Financial sanctions on Russia: big or nothing?

We just sent a camera out to film “Russian influence” in the City of London. As I expected, there’s a few nameplates, some doorbells and the odd logo – Alfabank, Sberbank – and that’s it. We could have filmed a few mansions, annoyed a few Alsatian dogs, but the point is: Russia’s financial presence in London is not primarily about institutions. It grows like bindweed through the roots of the financial sector, among many other kinds of exotic foliage.

So any attempt to use financial sanctions against specific Russian businesses and individuals close to Putin in London is fraught with difficulty, and possibly won’t work.

The point is: Russian capital flows through London. In the shape of company flotations, yes, but above all in the shape of the numerous legal entities, contracts and vehicles that enable money from tax havens to flow into the world of legal bank accounts.

There are the obvious big issues: Rosneft last year bought the oil trading arm of Morgan Stanley. But the deal has not yet gone through. That means if Rosneft – Russia’s state-backed oil giant – were targeted with sanctions here, as it is in the USA, that deal might be difficult to complete. Likewise BP remains a minority shareholder in Rosneft, after the latter acquired BP’s interest in the TNK joint venture.

But ultimately, the purpose of sanctions is supposed to be to encourage behaviour change.

Experts I’ve spoken to do not believe “punish the oligarchs” is a particularly effective way of bringing about behaviour change. More direct would be “punish Russia”. Vladimir Putin‘s entire political legitimacy rests on him being able to spread the gains of an oil boom to the general population, while strengthening the role of oligarchic state capital in the economy.

The USA’s sanctions prevent four major Russian companies – Gazprombank, VEB bank, Rosneft and Novatek – from issuing bonds to borrow money long term (longer than 90 days). The EU does not yet even do that. But if applied to a wide list of Russian companies, combined with a ban on actually trading either the shares or the debts of those companies, a freeze on market access would quickly bring the Russian economy to its knees. Its stock market would collapse, its banking system probably suffer a Lehman style moment.

In addition, any major and comprehensive crackdown on money laundering in London – with balaclava and kevlar-clad cops raiding the homes and offices of key people – would probably achieve the same effect just by being announced. London would seize up as a conduit for the tax-dodging billions of the Russian oligarchs.

And this encapsulates the problem. When a major state transgresses international law again and again, the only deterrents or remedies are major, unilateral actions by states that host global markets. The only thing you can do that is not for show is actually something quite massive.

Once Britain or the USA use the considerable powers at their disposal, the fiction that global markets are neutral, and non-geographic is exposed. The thought forms in the mind of the Chinese oligarch, or the African oil magnate, or the Asian potentate, that such action might be one day taken against them.

Specifically, both the USA and UK are said to fear the financial contagion that could happen if one of the big Russian banks were brought to default by lack of access to the markets.

David Cameron has been accused of double standards – pushing France to cancel military contracts while protecting the City of London by soft-pedalling on financial sanctions. But for financial sanctions against Russia to hurt, they actually have to pull a trigger that’s only so far been pulled against pariah states like Iran (and the hapless global banks that thought they should trade with them).

Yet the USA is getting impatient: after the Russian banks were stopped from raising money on Wall Street, they pretty quickly started raising it in Euros – so at the very least I would expect Europe to have to match what the Americans are doing, or look like actively colluding with the said Russian banks to avoid US sanctions.

If they are going to do serious financial sanctions, EU politicians have to state the aim of them.

The aim would be to cause massive capital flight from Russia, to temporarily tank the economy and force Putin to stop arming and supporting fighters, who think its cool to shoot down civilian planes and then wave the furry toys of the victims in the faces of their relatives.

It’s the inability to clearly state this, even to themselves, that leaves the European Union leaders floundering around in Brussels – and that’s even before you consider the direct influence of Russia on a layer of the political elite who still hanker after a ride on the oligarchs’ yachts.

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