COMMENT: The UK is struggling to clarify its Russian corruption and sanctions policy

COMMENT: The UK is struggling to clarify its Russian corruption and sanctions policy
The UK is still grappling with what to do about the Russian cash in London
By Alex Nice in Moscow May 22, 2018

On May 21 the UK House of Commons Foreign Affairs Select Committee published the findings of its investigation into Russian corruption in the UK.

The inquiry is a response to the poisoning of Sergei Skripal, a former Russian military intelligence officer, and his daughter in Salisbury in March. This prompted renewed calls for the British government to include financial sanctions in its response to the attack on UK territory. As experts at Chatham House noted at the time: “For many years, the government has effectively allowed key Russian stakeholders to use the services of the city…for purposes legitimate, illegitimate and even illegal. It is time to transform them from a source of advantage to Russia to a strategic asset for the UK.”

The Committee’s report also engages with the broader policy debate over financial and commercial regulation in the UK, which has long been accused of facilitating corruption through soft-touch regulation and weak disclosure requirements. Excellent investigative work by academics, NGOs and journalists has pushed this issue up the policy agenda.

The case for treating Russian corruption and Russian foreign policy as a single problem is that wealth and power in Russia are fused. The report states that: “There is a direct relationship between the oligarchs’ wealth and the ability of President Putin to execute his aggressive foreign policy and domestic agenda.” As Mark Galeotti of the Institute of International Relations noted, in Russia’s network state, the wealthy are also called upon to finance Russia’s foreign policy goals when required. This could include acquiring strategic industries abroad, providing donations to pro-Russian media resources, or loans to sympathetic political movements.

The symbiotic relationship between big business, the political elite and the state in Russia is indisputable. But with the exception of violent entrepreneurs such as Konstantin Malofeev, a major player in the Donbas conflict, and Yevgeny Prigozhin, the owner of a private military company, most Russian businessmen spend most of the time trying to build and defend their fortunes, not furthering Russian foreign policy.

If the purpose of financial sanctions is to influence Russian state policy, it may make more sense, at least in the first instance, to target state assets directly, rather than individuals on the periphery of the decision-making process. This would also avoid the problem that, as the report notes, a rule-of-law based state such as the UK cannot order law enforcement agencies to investigate individuals with no basis in evidence, which is often difficult to collect in the absence of cooperation from the home state.

There remain more direct ways to push back at Russian actions. Several state-owned companies are not subject to sanctions and Russia continues to issue sovereign debt in Western markets. The report briefly considers placing restrictions on sovereign debt, but concludes that this would be ineffective unless coordinated with the EU and US, which it regards as unachievable. Instead, it recommends only that sovereign bond offerings run by sanctioned entities such as VTB be prevented – a more symbolic move that is unlikely to have a significant impact.

Countering Russian aggression and closing the London “laundromat” are vital but distinct policy goals. The approach taken by the House of Commons Committee risks blurring this distinction. Their report examines three motivations for targeting Russian assets: to influence foreign Russian policy; to counter money-laundering; and to respond to serious human rights abuses committed in Russia. All of these may be good reasons in themselves, but they are separate policy issues. Like much of the discourse on sanctions, however, this report has a tendency to elide them, which risks producing confused and misdirected policy. The UK has a responsibility to clean up its financial sector regardless of its relations with Russia. Likewise, using asset freezes to target those who commit human rights abuses is a laudable aim, but why limit it to Russia by framing it as a “Magnitsky List”?

Merging the issues of corruption and Russian foreign policy also leads to unhelpful interpretations of the Russian leadership’s motivations and goals. It encourages the reductive view of Russia as a “Mafia State” or “kleptocracy,” whose actions are ultimately shaped by the personal financial interests of the leadership. Undoubtedly this is part of the story, but it does not explain why the Russian leadership decided to annex Crimea or initiate a war in eastern Ukraine. Indeed, a true Mafia State might have reasoned that such a war would be bad for business – even without sanctions, Russia’s banks and businesses lost billions of investments in the country.

Russia is neither the most corrupt country in the world nor the worst human rights offender. Shaping money-laundering laws with only Russia in mind simply encourages a view in Moscow that the UK’s human rights and anti-corruption agenda is simply a cover for other pursuing other goals. The House of Commons report itself notes the importance of tying financial sanctions to specific Russian actions and providing a clear path for their removal if Russian policy should change. But by situating the debate over its Russia policy in a broader discussion of the UK’s anti-money laundering laws, the UK makes it harder to craft a clear Russia strategy and sends confusing signals to Moscow.

Alex Nice is a freelance analyst and former Manager at the Economist Intelligence Unit