companies are not only a crucial part of the Russian economy, they also directly fund a large part of the Russian state. London-listed Russian oil, gas and mining companies paid their government £39bn in taxes in 2020, according to a Guardian analysis of payments to government disclosures. That revenue is hugely important to the Putin regime: Russia spent £41.7bn on its military in 2019, 11.4% of government spending, according to the World Bank’s latest figures.
Now those companies are under the spotlight, as legislators in London and Washington ponder what form sanctions should take.
A statutory instrument laid before parliament last week has given the UK government the power to impose sanctions on those “carrying on business of economic significance to the government of Russia” as well as companies supportive of the Russian government, and sectors of strategic significance, including energy, mining and financial services.
While not every Russian-linked company will be a target for sanctions, the reality is most of the London-listed companies potentially fall within the definition of having economic or strategic significance to the Russian government.
A draft US sanctions bill that is thought to have the backing of the White House explicitly names 12 Russian banks as potential targets for sanctions and would also give powers to hit companies in the oil and gas and mining sectors.
If carried out, the US threats would represent “massive sanctions at a level we’ve not seen before”, including after Russia’s invasion of Crimea in 2014, said John Smith, a partner at US law firm Morrison and Foerster who led the US Treasury’s Office of Foreign Assets Control (Ofac), the department’s key sanctions enforcement body, until 2018.
No companies or individuals have yet been designated, but the new legislation now allows for the speedy designation of a very broad range of individuals and entities.
Under the most extreme scenario, companies operating in the UK, US or EU – including most of the world’s major financial institutions – could be forbidden from any transactions with sanctioned entities. That could mean the indefinite suspension of their shares, and an inability to issue new debt or shares in London.
Asked whether the UK was likely to impose sanctions that would damage the interests of big British companies, Bernardine Adkins, a partner at the London law firm Gowling WLG, said: “I’ll believe it when I see it.”
“The modern way of sanctions tends to be very focused, and they’re not sweeping to hurt the economy,” she added.
Even if sanctions are imposed, there can be ways around them. Smith said he expected some “flexibility” in the US approach to the energy sector in particular, given the importance of Russian gas to the EU economy. Governments can take a “facts and circumstances” approach to allow limited licences for work with sanctioned entities.
The most obvious companies of economic significance to the Russian government, based on tax take, are Rosneft, Gazprom and Lukoil, who together paid 3.2tn roubles (£31bn) in tax and other payments to the Russian government in 2020. All three are primarily listed on the Moscow Exchange, but have secondary listings in London.
A spokesperson for Rosneft, the large oil company run by the former Russian deputy prime minister Igor Sechin, said the company was “a commercial organisation” that had no “political agenda”. The spokesperson highlighted a list of major institutional shareholders ranging from Goldman Sachs and BlackRock in the US to British asset managers such as Schroders and abrdn, and said it made “a notable contribution to the sustainability of the UK energy market”.
Gazprom, Norilsk Nickel and Sberbank did not comment. Lukoil and VTB did not respond to requests for comment.
Some companies with primary London listings also operate in sectors deemed by the UK government as strategically significant to Russia. The FTSE 100 steelmaker Evraz is incorporated in London but has significant operations in Russia. The company is 29% owned by Roman Abramovich, the Russian owner of Chelsea football club.
Lawyers for Abramovich disputed that he or Evraz fitted the criteria for potential designation for sanctions. They added: “It would be ludicrous to suggest that our client has any responsibility or influence over the behaviour of the Russian state.”
The London-based aluminium miner En+ Group, which raised $1.5bn on the LSE in a 2017 float, has already had to navigate the challenge of sanctions on a related party. It is part-owned by Oleg Deripaska, a Russian oligarch who has been on the US sanctions list since 2018.
En+ managed to escape US sanctions by reducing Deripaska’s ownership to 45% and appointing other directors in a plan devised by Greg Barker, a former UK energy minister and Conservative peer who is the company’s chair. The company is still thought to make monthly reports to Ofac. En+ declined to comment. However, Deripaska has taken legal action to challenge US sanctions. He has denied any wrongdoing and said US allegations against him were based on “false rumour and innuendo”.
At their peak in 2007, Russian companies raised $19.7bn on London’s equity markets, according to the data company Dealogic.
Roman Borisovich, a former investment banker and founder of the anti-corruption group ClampK, said the London listing is particularly valuable because it gives an “independently verifiable measurement of their capitalisation”.
“Traders are more likely to trust the London price than a quote from the Moscow exchange, where you don’t know what the liquidity is like or what market manipulation is there,” he said. “That’s really valuable when you’re looking to raise money by issuing bonds or shares, or enter any other financial transaction.”
The possibility of sanctions for London-listed companies poses tricky questions for the London Stock Exchange Group, as well as the City investment bankers, lawyers and accountants who serve them. Russian companies are likely to account for only a small portion of the LSE’s fee income, but it has in the past enthusiastically welcomed Russian money – even going so far as mounting a roadshow to Moscow in 2011 to drum up custom.
That mood has changed along with the geopolitics since the Crimea annexation, but Russian companies have still raised an average of $1.8bn a year on the LSE between the 2014 Crimea invasion and 2021, or £14bn in total, according to data from Dealogic. There were five equity capital raises by Russian companies in 2021, dominated by Fix Price, a Russian retailer (albeit incorporated in the British Virgin Islands), which raised $1.8bn.
Sanctioned companies can, depending on the details, be suspended from trading and removed from the LSE’s stock market indices – although there is little in the rules on what would happen if suspensions were to last years. The London Stock Exchange Group declined to comment.
Whether the UK will clamp down is an open question, says Thomas Mayne, a visiting fellow in the Russia and Eurasia programme at the thinktank Chatham House.
“London is open to business and this has produced a two-faced approach to Russia,” he says. “We’re happy for the money to stay here but we’re not happy with its foreign policy priorities. We’ve somehow not made the link.”