Iced out: What sanctions on Russian wealth could mean for U.S. real estate

The Americans had a clear message for Vladimir Putin: The war in Ukraine would cost him in more ways than one.        

On Feb. 28, the U.S. announced a ban on transactions with Russia’s central bank, in a bid to hobble the country’s financial system in the wake of its president’s decision to invade Ukraine.

Treasury Secretary Janet Yellen said the move “will significantly limit Russia’s ability to use assets to finance its destabilizing activities, and target the funds Putin and his inner circle depend on to enable his invasion.”

The ban followed a pledge by many Western nations to separate Russia from its roughly $630 billion in foreign reserves, access to which may have helped mitigate the impact of economic sanctions that have now cratered the ruble, tanked the country’s stock market and put a serious dent in the net worth of Russian citizens. And that’s just governments: The steps being taken by private companies to isolate Russia financially could be just as impactful. Energy giants BP and Shell both announced that they were exiting joint ventures with Russian energy companies. Other industries could follow suit. 

The measures are some of the most economically punitive the international community has pursued against a particular country in recent decades. And the U.S. real estate market, both a beneficiary of and a haven for Russian wealth, is watching the situation closely.

Russian buyers have long been among the splashiest contingent in high-end U.S. residential real estate, amassing Central Park-facing penthouses and townhomes in Manhattan, mansions in Los Angeles and condos in South Florida’s Sunny Isles Beach. Fertilizer oligarch Dmitry Rybolovlev set a Manhattan penthouse record in 2011 when he paid $88 million for a 15 Central Park West pad, and Chelsea F.C. owner Roman Abramovich, an oil and metals magnate and reputed Putin confidant, amassed nearly $100 million worth of trophy residential holdings in Manhattan between 2015 and 2017. 

In prime markets across the country during the early 2010s, the term “Russian buyer” became shorthand for clients with a preference for shiny product and secrecy. But some of Russia’s actions in recent years put a damper on their activity. The country’s annexation of Crimea in 2014 “crippled” their buying in Miami, said Craig Studnicky, CEO of Aventura, Florida-based brokerage ISG.

“Since then, the population of Russian buyers in Sunny Isles is about 50 percent what it used to be,” he said. Between August 2017 and July 2018, Russians represented just 2 percent of the foreign investment market in Miami, according to the National Association of Realtors. 

But in the wake of a universally condemned war, future transactions from that buyer pool could garner even more scrutiny. Add to that banking restrictions that make doing business with Russians more cumbersome and sprinkle in some reputational risk, and you’ve got a recipe for a freeze.

“In any sort of transaction, ordinary due diligence is going to be heightened,” said Andrew Ittleman, an anti-money laundering specialist and partner at law firm Fuerst Ittleman David & Joseph.

Playing offense

Despite some headline-grabbing transactions, the U.S. luxury market isn’t exactly oligarch central. That distinction belongs to London, which is dominated by Russian buyers, as well as other wealthy enclaves such as Monaco. The principality said last month that it would freeze assets and impose economic sanctions on certain Russians. The European Union moved to freeze assets and impose travel bans on some of Russia’s most prominent oligarchs in late February, and the Biden administration said it wasn’t far behind.

“This coming week, we will launch a multilateral trans-Atlantic task force to identify, hunt down, and freeze the assets of sanctioned Russian companies and oligarchs — their yachts, their mansions and any other ill-gotten gains that we can find and freeze under the law,” the White House tweeted on Feb. 26. 

Though the restrictions apply only to top Russian leaders and a list of other individuals close to the Kremlin, they could bring about a broader chilling effect. 

“If there is need for a payment to or from a Russian oligarch in the U.S. or the EU, that will be hugely problematic,” said Ross Delston, an attorney and anti-money laundering expert.

The Treasury Department’s Office of Foreign Assets Control (OFAC) is compiling a list of Specially Designated Nationals of Russia and Belarus who will be targeted by sanctions. Meanwhile, the Magnitsky Act — named for tax attorney Sergei Magnitsky, who died in a Russian prison in 2009 after alleging widespread corruption by government officials — authorizes the U.S. government to impose sanctions on those it perceives to be human rights offenders, including freezing the American assets of individuals on the SDN list.

“There are a lot of wealthy Russians and wealthy Ukrainians, and their names are on the Magnitsky list and their assets are blocked in the U.S.,” said Harold E. Patricoff Jr., a Duane Morris attorney focused on international disputes. “If the asset is blocked by OFAC … it cannot be sold, mortgaged and it is subject to forfeiture, which means the government could quickly take it away and the government could sell it.”

Key Russian banks are also set to be booted off the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, a messaging network that facilitates financial transactions between banks around the world. The SWIFT cutoff is partial, the AP reported, thus providing Europe and the U.S. the ability to escalate penalties down the road. 

“If they cannot use wires, if they cannot transfer money freely as they have been so far, that complicates business quite a bit,” said Natalia Raphael, a Moscow-born real estate agent with the Keyes Company who caters to Russian and Ukrainian clients in South Florida. 

On Feb. 24, the U.S. imposed sanctions on some Russian state-owned banks, including the country’s largest bank, Sberbank, as well as its subsidiaries, forcing American banks to sever ties within 30 days.

“Apparently, a lot of the money held in Sberbank is held in U.S. dollars, but in order to process it, it would have to go through a U.S. account,” said Aleksey Shtivelman, an attorney at Shutts & Bowen who focuses on international disputes. “That is what the government is trying to stop.”

Future sanctions could also make it more difficult for Russians to make payments, Ittleman added.

“There is a real credit risk that you didn’t have before,” he said. “The sanctions situation is so fluid. You could be nonsanctioned today, but that could change tomorrow.”

Some Russian oligarchs are taking steps to reduce their exposure. Late last month, Abramovich, who isn’t on a sanctions list, announced that he was handing over “stewardship” of his Champions League-winning soccer club to a foundation. A friend of Abramovich’s told the FT the decision was an effort to protect the London-based club from any sanctions he might one day face.

Collateral damage

Russia is not a major force in global commercial real estate markets. Average outbound annual capital flows from the nation were just $330 million in the last five years, according to Real Capital Analytics, which described Russian ownership of commercial assets in the world’s largest real estate markets as “sparse.” And Russian lenders are not a real force in the U.S.

The risk to U.S. commercial real estate is likely to be more indirect. 

“The main mechanism is likely to be through higher energy prices, which add to the inflationary forces already being felt across most European economies,” wrote Real Capital Analytics’ Tom Leahy in a report published Feb. 24.

“This whole tragic invasion of Ukraine could have indirect effects,” added David Dollar, a fellow at the Brookings Institution. “Europe is likely to go into recession, and the odds of a U.S. recession go up.”

Then there’s the reputational risk that comes with doing high-profile deals with notable Russian business figures — even if they have no known ties to Putin’s regime.  

Last month, protesters of the invasion gathered near the soon-to-open Aman New York in Manhattan, demanding to know exactly where Vladislav Doronin, the billionaire Russian-born developer who owns the luxury hotel, stands on the offensive. 

Doronin made headlines last summer when his company announced it would be offering a special “members-only” space inside the Fifth Avenue building to 100 clients willing to cough up a $100,000 initiation fee. Protesters wanted to know what type of person would be the beneficiary of those fees. 

“If someone is going to spend that much money, they need to know if it will then support a regime that just started a war in Ukraine,” said Peter Zinkovetsky, a Manhattan-based real estate attorney and native of Ukraine who helped plan the protest. “I have friends and family living in Kyiv who are under bombs, and cousins who have joined the national army. It is hard to sit here and do nothing.”

A spokesperson for Doronin emphasized that the billionaire is not in favor of the war.

“I denounce the aggression of Russia on Ukraine and fervently wish for peace,” Doronin said in a statement provided to The Real Deal.

Side door’s open

The U.S. has long tried to use regulation to stop the flow of illicit money into property — with mixed results. 

In 2016, in a bid to address money laundering in real estate, the Treasury Department’s Financial Crimes Enforcement Network issued geographic targeting orders, or GTOs, requiring title insurance companies to report all-cash purchases of residential properties in major U.S. cities. That decision rippled through luxury markets across the country, with developers and brokerages warning that it would hurt their business. 

Sanctions, though, could dial up the intensity to another level.

“The GTOs are a reporting obligation, whereas sanctions are a blocking mechanism,” said Jim Richards, an anti-money laundering expert who is the founder of RegTech Consulting. 

“These guys are industrialists in oil and gas and petrochemicals,” he added, referring to Russian businessmen close to Putin. “It would be shocking if they didn’t have any commercial properties.” 

Richards said asset forfeitures were a possible step. 

“The whole point of this is to put pressure on Putin,” he said. “The federal government could be very aggressive in seizing properties.”

Local politicians in markets popular with foreign buyers have already been calling for seizures.

During an investigation into Russian interference in the 2016 U.S. presidential election, Bill de Blasio, then mayor of New York City, complained that oligarchs had essentially stolen their country’s wealth and funneled it into the city’s real estate, but he had little recourse to do anything about it.

“It manifests here as people with a lot of ill-gotten gains buying a lot of property — I don’t like it one bit,” he said in 2017.

That rhetoric of cracking down has popped up several times over the years, particularly during periodic calls for a pied-à-terre tax. The war in Ukraine has given politicians another reason to call for scrutiny of foreign buyers.

“For years Manhattan has been one of the most popular safe harbors for Russian oligarchs to park their cash, especially via ultra-high-end apartments,” Manhattan Borough President Mark Levine wrote in a Feb. 25 tweet. “It’s time to start seizing their properties. #SupportUkraine.” 

He doubled down on Feb. 28, writing, “We’re still waiting for the U.S. gov’t to place the broad circle of oligarchs connected to Putin on the sanctions list. This is the prerequisite to seizing the ultra luxe apartments many hold in Manhattan. Let’s do it NOW.”

The U.S. government plans to go after assets of oligarchs, but identifying those assets isn’t straightforward, experts said. Many properties are likely hidden under multiple layers of corporate LLCs registered in states where true ownership does not need to be disclosed. 

“We don’t know that ABC Corporation of Delaware is owned by Russian oligarchs,” said Sarah Beth Felix, who runs anti-money laundering firm Palmera Consulting. 

Aided by an army of lawyers, wealth managers and accountants, many wealthy buyers — both foreign and domestic — have turned obscuring property ownership into an art form. Beyond registering in Delaware, the process often involves setting up shell companies and offshore trusts in tax-free havens such as the British Virgin Islands. 

Even if the government is hell-bent on going after oligarchs, the current dynamics of the market mean they might not know where to start. 

“They are using our loopholes against us,” Felix said.