Timothy Ash: How to stop Russian money laundering

I spoke this week at a Chatham House session Russian Dirty Money: What it would take to shut down the Russian Laundromat?

I attach herein my written notes from that session. I think we need to ask four basic questions:

1. What is the scale of Russian capital flows to the city?

2. Why is it a problem?

3. Why have we done nothing about it?

4. What can we do about it?

1. Size of the Londongrad laundromat – the scale of capital inflows into Russia.

I looked at Central Bank of Russia data covering private sector capital flows, available on http://www.cbr.ru.

They usefully detail the accumulation of assets overseas and “other capital flows,” the latter generally seen as a good proxy for capital flight. The data goes back to 1994, so 27 years of coverage.

It suggests an average level of capital outflows of $58 billion per year, or nearly $1.6 trillion on a cumulative basis. Just for the sake of it, let’s assume similar flows for the extra two years, so that’s a total of nearly $1.7 trillion.

Now using the back of my own envelope.

Given the relative importance of the city of London, I would assume at least one third of this would have been “channeled” through London, so likely around $600 billion. I think it could actually be significantly higher than this, but let’s go with this number as it’s as good an approximation as any others I have seen.

This represents something like 4% of U.K. financial sector assets – assuming it all goes into financial assets. I assume plenty likely went into U.K. property, so we might want to half this figure.

I would add in here, $2 trillion in capital markets transactions conducted by Russia since 1991, comprising debt raising and initial public offers over this period out of Russia. But, obviously, most of this money went back into Russia, albeit some of this then likely came back out via the capital flow data above. Most of this capital market activity will have been done through London. Given typical fee structures on this kind of business we can imagine an income stream of something like $6 billion over a 30-year period, so something like $200 million in annual capital markets fees paid to the city of London – to bankers, lawyers, PR firms, etc.

In addition, going back to the $600 billion capital flow figure and again thinking in terms of what that means for income streams into the city. If we assume half was deployed to traditional asset managers and half, to say, real estate. The asset management component could perhaps generate a further $50 million in annual income (at least, likely fees on these monies would be much higher than for standard clients) in annual fees, and I would assume the real estate portion even more, likely double this.

All told, and very conservatively we are talking of $350 million in annual fees from Russian capital flows through the city. That is obviously a huge money earner – and it does not even include Russian oligarch “spends” on things like lawyers, culture (football clubs), entertainment, et al.

But I think it gives a sense of the scale of this “business.” And I should point out that not all of these capital flows will be illegal/suspect or even “state-directed.” That’s a different calculation, albeit I would think it is significant given that still more than half of the Russian economy is state-directed/owned/driven.

Interestingly, $1.7 trillion in capital flight out of Russia over the period since 1991, is equivalent to 5.7% of gross domestic product over this period. The rest of the former Soviet Union, including the Baltics, GDP over this period came to around one-third that of Russia. It’s not unreasonable to think of similar levels of capital flight out of the region, which could add over $540 billion to total capital flight, making it $2.3 trillion in total flows, and increase those fee receipts for the city by around one third, so we could be thinking of something like $450 million in annual fees from this ex-Soviet business to the UK economy.

And again, I think I am being overly conservative if anything here, but these are really substantial fee flows. They pay a lot of businesses, employ a lot of people, and feed a lot of interests.

2. Why is it a problem?

a)  It sustains corruption overseas

By accepting/laundering these monies without a proper understanding of their origins we help sustain the absence of the rule of law/kleptocracy in Russia and other former Soviet republics. The city really does not ask enough questions as to how these huge sums were earned. The reality is the city, in effect, launders a great weight of the receipts of State Capture/oligopoly/kleptocracy, cleaning it, and then recycling it back into these states which to a large extent has the effect of further corrupting those systems – the bribery of politicians, regulators, lobby/PR against opposition and reform candidates, to maintain the existing Wild East capitalism that sustains continued capital flight.

We complain about Ukraine not doing enough to fight corruption, but why don’t we fight the money flows resulting from corruption? Actually, the city (in the widest sense and I don’t think other Western/offshore financial centres are any better) facilitates it and sustains the lack of rule of law in these countries.

If they were not able to cleanse their monies overseas, maybe the elites would have a better incentive to change the rules of the game at home – to support reform at home.

b)  It leaves the West vulnerable to malign actors looking to do us harm.

We have to accept the reality, that on the basis of hard facts and evidence, and a clear pattern of behavior, that Russia is not a benign actor when it comes to its relations with Western liberal market democracies. Indeed, a strong case can be made to describe it as a malign actor working to destroy our very system of government.

Evidence would be meddling in U.S. elections in 2016, 2018, 2020; Brexit; the attempted coup in Montenegro; military intervention Ukraine, Georgia, Transdnistria, and Montenegro; the 2018 poisonings of Sergei and Yulia Skrypal; the 2016 fatal poisoning of Alexander Litvinenko; and last year’s poisoning of Kremlin opposition leader Alexei Navalny; the Solarwinds hack. Russia has a particularly long track record now and a pattern of behavior.

I would argue that somewhere along the way (I assume post-1999), Putin figured out he could not live in/side by side with our system and saw it as an existential threat to his authoritarian regime – seems around 2011. when protests broke out against his rule (and which he blamed on the US/West), but maybe earlier, looking there to Putin’s Munich Security Conference speech in 2007.

We might not have a clash of civilizations but I think we do have a clash of systems, Western liberal democracy versus sovereign democracy/power vertical. We now have a real clash of systems where Putin is taking offensive action to undermine/destroy our very system of government. And from within.

Russian malign action has focused on vulnerabilities/weaknesses in our systems of democracy, whether that is:

· US — the electoral college and the fact that tens of thousands of votes sway the elections either way;
· UK Brexit and the European question;
· Europe — immigration.

Putin has figured out that by backing the far right and far left and playing the immigration card he can pull our societies apart, and the power of social media is huge in delivering/multiplying the discord, and I think finance is another conduit for this which is not really appreciated/understood.

Now if we believe that Putin is a malign actor – which seems to the message from our intelligence community, and has a track record there of acting against us across a range of theatres – social media, media, military intervention, “political technology”, cyber, why would he not act in other areas systemic to our systems – and finance is critical/key therein. Putin has the “motive” and has the opportunity (financial flows into the West) to act – why would he not do this?

The initial naive perception after the early fall of Communism of entrepreneurs or oligarchs out of Russia that we could turn a blind eye and they could become like us is just wrong. They were warped by their experiences in the 1980s and 1990s by Wild East capitalism and they are a super human variant of our own titans of industry, kind of an alien breed. It is also naïve to assume that most large/significant oligarchs who made their riches in Russia in the 1990s/noughties could have done so without the nod of the Russian state and/or criminal elements. If Putin wants to use finance as a tool against the West, and knocks on their doors to be part of the project, why/how could they say no?

How is Russian influence felt?

· The city – money shapes the Russia view – most analysts covering Russia now are Russian, while big Russian money interests pressurize the view in a Kremlin-favorable light;
· Law firms – Russian oligarchs are huge clients, and conduct most of their oligarch-on-oligarch legal action in London;
· PR agencies – most oligarchs employ a team;
· Conventional media & social media;
· Academia/think tanks feed on Russian oligarchic donations;
· Sport and culture – does the Premier League really have a “fit and proper” ownership rule?
· Real estate;
· Politics – anyone for tennis?
· Business – energy sector/trade flows (not even included in my $350 million annual income flow through the city).

3. Why have we not don’t anything about it?

Why have our elites failed to address the issue?

a) Ignorance/naivete – the Soviet-era crew have retired. See French President Emmanuel Macron’s interview, where the current generation simply have no comprehension of what the Soviet threat was and no understanding of how it has morphed into something as powerful, perhaps even more so.

b) The truth hurts – painful for Brexit/Donald Trump’s Make America Great Again movement to hear that they did not really win fair elections.

c) Lobbying/corruption

d) Military – It is painful for our military to hear that their victory in 1989 and 1991 might not have been so absolute and any conventional superiority is now useless against the asymmetric warfare being waged with finance being a central weapon in that game. And many of our military elites find it hard to accept that weaker conventional power has used asymmetrical warfare (finance) to such devastating effect. They have to accept we failed – we spent the peace dividend and got drunk on our own writing of history after 1989/91. Meanwhile, Putin sobered up quickly from the Boris Yeltsin era and got even.

It’s easy for the military to write off Russia – with an economy a fraction (1/10th) the size of the U.S. economy as being only a regional power, and not a “peer competitor” as China. But this ignores the ability for finance to have a disproportionate or asymmetrical impact. It also neglects the fact that Imperial Japan, with an economy only one-tenth the size of the U.S., almost imparted a knock-out blow on the U.S. at Pearl Harbor in 1941- by identifying its opponents critical and systemic weakness, and for the West, finance is just one of those key systemic weaknesses.

I think the military finds it hard to think beyond “kit” and big military budgets. They find it hard to accept that this is beyond their competencies. They have been trained to keep the West safe by using dynamic, symmetric means, but this is an asymmetric threat being waged through the city, the judiciary, the media, and social media, politics/lobbying.

e) Stopping Russia will cost us dearly

By just looking at the capital flows out of Russia to the West, and the likely income flows to the West resulting from those flows, it is clear that confronting the challenge posed by Russian dirty money will cost our economies dear. A price will be paid, and in the context of Brexit and Covid that might be seen to be a very high burden to bear – maybe it’s easier just to ignore the threat. But then what price democracy, and rule of law, so hard won (over hundreds of years in the UK) could so easily be lost in a matter of a decade.

4. What can we do about it?

· Understand/accept the threat;
· Expose the threat, be transparent – we need to educate. Expose Russian malign actors in financial sphere – out the offenders. Notable I think that Barack Obama made a critical mistake in not doing this post-Crimea, and in the 2016 elections;
· Tighten know-your-customer rules in the city. Perhaps increase risk weights on high risk jurisdictions in this process;
· Perhaps change the onus on large oligarchs wanting to do business in the city to prove their distance from the Kremlin, before accepting their business;
· Sanction large oligarchs with known associations to the Kremlin – make them choose between their cash/wealth and their support for a kleptocracy working to harm the West;
· Tighten overall beneficial ownership rules;
· Accept there will be a cost and be prepared to pay it.

But in all this we have to accept there will be a cost – that said what price defending liberal market democracy? We cannot just defend our system of governance by spending money on NATO. That is not good enough.

But is it already too late? Has the capture of our system already gone too far?

In the movie, Predator killed off Alien, do we have our own Predator to turn the tide on this alien oligarchic malign actor within our very system?

(c) KyivPost


  1. Good article that outlines what the UK and the West can do to cripple Russia. Financially it will hurt in the short term, but in the long term the benefits will be enormous. All we need is one leader to get his nose out of the trough, and sanction the fuck out of Russia, and prove that morals come before money. I won’t bother to hold my breath though.

    • I guess this explains in detail why London has been quiet about Putler’s oligarchs dealings in Great Britain. I think BJ should freeze everything and call for a nice, long audit. After all, they’re not restrained by the EU anymore.

      • On the London commercial and domestic property market, a colossal amount of Russian money is currently invested. It’s hard to get a figure, but Abramovich alone has £billions invested. CFC is worth c. £2.2 bn.
        However, the amount invested in NYC is much higher again! Several hundred $million is invested in Trump properties alone.
        In the immediate aftermath of Trump’s election victory, there was a staggering 35% uptake of Russian investment in the US property market. It is safe to assume that only an infinitesimal amount of that is held by anti-putler entities.

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