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OPINION

Bad egg. Vladislav Inozemtsev on how sanctions against MTS will affect Putin's regime

On the anniversary of the invasion of Ukraine new sanctions were imposed by Western countries, but their significance went largely unnoticed. Some in the opposition went so far as to claim collusion between the West and the Kremlin. In contrast, Vladislav Inozemtsev pointed out that imposing sanctions on the MTS conglomerate could significantly reduce the Kremlin's ability to conduct surveillance on Russians and carry out cyberattacks against other countries.

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New packages of sanctions were approved by the European Union, the United States, and the United Kingdom on February 24, marking the anniversary of the start of Russia's aggression against Ukraine. These sanctions were primarily intended to strengthen control over compliance with existing restrictions, according to many experts. Rosatom and its subsidiaries were not among the targets, and other measures generated significant controversy within the EU, causing a delay in their implementation for several days. Some members of the Russian opposition even claimed collusion between the West and the Kremlin. However, such conclusions are the result of a widespread lack of attention to detail.

Most Russian media overlooked the significance of a blow to one of Putin's most sensitive “pressure points.” It seems unlikely that this was accidental, as the MTS conglomerate is a crucial component of Putin's system, where surveillance of citizens, cyber-terrorism, and the laundering of corrupt proceeds converge. The company, which includes a bank and a cellular phone division, has long kept a highly classified system to protect the interests of Russia's top government officials.

A blow was dealt to the surveillance of citizens, cyberterrorism and laundering of proceeds of corruption

MTS is formally the largest cellular operator in Russia, a private company providing communication services under standard market conditions. However, it stands out from its competitors due to two distinguishing features. Firstly, it controls a bank (MTS Bank was established as the Moscow Bank for Reconstruction and Development in 1993, acquired by Sistema in 1994, and then transferred to MTS PJSC in several moves [as of 2019, the new major shareholder held a 95% stake in the bank]). Secondly, MTS obtained full control of MGTS, Russia's largest fixed-line telephony operator based in Moscow and involved in government communications, under rather murky circumstances.

The latter circumstance is likely what led to the creation of the main control center for information flows within MTS, enabling it to monitor contacts in mobile networks and the internet using SORM (System of Operative Investigative Activities) long before the “Yarovaya Law” was introduced. The unexpected connection between MTS and this FSB surveillance system is further highlighted by the fact that V. Sadovnikov, referred to on the internet as “an FSB officer who headed the SORM commission,” (implying that he holds the rank of general) currently works at MTS as Vice President for Corporate Security and Regime. (Some have alleged that he also oversees the entire money-laundering scheme at MTS Bank, but that is not the topic at hand.)

What's even more intriguing is that with the outbreak of the war in Ukraine, MTS Bank, which already had challenging clients, focused on establishing a parallel banking structure abroad. While Sber was rapidly divesting its subsidiaries in Turkey, Switzerland, former Yugoslav countries, and even in Kazakhstan, MTS Bank opened its branch in the UAE, where many wealthy Russians have recently relocated, and where the center of business interests of criminal politicians from the North Caucasus republics has long existed. In early February, the Western press reported that the new bank had received a license from the UAE Central Bank, which is a rare occurrence these days (although it was probably issued towards the end of 2022).

Following the establishment of the new bank, the deposits of many VIP clients who were cut off from international business giants like Sber and VTB began to flow quickly into the new institution. The reason is straightforward: the transfer of funds abroad took place within a single bank, a service that was previously only available through Raiffeisen but was always more complex and less “in-house.”

On February 24, the U.S. Treasury Department dealt a significant blow to the entire network of corrupt entities. A determination under Executive Order No. 14024 of April 15, 2021, targeted the Moscow-based MTS Bank and its UAE subsidiary, among others. What set MTS Bank apart from all other banks sanctioned under the same order, and went unnoticed by Russian analysts, was that it was not granted a grace period until May 25 to complete its foreign operations. This meant that the bank was cut off from SWIFT within hours, and its correspondent accounts and foreign assets were immediately frozen. Although the Americans did not emphasize this point, it is evident by referring to the document (and the incident was only briefly mentioned by Vedomosti in Russia).

MTS Bank was not granted a grace period to complete its foreign operations, it was cut off from SWIFT within hours

The new determination placed almost all companies associated with the “spy nest” inside MTS on the SDN list, including the main producer of SORM software used in Russia, Citadel, and 11 other prominent firms operating in this field, along with their respective owners and managers. All these companies have been active in the Russian “market” for a long time and are well-known.

It is difficult to estimate the amount of money frozen at MTS Bank in the UAE, which had already been in operation, but it is clear that Russian companies will face significant challenges in obtaining spy equipment. Furthermore, on the same day, the U.S. Department of Commerce issued Rule No. 230221-0047, which prohibits the export of telephone and computer equipment valued at more than $300 in U.S. retail sales to Russia and Belarus. This is a reinstatement of the ban on exporting computers and phones for private use that was previously lifted and may lead to criminal penalties for violations of the new regime. As a result, “parallel importers” may suffer the same fate as those brave individuals who tried to purchase parts for Russian aircraft in the U.S. and may face up to 20 years in federal prison.

The impact of the sanctions on Putin's system of domestic surveillance cannot be overstated. The SORM-related services market has recently been highly lucrative, with government contracts worth billions, if not tens of billions, of rubles. It is worth noting that in addition to numerous officials and military officers associated with the “special military operation” the list of sanctioned individuals and entities includes Maksut Shadaev, the Minister of Digital Development, Communications and Mass Media of the Russian Federation, who is considered a civilian and has not previously been subject to any restrictions.

The SORM-related services market has recently been highly lucrative, worth billions of rubles

When it comes to SORM, it's important to remember that not only were the system's basic technologies transferred to Russia by the US during a period of collaboration in counter-terrorism efforts, but also that the system relies on the falsification of SSL certificates of major websites, including those deemed “extremist” by the Russian government. This means that not only can Moscow successfully spy on its citizens, but it can also infiltrate the World Wide Web, unlike China which initially chose to create a firewall to cut itself off from the internet. Therefore, the sanctions against Russian companies connected to SORM are not just a tool of sanctions policy, but also an example of preventive war, long overdue. The complete destruction of this sector of the Russian “information economy” could be the most important step in guaranteeing digital security for Western countries and, equally importantly, an instrument for the radical expansion of freedom in the Russian sector of the worldwide web.

It is worth highlighting that the announcement of sanctions against the “SORM heroes” was published on the State Department website on the same day they were imposed, which is usually not the case as the U.S. Treasury Department is typically responsible for releasing information on sanctions policy.

However, for most Russians, the possibility of their conversations being wiretapped and their correspondence being intercepted on the supposedly secure messaging app Telegram is not as alarming as the potential consequences of the sanctions that the Americans may impose in the near future (although it is speculated that the Kremlin is increasingly concerned about monitoring the mood of the elite, and the deaths of several major businessmen may be linked to their lack of caution in the digital realm). In essence, on February 24, the US issued another “Chinese warning” to Russia, having thus far only sanctioned MTS Bank for its money-laundering business and the SORM-related companies that are linked to MTS. However, the mobile phone network provider itself, with its 80 million subscribers, has yet to be targeted. Should it be, the roaming system (which necessitates settlements with foreign providers) and the entire infrastructure of services based on US-patented equipment and technologies - such as 4G communication and LTE mobile data transmission (which MTS has been able to parallel import since summer 2022, although it may no longer be relevant) - would be immediately affected.

Roaming and 4G and LTE communications standards may no longer be useable as a result of the sanctions

Naturally, it would be unexpected if the sanctions were not met with a series of statements downplaying their impact, such as claims that MTS Bank is “operating normally“ (especially considering that the other entities on the sanctions list, even those granted a grace period, have already encountered significant issues, and MTS Bank itself has been removed from both AppStore and GooglePlay). However, the UAE authorities have modestly announced that “the Central Bank is exploring potential options [resulting from the new status of MTS Bank] in order to make an appropriate decision in due course” (likely having been doing so since the recent visit to Abu Dhabi by Brian Nelson, the US Deputy Treasury Secretary responsible for counter-terrorism and financial intelligence).

There is currently panic within MTS as a significant number of the company's top managers have assets in Europe and the U.S. and hold documents for permanent residence in countries that are considered “unfriendly” by Russia. MTS has a board of directors that is uncommon for large Russian companies, with at least four out of eight members being citizens of foreign countries. This is in contrast to the overall situation in Russia, where only 14% of public company board members are foreigners. Due to their mass departure, many large corporations have had to replace up to 80% of their directors.

In 2006, MTS underwent a rebranding process during a period of unparalleled growth, and its selection of an egg as its logo was a source of confusion for even the most experienced designers. The egg was meant to symbolize “the company's simplicity, eventful past, active present and prosperous future.” It is unlikely that the egg and needle symbolism or the Kremlin alfa males' recent fixation on primary sexual characteristics (even God matters to them primarily because he is supposed to be male) had anything to do with the decision to saturate MTS with Russian secret service personnel and use the company as a base for implementing a system of information surveillance on the Russian people. But the leading domestic cellular operator's ball-like logo design corresponds perfectly to the aim and the severity of the sanctions blow. Time will tell whether “Putin's balls” have been busted.

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