Russia

The Russia Collusion You Should Care About

Why aren't Western governments doing more to stop Russian money from poisoning their economies?

The real threat.

Photographer: Vladimir Sindeyev/AFP -- Getty Images

Forget Twitter trolls, Facebook ads and multilingual propaganda websites: The biggest Russian threat to Western democracies comes from the massive amounts of cash Russians have exported and parked in the West. That money's corrupting potential is all but limitless, but both the increasingly isolationist Russia and the increasingly anti-Russian West do little to stem the flow.

In a recent paper, Thomas Piketty, Filip Novokmet and Gabriel Zucman estimated the offshore wealth accumulated by Russian companies and businessmen at about $1 trillion, or as much as the entire domestic wealth held by Russian citizens. That's a root cause of Russia's current condition: Had less of the money fled, it could have fed a massive economic boom which probably would have led to political liberalization.

But the money is far from harmless to the receiving countries. It feeds hundreds of unscrupulous lawyers and bankers who form transnational corruption and tax evasion networks, and it inevitably filters into politics. When former German Chancellor Gerhard Schroeder recently accepted the post of board chairman at Russia's state-controlled oil company, Rosneft, his move dealt a bigger blow to his Social Democratic Party than any amount of Russian propaganda could have done. The Trump family's old deals involving "Russian money" look far sleazier than anything Donald Trump did during the 2016 election campaign. Nebulous connections to "Russian money" were also used to attack Hillary Clinton.

Ostensibly, Russian president Vladimir Putin would rather have that money back. In his annual address to parliament in 2012, Putin complained that nine out of 10 significant deals involving Russian companies were executed outside the Russian jurisdiction and called for "deoffshorization." A year later, he threatened to cut off government orders and state bank loans to foreign-registered companies with Russian assets. In late 2014, after Russia was hit by Western sanctions following the Crimea annexation and the war of secession in eastern Ukraine, Putin signed a tough anti-offshore law. It required foreign companies controlled by Russian beneficiaries to pay Russian taxes. But, like many other Russian laws, it merely created another opportunity for selective pressure on businesspeople. There was no mass repatriation of money or corporate entities. The well-connected Russian law firm Yegorov, Puginsky, Afanasiev and Partners earlier this year published a survey showing that only 20 percent of offshore company owners have closed their foreign companies. Another 40 percent preferred to move overseas; most of the rest tweaked their legal arrangements to get around the law. 

The Russian government doesn't really want to tighten the screws any further. It has just rejected a plan by the finance and economics ministries to move "systemically important" companies to the Russian jurisdiction. These 199 companies account for 70 percent of all Russian corporate profits and some 20 percent of the employed workforce. They include the top energy producers, retailers, telecommunications firms -- all either held by offshore entities or doing a significant part of their business through them. First Deputy Prime Minister Igor Shuvalov reported to Putin that ending these practices would weaken the "systemic" companies' international competitiveness and scuttle important foreign contracts. 

Shuvalov's argument makes sense because Russia effectively outsources economic justice to other countries. Russian courts and enforcement are unable to guarantee property rights and contract enforcement. So Russian companies -- including state-owned ones, such as oil and gas export giants Gazprom and Rosneft -- need to operate outside the Russian jurisdiction, where proper contractual relationships are protected by Western laws and courts. The official excuse is that Western partners wouldn't trust Russian courts -- but not even the government officials, let alone the Russian businesspeople, trust them. That's how London courts end up adjudicating disputes between Russian businesses without U.K. operations.

Instead of hampering this practice of justice outsourcing, Western nations are trying to expand it to areas in which the Russian government would rather keep its jurisdiction, such as human rights. That's the function of the Magnitsky Act in the U.S. and the similar bill Canada passed on Wednesday. These laws impose travel bans and asset freezes on officials believed to be guilty of rights violations -- people who haven't been tried by any court but merely designated by governments. That's how the personal sanctions imposed on Russia since 2014 work, too.

The Kremlin vehemently protests such measures, but it has few real reasons to complain: Western nations, in effect, collude with it. The human rights angle is about optics, not about blocking suspect Russian money. The arbitrary selection of a few hundred individuals who are not welcome does nothing to stem the flow. At best, they just shift their property elsewhere and discover new vacation spots, while thousands of others -- equally corrupt, equally plugged into the Kremlin system -- continue using the West for their purposes. A recent investigation into the Italian assets of notorious Moscow TV propagandist Vladimir Solovyov is just one recent example.

This Western collusion, there for everyone to see, is the worst kind. It's up to Western governments to investigate the offshore schemes and the paths by which Russian disputes end up in Western courts and dubious Russian money gets parked in Europe and the U.S. Now, such investigations stop curiously short of meaningful results. Earlier this year, Deutsche Bank settled for $630 million the U.S. and U.K. cases involving "mirror trades" -- transparently fraudulent transactions that helped the bank's clients move some $10 billion out of Russia. The bank cleaned up its act -- but the $10 billion seemingly vanished. It wasn't the subject of the probe.

That money is poison in Western economies' veins. While it's allowed to flow without major obstacles -- and the current "sanctions" and "Magnitsky laws" can't be regarded as such -- the Kremlin system can function more or less as before, buying influence and expanding its economic reach. The West should be more interested in Russia's "deoffshorization" than Putin is. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Leonid Bershidsky at lbershidsky@bloomberg.net

    To contact the editor responsible for this story:
    Mike Nizza at mnizza3@bloomberg.net

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