Outside the Beltway

Why the UK Government Hasn’t Done More to Punish Russia

Theresa May's government has not hit Russian oligarchs nearly as hard as they deserve because the UK benefits from turning a blind eye.

James Joyner · Sunday, March 18, 2018 · 7 comments

Rory Smith, chief soccer correspondent for the NYT, points out just how deeply Russian roots run through the English Premier League.

The Russian flag has been there so long now that it hardly attracts any notice, just another familiar piece of background scenery in the global, cosmopolitan Premier League.

It hangs from the upper deck of the Matthew Harding Stand at Stamford Bridge, the home of Chelsea Football Club. In its central blue band, spelled out in white block capitals, are the words “The Roman Empire.”

It is not intended, of course, as a political symbol. It is not demarcating this patch of West London as sovereign Russian territory. It is simply a display of gratitude to Roman Abramovich, the Russian oligarch who arrived at Chelsea in 2003 and, cracking open his sizable bank account, quickly turned the club into one of soccer’s modern superpowers, a serial champion of England and, at its 2012 peak, the champion of Europe.

And yet, as relations between Britain and Russia strain and crack in the aftermath of the poisoning of a former Russian spy and his daughter on March 4, that flag becomes a symbol of something else — how difficult it would be to punish Russia’s ruling class by separating its oligarchs from their property in Britain.

Both Britain’s prime minister, Theresa May, and her foreign secretary, Boris Johnson, have raised the possibility of striking back at Russia’s president, Vladimir V. Putin, by targeting the assets of oligarchs living in London. Alexei Navalny, the most prominent opposition figure in Moscow, has suggested such a move would win public approval in Russia. Send a message by punishing those close to Putin, those who benefit from his power, goes the logic.

But any move against the oligarchs would not simply be a case of seizing the Belgravia townhouses or freezing the bank accounts of a cadre of unfamiliar names. It would not be neat, or quiet. It would be high-profile, complex, almost unimaginable. Russian money has laid down the deepest of roots in British life.

Abramovich is not the only link between English soccer and Russia, of course. Across London, another oligarch, Alisher Usmanov, owns 30 percent of Arsenal. His longtime business partner, the British-Iranian Farhad Moshiri, is now the largest shareholder at Everton, where the training ground bears the name of USM, a holding company established by Usmanov.

A third Premier League team, Bournemouth, has been bankrolled by a Russian benefactor: Maxim Demin, a former trader and petrochemical magnate, bought the financially stricken club in 2011, and has since transformed it into a Premier League mainstay. Two other teams — Portsmouth and Reading — have been in Russian hands in recent years.

Manchester United, meanwhile, announced in 2013 a five-year deal that made Aeroflot, the Russian state airline, its official carrier. A year earlier, Chelsea had unveiled Gazprom, Russia’s energy monolith, as its official energy partner. Gazprom is also one of the principal sponsors of the Champions League.

The rationale behind all of those deals, according to Paul Brannagan, a lecturer in sport management and policy at Manchester Metropolitan University, is Russia’s desire to gain what is known as “soft power” in the West.

“Russia is doing what Qatar has done,” he said, pointing out that hosting the 2014 Sochi Olympics and the 2018 World Cup is part of Russia’s larger strategy. “That gets the world’s attention, and then it is a matter of seeing what other parts of the state or the economy can benefit through that.”

The post-Soviet Russian elite is, for all intents and purposes, an organized crime family. They’ve laundered their money superbly. Turning that against them would be just desserts but, as Smith notes, extremely complicated.

In one stroke, Abramovich’s purchase of an iconic soccer team distanced him from Russia and established him in Britain, said Vladimir Ashurkov, a Russian opposition figure now living in London.

He was no longer just another oligarch who had made an unimaginable fortune in the dubious, chaotic world of post-Soviet Russia, drawing private profit from the country’s vast mineral wealth. He was not just another gaudy standard-bearer for an influx known for its excess. He was, instead, the benign, silent benefactor of Chelsea, which became champion of England only two years after he arrived.

To some extent, his strategy worked. Abramovich — like Usmanov — now has all the trappings of the British establishment: a country home, luxury properties in London’s most exclusive neighborhoods and a soccer team as a plaything.

The one doubt that lingers is how permanent all of it is. Navalny has named Abramovich and Usmanov as prime targets if May follows through on threats to strip Russian tycoons of their assets.

“Britain has some of the most advanced laws in the world already in place,” Ashurkov said. What has always been lacking, he said, is “the political will to use them.”

One tool under consideration is Britain’s power to use so-called Unexplained Wealth Orders to demand that those who may have benefited from corruption prove the provenance of their money. That, according to Goldfarb, makes Abramovich especially vulnerable: His lawyers admitted, during 2012 civil litigation against Berezovsky, that the auction of the energy giant Sibneft — which turned Abramovich into one of Russia’s richest men — was “rigged.” “Abramovich would be a prime candidate given his testimony,” Goldfarb said. “And there are legal grounds for moving against this wealth.”

Like Ashurkov, though, Goldfarb and others contend any such maneuver is unlikely. Not just because of the escalation in tension that would ensue, or the furor that seizing a club as big as Chelsea would create, but because of just how complicated the process would be, just how entangled Russian money is in the modern British economy.

Beyond the real estate brokers and the bankers and the wealth managers who have helped Russians invest their money in all areas of British life, there are major institutions that are now, at least in part, Russian.

An NPR report from Friday (“The U.K.’s Connection To Russian Money“) notes just how far beyond the EPL this stretches:

KAKISSIS: But the British government is walking a fine line. Analysts estimate that Russian money accounts for about 10 percent of all land and property worth more than a million pounds in London. That’s about $1.4 million. And Britain also has investments in Russia, especially in the oil and gas sector.

ANDREW FOXALL: BP, British Petroleum, owns almost a fifth of Rosneft, which is an oil company – Russian company that’s a loosely disguised arm of the Russian government.

KAKISSIS: Andrew Foxall directs the Russia and Eurasia Studies Center at the Henry Jackson Society, a London thinktank.

FOXALL: Only last year, for example, BP signed a new deal with Rosneft to bring Russian gas to European energy companies by the end of the decade. So there are well-established relations in the energy sector there. Beyond that, though, there’s not really much at all.

KAKISSIS: Foxall says Britain does not need Russia as much as Russia needs the West.

FOXALL: Russia’s Achilles’ heel is its dependence on the Western financial system. The Russian elite uses capital markets and payment systems to launder their loot and legitimize their ill-gotten wealth.

KAKISSIS: And Foxall says, if diplomatic tensions escalate, the U.K. still has leverage to hit Moscow where it hurts – in the pocketbooks of Kremlin associates.

A Vox report, subtitled “London benefits too much from corrupt Russian money in the UK to crack down on it,” goes even further:

“There is no evidence beyond the rhetoric that the [UK] government has ever been serious about tackling dirty money — quite the contrary, in fact,” James Nixey, the head of the Russia and Eurasia program at Chatham House, a London think tank, told me.

There’s a simple reason for that: London — or at least some of its most influential players — benefits from turning a blind eye to illicit Russian money.

Rich Russians love sending their money to London. Many have invested in real estate there or have their money managed by the British banking system. “I’d say the bulk of Russian wealth goes through London in one way or another,” Timothy Ash, a senior sovereign strategist at BlueBay Asset Management, told CNN.

A lot of that money has been gained through corruption and is laundered through real estate investments. London is among the top three destinations in the world for Russian money laundering through real estate, according to Michael Carpenter, a former director of Russia policy on the National Security Council during the Obama administration.

Russian investors also funnel illicit money through shell corporations registered in the UK. Those corporations allow their owners to remain at least somewhat anonymous and are used to hide money that would otherwise appear suspicious.

On Wednesday, May said she would seize Russian assets from corrupt sources and step up record-keeping on shell corporations. It’s a natural target for the British, since so much of the Russian wealth in London is owned by powerful businessmen with ties to the Kremlin. If she seizes their wealth, she could make Putin and his associates think twice about meddling in the UK again.

But as the New York Times reports, the law that May would use to crack down on assets gained from corruption has “been in effect since last year and has been little used.” And the British government has little to show for earlier campaigns promising to shine a light on shady shell corporations.

Experts say they expect the disconnect between rhetoric and action to continue into the future, because the UK has a lot to lose by getting serious about it.

London attracts a lot of foreign investment precisely because it doesn’t seriously scrutinize the origins of the money used to buy real estate or funneled into shell corporations that register there. In fact, the UK has a reputation as a haven for the global 1 percent due to that no-questions-asked attitude.

Foreign investment has contributed to the explosive growth of London’s property market, signaled international confidence in the British economy, and helped the UK attract foreign talent.

It has also lined the pockets of many of London’s most powerful players.

“UK governments have shied away from hitting the moneyed Kremlin-linked interests that, by an extraordinary coincidence, enrich a well-connected stratum of UK-based bankers, accountants, solicitors, and estate agents,” Chatham House’s Nixey told me.

In order for May to get serious about seizing Russian assets, she would have to confront those beneficiaries of London’s lax attitude toward laundering. She would also have to endure the cost of spooking foreign investors and cutting off a serious source of revenue for London — property taxes.

“Do you turn a blind eye to mafia money because it makes your city richer?” Carpenter asks, summing up May’s dilemma.

Truly fascinating. The UK, in concert with Western allies, could do a lot of damage to Putin and his cronies. But it’s understandable that she’s not willing to take the economic hit from acting alone.

UPDATE: WaPo’s Anne Applebaum (“Why does Putin treat Britain with disdain? He thinks he’s bought it.“) piles on:

“Londongrad” is the nickname, not entirely affectionate, that wealthy Russians have bestowed upon Britain’s capital. The term doesn’t just designate a physical place, though many Russians do indeed live here. Londongrad is more properly a state of mind — encompassing not only the nonresident owners of large houses in Kensington, but also the British institutions, banks, law firms, accountants, private schools, art galleries, and even the Conservative Party fundraisers that have gone out of their way to accommodate them.

Londongrad can be a place of bizarre contrasts. A few years ago, I found myself standing on the sideline of a school’s rugby pitch, watching small boys tackle one another in the mud. All around me were the green fields of England; cows were grazing in the middle distance. Huddled on the sidelines, a group of men — presumably parents of some of the small boys — were arguing loudly, in Russian, about large sums of money. Equally weird was a walk with friends in rural Hampshire, past the gates of a vast estate. Although registered to a company called Skymist Holdings, the house was in fact owned by Elena Baturina, a Russian business executive who became enormously rich while her husband, Yuri Luzhkov, was the mayor of Moscow. The locals knew the owner’s identity because they had seen Luzhkov at the pub.

These incongruities were produced by a tacit deal: For two decades, the British establishment has agreed not to think too hard about where the Russians got their money — how cash was stolen from the state, recycled in the West, then used to help bring Vladimir Putin and his ex-KGB colleagues to power. In return, the Russians spent a lot of that money in Britain, to the benefit of the British.

The relationship has, at times, been extraordinarily complicit. There was the 2006 London flotation of Rosneft, the oil company created from the stolen assets of another oil company, whose owner had been arrested and sent to prison in Siberia. The prospectus did actually warn potential purchasers of the risks: “Crime and corruption could create a difficult business climate in Russia.” But the sale went forward, reaped rewards for those who arranged it and established a principle: Stolen goods can become legal, as long as the London financial establishment approves.

Now, the relationship is at a low point. The British were shocked — or should I say “shocked, shocked” — to discover that Russian operatives treat all of Britain like Londongrad. For a second time, they appear to have used a dangerous chemical agent in an attempt to murder one of their compatriots on British soil. On Wednesday, Prime Minister Theresa May eloquently condemned Russia for its use of a “military-grade nerve agent,” declared she would expel 23 Russian diplomats and charged that the Russian government has “demonstrated complete disdain for the gravity of these events.”

But that means she doesn’t understand the profundity of the problem — that the Russian government treats Britain with disdain because the Russian government thinks it has bought the British elite. Worse than that, it may be right. On the day of May’s speech, Gazprom, the state-controlled energy company that is the source of wealth for so many of Russia’s leaders, issued an eight-year, nearly $1 billion Eurobond. The Russian Embassy sent out a tweet announcing that the Gazprom sale was oversubscribed and added a punchline: “Business as usual?” On Friday, the Russian government itself sold $7 billion worth of Eurobonds.

It’s rather amazing how these “everybody should have known” stories all come out simultaneously.