The case for a financial and supervisory policy response to the Salisbury attack
The most basic responsibility of a state is to ensure the safety and security of its citizens. By responding to the Litvinenko murder in a manner that did not deter the attack in Salisbury in March 2018, the UK government failed in this duty. Despite ministers’ tough talk, particularly after the publication of the Litvinenko inquiry report, their actions lacked credibility. There was a gap between the strength of the UK’s rhetoric and the rigour of its actions.
And this gap, although narrower than it was, is still there. As noted, the UK’s response has concentrated overwhelmingly on the political, diplomatic and law enforcement measures announced in March. Consequently, there is a risk that its actions are again perceived to be out of line with its rhetoric and prove to be an ineffective deterrent. UK policymakers should close the gap between word and deed by putting financial and supervisory policy instruments at the centre of their response in order to inflict a cost on Russia.
Since the break-up of the Soviet Union, Russia’s elites have embraced economic globalization. Western jurisdictions provide capital for Russian companies and havens in which to secure assets, whether buried in opaque offshore vehicles, invested in real estate or protected by contracts written in foreign law and subject to dispute-resolution procedures in Western courts. Certain Western countries offer opportunities for luxury consumption as well as places where spouses can live safely and where children can receive a high-class education. They provide avenues through which to pursue respectability, whether by philanthropic work or by acquiring awards and titles. Western countries are, moreover, desirable jurisdictions in which to acquire residency and citizenship. The UK, together with its overseas territories and crown dependencies, has been an important and accommodating part of this story; sizeable inflows of Russian capital seem to have been one factor behind the UK’s current account deficit.52 Although, since 2000, the Putin regime has tried in various ways to limit the degree to which integration into the international economy leaves Russia potentially vulnerable to external influence,53 the intertwining of its elites and the global economic system presents the UK with potentially potent policy options.
So does the nature of Russia’s domestic regime, which is founded on a systemic intertwining of the political and commercial realms. Because the rule of law is weak and property rights are insecure, all commercial groups build ties to state bodies and officials for patronage, protection and access to resources. Major Russian business figures – often inaccurately referred to as ‘oligarchs’54 – depend on the favour of the state for their wealth, status and security. In return, they show obedience and loyalty. They may also be called on to perform tasks for the authorities, such as investing in prestige infrastructure projects.
The symbiotic relationship between Russia’s state and its business sector extends to foreign jurisdictions. At least some Russian assets abroad may well be held by intermediaries on behalf of members of Russia’s leadership. One such may be Sergey Roldugin, in respect of whom allegations were raised following publication of the Panama Papers. A musician and a friend of Putin, it was claimed that Roldugin may have been involved in a chain of offshore companies, linked to associates of Russia’s president and centred on offshore financial centres, that handled transactions totalling at least $2 billion.55 By squeezing such networks, the UK could impose costs on Russia’s decision-makers.
The use of financial and supervisory tools to put pressure on members of Russia’s elite – and, via them, its political leaders – would be weighted in the UK’s favour. The importance of the City of London affords the UK leverage as regards Russia that most other countries lack. Russia’s elites, including individuals close to the leadership, unquestionably value their access to the UK services industry. By contrast, the UK’s services industry is not critically reliant on Russia, which accounted for fractionally less than 1.8 per cent of the value of UK services exports in 2017;56 and the stock of Russian investments in the UK amounted to 0.5 per cent of total European international assets invested in the UK in 2014.57
The UK should exploit this asymmetry in two ways. First, it should signal its readiness to exact a direct cost by sanctioning members of Russia’s elite and their interests. Second, it should supervise its financial and related industries (termed designated non-financial businesses and professions – DNFBPs) more effectively. As well as imposing a cost on the beneficiaries, the UK would shield itself more effectively from the negative impact of illicit capital inflows, enhance its governance record and be better placed to press others to adopt similar measures. Over time, the mix of steelier resolve, greater internal resilience and a stronger external reputation would combine to forge a more compelling set of policies towards Russia.
52 Harvey, O. and Winkler, R. (2015), ‘Dark matter: the hidden capital flows that drive G10 exchange rates’, Deutsche Bank Market Research, 9 March 2015, pp. 7–9, https://www.documentcloud.org/documents/3036316-Special-Report-9-Mar-2015-2.html (accessed 13 Oct. 2015).
53 Gould-Davies, N. (2016), Russia’s Sovereign Globalization: Rise, Fall and Future, Research Paper, London: Royal Institute of International Affairs, pp. 9–14, https://www.chathamhouse.org/sites/default/files/publications/research/20160106RussiasSovereignGlobalizationGouldDaviesFinal.pdf (accessed 13 Oct. 2018).
54 The term exaggerates the independence and influence of the individuals concerned. The resurgence of the state under Putin has underlined their potential vulnerability, illustrated most vividly by the arrest of tycoon Mikhail Khodorkovsky in 2003 and the subsequent dismemberment of his Yukos oil company.
55 Bernstein, J. et al. (2016), ‘All Putin’s Men: Secret Records Reveal Money Network Tied to Russian Leader’, 3 April 2016, International Consortium of Investigative Journalists, https://www.icij.org/investigations/panama-papers/20160403-putin-russia-offshore-network/ (accessed 13 Oct. 2018).
57 Open Europe (2014), ‘The Battle of Londongrad? How vulnerable is the city to sanctions on Russia?’ https://www.openeurope.org.uk/intelligence/foreign-policy/uk-russia-sanctions/ (accessed 13 Oct. 2018).