You are here
Since the poison attack on former Russian spy Sergei Skripal and his daughter Yulia in Salisbury in early March, the British government has been consumed by efforts to identify appropriate responses to the alleged Russian state-directed attack.
Twenty-three Russian embassy staff have been expelled from London and a broad coalition of international support has been created, resulting in a further 150 Russians being sent home from nearly 30 other states. Moscow has responded in kind.
What the British government has so far failed to do is to find the financial lever they, the parliamentary opposition in London and commentators, appear most keen to pull to target the finances of Russia’s oligarchs closely associated with the Kremlin.
The extent to which Russian money, linked to what the recent UK government National Security Capability Review terms ‘corrupt elites’, has flowed into Western financial markets and high-end assets, such as real estate and yachts, and funded private school educations and reputation-enhancing donations to museums and universities, has been widely reviewed.
These analyses, from the author among others, have concluded that, on its own, the UK has limited ability to exert meaningful financial pressure on those who have taken advantage of 20 years of light-touch regulation and the limited scrutiny of in-bound capital flows.
The US has developed a considerable and highly effective ‘financial warfare’ capability over the past two decades
In fact, it is perhaps arguable that the UK and its Overseas Territories have benefited from these flows of illicit funds, and thus disrupting and reversing this benefit is not an easy economic decision for the government to take. Furthermore, perversely, reversing these flows might play into the hands of President Vladimir Putin by forcing the repatriation of offshore funds.
In contrast to the UK’s limited capacity (or willingness) to take meaningful financial action against these corrupt elite, the US has developed a considerable and highly effective ‘financial warfare’ capability over the past two decades.
Rooted in President George W Bush’s response to 9/11, led by US Treasury, the US has capitalised on the extraterritorial influence and reach provided by the global dominance of the dollar, the currency of choice for trade and investment.
It has also exploited New York’s key position in the global financial ecosystem, specifically as centre through which almost all transactions conducted in dollars (or facilitated by the greenback, such as foreign exchange transactions) clear.
Thus, a deal undertaken between a Dubai-based trader and a Singaporean shipping company on behalf of a Russian businessman might not obviously touch the US, but related payments almost certainly do, however fleetingly, bringing them within the ambit of its law enforcement.
US dominance is rarely welcomed by the international community. The ability of the US to exert influence over the financial decisions of sovereign states, their industries and financial services sectors attracts significant criticism.
Yet despite the rise in alternative payment methods, the increasing liquidity of non-US dollar currencies such as the euro and the Chinese renminbi, and asset markets outside the US, approximately 50% of global trade is still conducted in the US currency.
The EU needs to demonstrate that it too is willing to take financial measures against the interference by Russia
Nearly two-thirds of global currency reserves are held in US dollars (in contrast, about 20% are in euros and 1% in renminbi). Put simply, control of the dollar still provides US authorities with a high degree of financial and economic hegemony.
But perhaps, for once, this influence and power might be welcome. For last Friday, the US Treasury’s Office of Foreign Assets Control (OFAC) designated seven Russian oligarchs and twelve companies they own or control as well as seventeen senior Russian government officials ‘in response to worldwide malign activity’.
OFAC noted further that ‘The Russian government operates for the disproportionate benefit of oligarchs and government elites [who] will no longer be insulated from the consequences of their government’s destabilizing activities’.
While no specific mention was made of the poison attack in Salisbury, it seems certain this sanctions activity was bolstered by events in the UK. Furthermore, Senators Mike Turner (Republican) and Joaquin Castro (Democrat) have proposed bipartisan legislation, the Stand with UK Against Russia Violations Act, that would sanction any individual found to be connected with the poisoning in Salisbury.
OFAC’s sanctions will not merely affect the financial assets of these 24 individuals in the US; banks around the world, particularly those that have subsidiaries in the US or dealings with banks based in New York, will also take note.
Sanctions passed down by OFAC send waves across the entire financial system. A bank in London, Dubai or Singapore providing financial services to one of the sanctioned individuals or companies, will think twice before continuing to offer those services.
The EU has been weak in its response to Russian interference, in no small part due to the consensus needed to increase sanctions pressure on Moscow
Indeed, in guidance (FAQ 574) published alongside the latest sanctions, OFAC noted that foreign persons are also covered by the requirements of these new sanctions if they ‘knowingly facilitate significant transactions, including deceptive or structured transactions, for or on behalf of any person subject to U.S. sanctions with respect to the Russian Federation, or their child, spouse, parent, or sibling’.
The markets have also spoken. At the opening of trading this week, share prices of EN+ and Rusal (deemed to be controlled by aluminium magnate and sanctioned oligarch Oleg Deripaska) quickly fell approximately 40% and 50% respectively. Other Russian stocks, currently unaffected by sanctions also suffered, with the Russian stock market slumping 10%.
Recognising its own feeble position and the ability of the US to exert out-sized, extraterritorial pressure on Russian corrupt elites, perhaps the UK has encouraged America to act, or has at least capitalised on the prevailing mood in Washington by contributing names and supporting intelligence to facilitate target selection.
So, what might happen next? The UK and the EU more broadly, many of whose member states have also suffered from malign Russian activity, cannot continually rely on US action. The EU needs to demonstrate that it too is willing to take financial measures against the interference by Russia in the internal affairs of member states.
As the divergence in responses between the US and the EU has grown, ever since sanctions were imposed by the EU following the annexation of Crimea and the shooting down of a Malaysian airliner over Ukraine in 2014, the EU has been weak, in no small part due to the consensus needed to increase sanctions pressure on Moscow.
Later this month, the European Council will hold its next Foreign Affairs Council meeting. This is an opportunity for the EU to re-exert itself and to demonstrate that the use of sanctions is genuinely a tool of EU Common Foreign and Security Policy. Strong consideration should be given to expanding the scope of existing EU sanctions on Russia, particularly ‘Tier 2’ sanctions on individuals and/or entities.
Furthermore, as the was the case following the Panama Papers, the European Parliament needs to establish a specific committee enquiry into the presence and role of Russian money in the EU.
The UK has called for the creation of a ‘deep and special partnership’ on security in the context of Brexit. Despite its isolated status in Brussels, given the UK’s position as the leading financial centre in the EU, now would be great opportunity to step up, show leadership and demonstrate what such a partnership can achieve.
Banner image: Theresa May and Vladimir Putin in happier times. Courtesy of the Kremlin
The views expressed in this Commentary are the author's, and do not necessarily reflect those of RUSI or any other institution.