The Day Russian Money Didn’t Freeze

BY ILYA SHUMANOV

Russia’s recognizing the self-declared Donetsk People's Republic and Luhansk People's Republic, followed by the Russian invasion of Ukraine, became a formal pretext for the collective West to impose restrictions on Russia in support of Ukraine’s territorial integrity. The negative consequences of such a scenario had been discussed before, but nobody believed them. The sanctions implemented in response to Russia’s invasion of Ukraine basically restored the Iron Curtain that was destroyed when the Soviet Union collapsed.

At first, the sanctions against Russia included restrictions on oligarchs close to the Kremlin, as well as a ban on working with the Russian national debt, a ban on participating in energy-related projects in Europe, and restrictions on Russian banks. As hostilities continued, the sanctions became tougher and struck at the Russian financial system by denying some Russian banks (but not the central bank) access to SWIFT, the international financial transactions system, and including Vladimir Putin and his circle on the sanctions lists. The next financial steps being discussed include an embargo, the cancellation of visas, and limiting the rights of Russian citizens to make bank deposits in Europe.

For now it’s obvious that it’s regular Russian citizens who will suffer. The planned blocking of access of some Russian banks to the SWIFT system will not destroy the offshore trusts of the oligarchs; instead, it will rob regular citizens, many of whom disagree with what Vladimir Putin is doing.

Despite all the threats from the West to crimp the Russian financial system and private accounts, Russian oligarchs, both those of the “first wave” and those who are in the president’s inner circle, are not exactly in a hurry to return to Russia from the West. For now, it’s been the opposite. After the oligarchs met the president last week, the private jets of businessmen who are loyal to the Kremlin went traveling all around the world. Some of those oligarchs could barely be called Russian. Some of them have long held the passports of countries that imposed sanctions on Russia: Roman Abramovich (Portugal); Alisher Usmanov, Yuri Shefler, and Said Gutseriev (Great Britain); Oleg Deripaska, Dmitry Rybolovlev, Yelena Baturina, Aleksandr Abramov, and Aleksandr Ponomarenko (Cyprus); and Boris Rotenberg (Finland).

The programs of citizenship through investment that Western countries offer are highly popular with affluent Russians. About one quarter of people who recently bought Maltese citizenship are Russian—almost 700 this year. And even though London and Moscow are at odds, seventy-one Russian citizens managed to buy an investment visa for long-term British residence in 2021. The U.S. program of citizenship through investment attracts Russian money, even from the people connected with Moscow's political elites.

Is it really that difficult for wealthy Russians connected with the Russian authorities to evade global sanctions? No. In fact, it’s very easy. It’s enough to use three simple principles from the world of “dirty money.”

There Is Always Someone Who Can Help
Offshore leaks and investigations allow you to see the underbelly of the world of big money. We can see how Arkady Rotenberg, co-owner of a large gas pipeline construction company and a close friend of Vladimir Putin who is under sanctions from the EU and the United States, still manages to use proxies to participate in bidding for and buying artworks on the American art market. Villas and luxury apartments registered to distant relatives, as well as dozens of tried and tested straw men in place as directors of companies, are routine findings in the investigations of corrupt Russian officials.

Increased punishment for intermediaries in money laundering schemes could be the answer to these problems, but it won’t work without higher ethical standards among financial and nonfinancial intermediaries in all countries.

There Is Always Somewhere to Hide
Offshore jurisdictions still provide a “dark corridor” to transfer billions in dirty money. Journalists’ investigations of the offshore empires of establishment figures almost always mention high-profile Russians connected with the authorities.

Countries with a good reputation, such as Switzerland and the United States, still allow anonymous ownership of companies that might be used to shelter suspicious assets. The British Overseas Territories (in particular the Cayman Islands and British Virgin Islands) also bear mention, along with the Isle of Man, Guernsey, and Jersey, as places where the chief assets of the Russian elites accumulate.

Despite recommendations from Transparency International, registers of ultimate beneficiaries appear very slowly in various countries. This is a path with many obstacles, but we have to remember that if you don't walk today, you'll have to run tomorrow.

Tons of Impunity
Impunity became the calling card of Russian dirty money. Viktor Vekselberg, president of Renova Group, who is under sanctions, appealed the ruling that froze his money in Swiss banks, won the appeal, and managed to regain access to his money. Suleiman Kerimov, a Russian oligarch and senator who was arrested in France on suspicion of money laundering, managed to avoid prosecution and returned to his position as a senator in the Russian parliament.

Since cooperation with Russian law enforcement agencies is not happening because of political differences between countries, it is necessary to implement alternative models of working with Russian corrupt assets abroad. Despite strong statements by British politicians about fighting the Russian dirty money that has flooded the country and despite implementation of so-called Unexplained Wealth Orders to freeze suspicious assets, this mechanism has never been used against influential Russians.

Sanctionomics?
The EU announced large-scale sanctions against multiple officials, including President Putin and Foreign Minister Sergey Lavrov. The blacklist includes the 351 deputies of the State Duma of Russia who supported recognizing the independence of the self-styled Luhansk and Donetsk People’s Republics. Russian MPs do not own property in the United States but do own some in Europe. But the number of MPs who might be affected by this ban and who own real estate in the EU is very small, only fourteen people, or 3 percent of all Russian MPs.

On February 22, President Biden announced, among other things, sanctions against families of the elites who are personally connected with Putin. The only people mentioned in that document are the son of Aleksandr Bortnikov, the head of the FSB; a son of Mikhail Fradkov, former head of Russia's Foreign Intelligence Service; and the son of Sergey Kiriyenko, first deputy chief of staff of the presidential administration of Russia. Their fathers have long been on sanctions lists. Later, three more family dynasties were added to the lists: Igor and Ivan Sechin (Rosneft), and two people named Sergey Ivanov (the father, a special representative of Vladimir Putin, and the son, the head of the Alrosa diamond mining company). Sanctions were also levied against Nikolay Patrushev, an ally of Vladimir Putin and secretary of the Security Council of Russia, and Patrushev’s son Andrey, formerly a deputy director of Gazprom Neft.

The sanctions bill introduced by the Democrats in late January 2022, H.R. 6470: Defending Ukraine Sovereignty Act of 2022, could pose problems for representatives of twelve Russian banks, including private financial organizations. These banks include Alfa Bank (Mikhail Fridman and Petr Aven), Sovcombank (Sergey Khotimskiy), and Transkapitalbank (Olga Gryadovaya and her husband, Leonid Ivanovskiy).

Another unpleasant piece of news for Russian oligarchs is a sanctions bill introduced by the House Republicans, H.R.6422: Putin Accountability Act, which includes a proposal for restrictions on the biggest businessmen who are connected with Russia: Mikhail Fridman and Petr Aven of Alfa Bank (again); Iskander Makhmudov and Andrey Bokarev, principals of Transmashholding and other companies; Dmitry Rybolovlev, former principal of Uralkali and currently an owner of the Monaco football club and multiple other assets in the West; Mikhail Gutseriev, who runs oil and potash businesses for the benefit of President of Belarus Aleksandr Lukashenko; Ruben Vardanyan, former principal of Troika Dialog and sponsor of the Skolkovo school; and Alexander Vinokurov, son-in-law of Foreign Minister of the Russian Federation Sergey Lavrov and principal of the Marathon Group.

So Where Does That Leave Us?
There is an apparent lack of coordination between the countries of the West, especially when it comes to personal sanctions against the Russian elites.

The UK, after announcing new sanctions against the family of Boris and Igor Rotenberg (friends of Putin), then allowed other members of this family (all on the Russian Forbes list) to enjoy London’s hospitality. After failing to have his British investment visa extended, Roman Abramovich quickly received citizenship from Portugal, being a Sephardic Jew. It would be strange to implement EU sanctions against a citizen of one of the EU countries.

Sanctions reduce the wealth of Russian billionaires, but they don’t force them to stop supporting the Kremlin. Wealthy people with connections to the Russian political elites manage to find places where their money is welcome. Such places are still plentiful on this planet. They’re ready to be publicly humiliated in the Western press, or to come running to the president of Russia whenever he wants to see them. All of this is nothing compared to the benefits they’re getting: billions of dollars in their bank accounts, as well as citizenship in several Western countries.

In this situation, you can wait till hell freezes over before the West efficiently freezes Russian money, whether it’s to stop spreading corruption or to stop Russian tanks in Ukraine. Those who speak out against corruption have been saying it for a while. Those who engage in corruption in Russia have always known that. Those who care about the military aspect are only starting to understand it now.

The opinions expressed in this article are those solely of the authors and do not reflect the views of the Kennan Institute.