The financial community is closing its doors to Russia. Will the art market follow?

Since Russia invaded Ukraine last week, an art adviser has been busy answering questions from worried clients, some of whom have works for sale in London this week, including at Phillips auction house . The company, owned by Russian luxury conglomerate Mercury Group, plans to offer tens of millions of dollars worth of artwork at mid-season auctions.

The adviser’s concern was whether the art or sales proceeds could be affected if Phillips’ Russian owners landed among the parties sanctioned by the US and EU governments. After contacting Phillips, the adviser was called back directly by chief executive Stephen Brooks on Monday.

“Based on my conversations with management and my review of the various applicable sanctions lists, as they stand today, I am comfortable continuing our dealings with Phillips,” the person said. “Obviously, if the situation changes or new information comes out down the road, that would be a different story.

The broader art market finds itself in a similar situation. As the financial community closes its doors to Russia, dozens of Russian millionaires and billionaires may need to convert their Warhols, Rothkos and Picassos trophies into cash, just as international sanctions have made them toxic for doing business.

Many state-owned companies have been effectively locked out of the global financial system as a result of sanctions imposed by the US and European governments. The restrictions affect around 80% of Russia’s domestic banking assets as well as the country’s ability to raise debt through public and private institutions, according to the US Treasury Department. In addition, five major Russian banks have been cut off from Society for Worldwide Interbank Financial Telecommunications, better known as SWIFT. The ruble fell 30% on Monday and people rushed to withdraw cash deposits from banks.

“It’s not unreasonable to think it might shake some things up,” an auction house executive said of the current situation.

Russian President Vladimir Putin with billionaire businessman Arkady Rotenberg and his brother, Boris Rotenberg, during the 2017 Formula One Russian Grand Prix in Sochi, Russia, April 30, 2017. Photo: Mikhail Svetlov/Getty Images .

Artnet News asked a series of major art companies – auction houses, mega-galleries, advisers and advocates for wealthy collectors –what they are doing, if at all, to ensure that they prevent works of art belonging to Russia from being converted into cash to circumvent sanctions.

One thing is clear: companies must be prepared to pass on a lot of business, no matter how lucrative or struggling.

Strict anti-money laundering regulations, including know-your-customer (“KYC”) laws, require companies to identify the ultimate beneficial owner of LLCs, trusts, and private foundations . Now companies will have to invest more attention than usual in the process.

They must ensure that they do not transact with specially designated nationals or blocked persons, in particular through a third party, according to Georges Lederman of Withers Worldwide. “This means that increased due diligence is now required to determine the source of funds and who is behind any offshore LLC,” he said.

Russian collectors have been a force in the art market since the early 2000s, but their ranks dwindled after the 2008 financial crisis. In recent years, as global wealth has grown, many have returned to collecting as a fashion lifestyle and form of investment, although their impact has not been the same as before, dealers and auction officials said. Much of their assets are believed to be stored outside of Russia, in free ports in Switzerland and Luxembourg or in mansions in London and New York.

Leonid Mikhelson, the billionaire owner of Russian gas giant Novatek, has been supporting Western art for more than a decade, sponsoring exhibitions at the Art Institute of Chicago, the New Museum in New York and the Tate in London. Viktor Vekselberg’s obsession with Fabergé led to a $100 million purchase of nine jewelry eggs in 2004. Four years later, Roman Abramovich paid $86.3 million for Francis Bacon. Triptych and an additional $33.6 million for Lucian Freud Dormant Benefits Supervisor, both were records at the time. (None of these men are on the current list of those sanctioned by the US government.)

Any attempted transfer or conversion of assets by a sanctioned person “should not in theory succeed as far as current law is concerned”, said Susan J. Mumford, founder of London-based Art AML, which advises galleries and dealers on compliance. To date, regulations are stricter in the UK than in the US

Representatives from Christie’s, Sotheby’s and Phillips all reiterated their commitment to avoid doing business with sanctioned individuals and companies. All three houses have offices in Moscow; they remained open on Mondays.

Larry Gagosian speaks during a private dinner at the opening of Gagosian at the Chocolate Factory September 17, 2008 in Moscow.  (Photo by Chris Jackson/Getty Images for Gagosian Gallery)

Larry Gagosian speaks during a private dinner during a Gagosian opening at the chocolate factory September 17, 2008 in Moscow. (Photo by Chris Jackson/Getty Images for Gagosian Gallery)

“We have strict customer identification and screening processes in place as part of our global anti-money laundering and sanctions compliance programs, and we will not allow designated individuals or companies on applicable sanctions lists to transact with us,” a Christie’s spokeswoman said. noted. “Politically Exposed Persons and those with a connection to a sanctioned jurisdiction or other high-risk jurisdictions are subject to enhanced due diligence.”

Phillips is owned by Leonid Strunin and Leonid Fridlyand, Russian nationals known in the art world as Leonids.

“The owners of Phillips are not subject to sanctions and have no ties to any individuals or institutions that may be directly or indirectly included on any sanctions list,” a spokeswoman said.

Major international galleries, including Gagosian, David Zwirner and Hauser & Wirth, did not respond to requests for comment. Others, including Acquavella Galleries, Dominique Lévy and Brett Gorvy, declined to comment.

Victoria Gelfand-Magalhaes, director of Lévy Gorvy, has done extensive business with Russian collectors since the mid-2000s and was a force behind Gagosian’s pop-ups in Russia, including her 2007 show at Barvikha Luxury Village , owned by Mercury Group outside. from Moscow. She posted on WhatsApp this week: “I have found it very difficult to focus on my work in the art world while a tragic war is unfolding in Ukraine. You know my past in Soviet Belarus as a persecuted minor [sic] and I am shocked that brutal history is repeating itself in this year 2022 in Europe. She provided several links for people to send aid to Ukraine.

From a business perspective, the situation is “like ridiculous,” said an auction manager. He was referring to Catch-22 where what makes art valuable – the combination of rarity, quality and provenance – is inextricably linked to the prohibition against profiting from it.

The Freeport in Luxembourg Courtesy: The Freeport

The Freeport in Luxembourg. Courtesy of Freeport

In an industry as international as the art market, there will also be other impacts beyond sales. war may cause higher shipping cost because carriers used Russian airspace for shortcuts to and from Asian hubsnoted Fritz Dietl, founder of the Delaware Freeport. They now have to bypass Russian airspace, increasing flight times and fuel consumption.

And then, of course, there’s the optics.

Even technical business considerations aside, some experts said the mere fact that Phillips is owned by Russian nationals might give customers pause.

“Can Phillips assure us of greater transparency regarding their ownership?” asked a lawyer who advises wealthy clients. “Even if it’s fine, is it optically correct for me? Will buyers go to a Russian auction house or am I better off putting it up for sale at Sotheby’s or Christie’s?”

As the deadline for major May shipments approaches, she said, these are the types of questions that have been asked by customers. “It’s been on everyone’s radar for four days,” the attorney added. “It’s a super dynamic situation. The sanctions are expanding and they could continue to expand.

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