The Financial Community Is Shutting Its Doors to Russia. Will the Art Market Follow?

In the days since Russia invaded Ukraine last week, one art advisor has been busy fielding questions from worried 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, is planning to offer tens of millions of dollars worth of art during the mid-season auctions. ​

​

The advisor’s concern was whether the art or the proceeds from the sales may be impacted should Phillips’s Russian owners land among the parties sanctioned by the U.S. and European governments. After contacting Phillips, the advisor got a call back directly from chief executive officer 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 with proceeding with our transactions with Phillips,” the person said. “Obviously, if the situation changes or if new information comes out down the road, that would be a different story.”​

​

The broader art market is finding itself in a similar bind. As the financial community shuts its doors to Russia, scores of Russian millionaires and billionaires may need to convert their trophy Warhols, Rothkos, and Picassos into cash—just as international sanctions have made them toxic to do business with. ​

​

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

​

“It’s not unreasonable to think this might shake some things loose,” one auction-house executive said about the current situation. ​

​

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

​

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

​

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

​

They must be careful not to transact with any specially designated nationals or blocked persons, especially through a third-party intermediary, according to Georges Lederman of Withers Worldwide. “That means heightened due diligence is now required to determine the source of funds and who is behind any offshore LLC,” he said.​

​

Collectors from Russia have been a force in the art market since the early 2000s, but their ranks dwindled after the financial crisis in 2008. In recent years, as global wealth expanded, many resumed collecting as a lifestyle and form of investment, although their impact hasn’t been the same as before, dealers and auction executives said. Much of their holdings are thought to be stored outside Russia, in freeports in Switzerland and Luxembourg or mansions in London and New York. ​

​

Leonid Mikhelson, the billionaire owner of Russia’s gas giant Novatek, has been supporting the Western art world for more than a decade, sponsoring exhibitions at the Art Institute of Chicago, the New Museum in New York, and London’s Tate. Viktor Vekselberg’s obsession with Faberge led to a $100 million purchase of nine jeweled eggs in 2004. Four years later, Roman Abramovich paid $86.3 million for Francis Bacon’s Triptych and another $33.6 million for Lucian Freud’s Benefits Supervisor Sleeping. Both were records at the time. (None of these men is on the current list of individuals sanctioned by the U.S. government.)​

​

Any sanctioned person’s attempt to transfer or convert assets “should not in theory be successful as it relates to existing law,” said Susan J. Mumford, founder of London-based Art AML, which advises galleries and dealers on compliance. To date, regulations have been more strict in the U.K. than in the U.S.​

​

Representatives for Christie’s, Sotheby’s, and Phillips all reiterated their commitment to avoiding business with sanctioned individuals and companies. All three houses have offices in Moscow; they remained open on Monday.​

​

“We have strict client identification and screening processes in place as part of our global anti-money laundering and sanctions compliance programs, and will not permit individuals or companies who are designated on applicable sanctions lists to transact with us,” a Christie’s spokesperson said. “Politically exposed persons, and those with a connection to a sanctioned or other high risk jurisdictions, are subject to enhanced due diligence.”​

​

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

​

“The owners of Phillips are not the subject of sanctions and have no connections to any individuals or institutions that may be included directly or indirectly in any sanctions list,” a spokesperson said. ​

​

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

​

Victoria Gelfand-Magalhaes, a director at 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 its 2007 show at Barvikha Luxury Village, owned by the Mercury Group outside of Moscow. She posted on WhatsApp this week: “I have found it very difficult to focus on my work in the art world as a tragic war is taking place in Ukraine. You know my past in Soviet Belarus as a persecuted minorly [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 support to Ukraine. ​

​

From a business perspective, the situation is “like, ridiculous,” one auction executive said. He was referring to the Catch-22 where the very thing that makes the art valuable—the combination of rarity, quality, and provenance—is inextricably linked to the prohibition against cashing in on it. ​ ​

​

In an industry as international as the art market, there will be other impacts beyond sales, too. The war may result in higher shipping costs because carriers used Russian airspace for shortcuts to and from Asian hubs, said Fritz Dietl, founder of the Delaware Freeport. They now have to reroute around Russian airspace, which increases flight times and fuel consumption.​

​

And then, of course, there are the optics. ​

​

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

​

“Can Phillips give us assurance about more transparency concerning their ownership?” asked one attorney who advises high-net-worth clients. “Even if everything is alright, is this right optically for me? Are buyers going to be going to a Russian-owned auction house or would I be better off putting it up for sale at Sotheby’s or Christie’s?”​

​

As the deadline for major May consignments looms, she said, these are the types of questions that have been coming in from clients. “This has been on anyone’s radar for four days,” the lawyer added. “It’s a super dynamic situation. The sanctions are expanding and they may continue to expand.”​

​

Update, March 1, 2 p.m.: 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 spokesman for Swiss federal department of economic affairs, education, and research told Artnet News. Luxury goods, real estate, and works of art would be blocked as well as assets stored in bonded warehouses.​