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

In the days since Russia invaded Ukraine last week, an art consultant has been busy fielding questions from concerned clients, some of whom have works for sale in London this week, including at Phillips auction house. The company, owned by Russia’s luxury conglomerate Mercury Group, plans to offer tens of millions of dollars worth of art during mid-season auctions.

The adviser’s concern was whether the art or profits from sales could be affected if the Russian owners of Phillips are among the parties sanctioned by the US and European governments. After contacting Phillips, the adviser received a direct call from CEO Stephen Brooks on Monday.

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

The art market in general is in a similar bind. As the financial community closes its doors to Russia, dozens of Russian millionaires and billionaires may need to turn their Warhol, Rothko and Picasso trophies into cash, just as international sanctions have made them toxic for doing business.

Many state-owned companies have been effectively shut out of the global financial system following sanctions by the US and European governments. The restrictions affect about 80 percent of Russia’s domestic banking assets, as well as the country’s ability to raise debt through state and private institutions. according to the US Treasury Department. In addition, five large Russian banks have been isolated from the Society for Worldwide Interbank Financial Telecommunication, better known as SWIFT. The ruble fell 30 percent on Monday and people rushed to withdraw cash deposits from banks.

“It’s not unreasonable to think that this could shake 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 at the 2017 Formula 1 Russian Grand Prix in Sochi, Russia on April 30, 2017. Photo: Mikhail Svetlov/Getty Images .

Artnet News asked a variety of major art businesses (auction houses, mega-galleries, high-net-worth collectors’ advisors and attorneys)what they are doing, if anything, to ensure they prevent Russian-owned artworks from being converted into cash to circumvent sanctions.

One thing is clear: companies must be prepared to transfer a large number of businesses, no matter how lucrative or difficult.

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

They should be careful not to transact with Specially Designated Nationals or Blocked Persons, especially through a third party intermediary, according to Georges Lederman of Withers Worldwide. “That means more due diligence is now required to determine the source of funds and who is behind any offshore LLC,” he said.

Russia’s 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 expanded, many have resumed collecting as a lifestyle and form of investment, although its impact has not been the same as before, dealers and auction executives said. Much of his 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 the Western art world for more than a decade, sponsoring exhibitions at the Art Institute of Chicago, New York’s New Museum and London’s Tate. Viktor Vekselberg’s obsession with Faberge led to the purchase of nine jeweled eggs worth $100 million in 2004. Four years later, Roman Abramovich paid $86.3 million for Francis Bacon’s eggs. Triptych and another $33.6 million for Lucian Freud Benefits Supervisor Sleep. Both were records at the time. (None of these men are on the current US government sanctioned list.)

The attempt by any sanctioned person to transfer or convert assets “should in theory not be successful as far as existing law is concerned,” said Susan J. Mumford, founder of London-based Art AML, which advises galleries and dealers. about compliance. To date, regulations have been stricter in the UK than in the US.

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

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

Larry Gagosian speaks at a private dinner at a Gagosian opening at the Chocolate Factory on 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 individuals or businesses designated on applicable sanctions lists to transact with us,” it said. a Christie’s spokesman. saying. “Politically exposed persons and those with a connection to sanctioned or other high-risk jurisdictions are subject to enhanced due diligence.”

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

“Phillips owners are not subject to sanctions and have no connections to any individual or institution that may be directly or indirectly included on any sanctions list,” a spokesperson 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 much business with Russian collectors since the mid-2000s and was a force behind Gagosian pop-ups in Russia, including her 2007 show at Barvikha Luxury Village, owned by Mercury Group out of Moscow She posted on WhatsApp this week: “It has been very difficult for me to concentrate on my work in the art world as there is a tragic war going on in Ukraine. You know my past in Soviet Belarus as a persecuted minor. [sic] and I am surprised that brutal history repeats itself in this year 2022 in Europe.” He provided various links for people to send support to Ukraine.

From a business perspective, the situation is “like ridiculous,” an auction executive said. 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.

Le Freeport in Luxembourg Courtesy: Le Freeport

Le Freeport in Luxembourg. Courtesy Le Freeport

In an industry as international as the art market, there will also be other impacts beyond sales. War may result in higher shipping costs because carriers used Russian airspace for shortcuts to and from Asian hubssaying Fritz Dietl, founder of the Delaware Freeport. They they now have to divert through Russian airspace, increasing flight times and fuel consumption.

And then, of course, there is the optics.

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

“Can Phillips give us assurances about more transparency regarding your property?” asked a lawyer who advises high-net-worth clients. “Even if everything is fine, is this optically correct for me? Will buyers go to a Russian-owned auction house or would it be better to put it up for sale at Sotheby’s or Christie’s?

As the deadline for major May shipments approaches, he said, these are the kinds of questions that have been coming in from customers. “This has been on everyone’s radar for four days,” the lawyer added. “It is a super dynamic situation. Sanctions are expanding and may continue to expand.”

Update, March 1, 2 pm: Switzerland joined the sanctions this week, breaking its neutrality for the first time. The sanctions will apply to assets that are tangible or intangible, movable or immovable, a spokesperson for the Swiss federal department for economic affairs, education and research told Artnet News. Luxury goods, real estate and works of art, as well as assets stored in bonded warehouses, would be blocked.

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