The UK has long-standing and substantial links to kleptocratic finance in Russia and elsewhere in the former USSR. These links were outlined in a December 2021 Chatham House research paper, which concluded that the UK has been uniquely appealing for kleptocrats because ‘…it is not just money that is laundered, but also reputations. Key allies of kleptocratic presidents merge into UK society and sometimes acquire British citizenship following receipt of a ‘golden visa’’.
It is difficult to assess the full economic significance of Russian kleptocratic wealth in the UK. However, the anti-corruption NGO Transparency International has identified at least £1.5 billion of UK property owned by Russians accused of financial crime or with links to the Kremlin. Meanwhile, Pandora Papers researchers ‘identified more than 700 offshore companies which owned UK properties, and found that 5% of them were owned by Russian citizens’.
While the UK’s financial links to Russia pose moral and political problems, they do not constitute a major part of British trade and inward investment. In 2020, the UK received £681 million in FDI from Russia – less than 0.1 per cent of the total UK inward FDI stock and a small sum compared to the £11.2 billion of British FDI in Russia.
A more substantial impact is likely to come from the introduction of new sanctions. These could: (a) directly affect investment and business activity in the UK through legal restrictions; (b) indirectly affect trade and investment through the perception that the UK is no longer open to business in certain sectors or with certain kinds of companies and individuals; or (c) affect future business activity through setting a precedent of applying sanctions against unsavoury regimes.
For instance, in 2020, the UK received FDI from China of £3.4 billion, an amount substantially larger than that from Russia. Chinese investors may conclude that the UK is an unsafe location for their investments, to protect themselves against any future UK sanctions on China – perhaps on the grounds of alleged human rights abuses in Xinjiang or a future invasion of Taiwan. To a lesser extent, investors from other countries with questionable human rights records, such as India, Qatar and Saudi Arabia, may also be concerned, though the UK’s courtship of these countries for trade and investment partnerships may dampen such fears.
Russia’s invasion of Ukraine has prompted an unprecedented response from UK businesses with activities in Russia – with major companies cutting ties with the country.
Just before Russia’s invasion of Ukraine, the Home Office scrapped its tier 1 (or ‘golden’) visas, which previously allowed many Russians and others to regain residency by investing £2 million or more in the UK. In March 2022, the UK Parliament also passed the Economic Crime (Transparency and Enforcement) Act, which establishes a register of beneficial ownership for property owned by overseas entities, in a bid to improve transparency. Additionally, the UK has sanctioned specific Russian individuals and companies – including through freezing the assets of Russian banks and barring Russian firms from borrowing money – primarily targeting those with links to Russian president Vladimir Putin and his regime.
In addition to formal sanctions, Russia’s invasion of Ukraine has prompted an unprecedented response from UK businesses with activities in Russia – with, for example, BP exiting its 19.75 per cent shareholding in Russian state-owned energy company Rosneft. Other major British companies, including Marks & Spencer and Vodafone, have shut down operations in Russia or cut ties with partners in the country, largely as a result of consumer pressure and public relations concerns, rather than the legal requirement of international sanctions.
The key question is what precedent this sets for future sanctions. Russia makes up a small proportion of UK trade and investment abroad: even companies with significant interests in Russia like BP have behaved in a way that indicates that they are more concerned about mitigating Western consumer pressure than about losing money on investments. However, it is worth considering whether companies would behave the same way if political and public attention turned towards China or other major UK trading partners.
There are good reasons for thinking that the British government and private sector would treat China differently to Russia in the event of escalating tensions. China’s economy is far more important for global GDP, and it is highly integrated into global supply chains for key manufacturing products and materials. Chinese outward investment, including that in Western countries, is substantial, the Chinese consumer market for Western goods is growing, and many Chinese students travel to countries like the UK to study. As tensions between China and the West continue to rise, particularly over the status of Taiwan, this question already feels less hypothetical.
However, some individuals and businesses may prefer to play it safe and keep their assets in territories less likely to experience political tension with China or another significant trading partner. In the medium to long term, the main impact of sanctions on the UK economy could therefore be as a precedent for political values trumping business interests when it comes to trade.