Since Russia's invasion of Ukraine began, economic sanctions have emerged as one of the main pressure points used by Western policymakers to try and make Russia's economy scream and force an end to the military conflict.
Over the past week, the Biden administration and its allies in Europe have announced increasingly strict sanctions that promise to have a wide-ranging effect but initially didn’t go as far as they could, and didn’t necessarily target who they should: namely, billionaires and oligarchs.
In the New York Times, David Leonhardt on Friday pointed to a few potential sanctions that were then not yet being pursued―suspending Russia from SWIFT, seizing Russia's offshore wealth, censoring Russian networks, and curtailing the purchase of Russian oil and natural gas―for three primary concerns: sanctions could “hurt the West, too”; they could start "closing off lines of communication"; they could close off future options or aggravate the crisis further.
These three primary concerns overlap enough that it might be fair to offer another that sits at the center: global elites aren’t too interested in imposing sharp costs on members of their own class or establishing precedents that could come back to hurt them.
On its surface, that seems to be changing―at least with regard to penalizing Russia. The new U.S. and European sanctions announced on Saturday included expelling some Russian banks from SWIFT, preventing the Russian Central bank from accessing its reserves of foreign currencies, limiting the "golden passports" wealthy Russians use to accelerate citizenship applications and access Western finance, and a "transatlantic task force" (called “Kleptocapture”) aimed at freezing the assets of sanctioned individuals including yachts, luxury apartments, cryptocurrency. Seizures have already started too, with German authorities seizing a 512-foot yacht worth $600 million in Hamburg on Wednesday.
Still, sanctions that target a few wealthy individuals are insufficient given it is a global system for the world’s elite―including Russian oligarchs―that allows for wealth to be hidden offshores away from the eyes of domestic and international regulators. The West is implicated in all this not only because that’s where the offshore hubs thrive, but that’s often where the assets themselves are stashed.
We’ve been here before, after all. By September 2021—seven years after Russia’s previous invasion of Ukraine—the United States had sanctioned 735 Russian individuals and entities to some effect. These entities, however, comprise corporations, state agencies, vessels, and aircraft. And even then, the impact of this is relatively limited because such a system can be bypassed by the use of proxies known as "nominees" that obscure real ownership of an asset.
“For example: A Nominee sets up a company in the [British Virgin Islands], which then owns a company in the Cayman Islands, which owns a company in Jersey that then owns a company in the US that sells real estate,” said Tommaso Faccio, Head of Secretariat at the Independent Commission for the Reform of International Corporate Taxation (ICRCT), a coalition of civil groups and scholars, in an interview with Motherboard.
It’s hard to overstate how important tax havens, shell entities, as well as nominee services are to the global offshore network that allows wealthy individuals to hide assets overseas. Since 2013, the International Consortium of Investigative Journalists' Offshore Leaks Database has published data on 800,000 offshore companies, foundations, and trusts from its leaks via the Pandora Papers, Paradise Papers, Bahamas Leaks, Panama Papers, and Offshore Leaks—all used for this very purpose.
The 12 million documents leaked to journalists that comprise the Pandora Papers revealed one global offshore network with billions sloshing around in it implicating at least 300 politicians and public figures in 91 countries. One of the many revelations (or confirmations, depending on your perspective) was that banks in Europe―as well as tax havens like South Dakota and Delaware―played an instrumental role in helping elites across the world hide their wealth. Russian oligarchs appear in these leaks too: targeted and hurt by sanctions, but also able to dodge and evade them when necessary by using offshore networks.
In 2018, researchers Annette Alstadsæter, Niels Johannesen, and Gabriel Zucman tried to estimate how much of each country's wealth was hidden away through offshore structures―finding that while the equivalent of 10 percent of Earth's GDP was held offshore, this obscured the dynamics of offshore wealth in any given society.
Spain and France, for example, hover around the world average of offshore wealth as a percentage of GDP (10 percent) but their wealthiest 0.01 percent hoard 4 to 5 percent of the country’s wealth and put 30 to 40 percent of those ill-gotten gains offshore. Russia, however, was wildly different: Its offshore wealth is equivalent to as much as 60 percent of the country's GDP and its top 0.01 percent―who hoard 13 percent of the country’s wealth―park about 80 percent of their wealth offshore. That means that as the ruble craters thanks to the U.S. and E.U.-led sanctions, the pain will be felt primarily by everyone but Russia’s power elite, who are holding offshore assets in the West.
Another 2018 study—this time a survey of Russian economic data from 1905 to 2016 by Filip Novokmet, Thomas Piketty, and Zucman—affirmed the earlier findings, concluding that the Smaugian hoard of wealth smuggled offshore by wealthy Russians was equivalent to as much as 85 percent of Russia's national income in 2015. That’s close to $1 trillion stashed offshore by the study’s conservative estimates.
This is an eye-watering sum, but one that would not be possible were it not for a few things. The first, of course, is the offshore banking discussed above that is largely run out of the West. The second is the effort by Western nations to "modernize" Russia after the collapse of the Soviet Union.
Take the team of Harvard economists led by Jeffrey Sachs, profiled in a triumphant 1993 New York Times Magazine piece titled “Dr. Jeffrey Sachs, Shock Therapist” which celebrates the “shock therapy” or rapid privatization reforms and huge social spending cuts to stabilize and modernize Russia. The grand experiment failed as soon as it began. By 1998, The Nation observed that what emerged was “a system of tycoon capitalism run for the benefit of a corrupt political oligarchy that has appropriated hundreds of millions of dollars of Western aid and plundered Russia’s wealth.”
A great deal of commentary overlooks all this and focuses instead on how the sheer wealth of the oligarchs presents “a huge vulnerability that the West can exploit,” instead of the intricate web of complicity and corruption that implicates the West and limits its capacity to respond in the current crisis. Yes, the sanctions are too broad in that they hurt the Russian public—they’re also too narrow in that they only hit Russian oligarchs and not the global system that services them and Western oligarchs alike.
A sublime joke making the rounds online gets to the heart of the problem in the minds of many Westerners here: “Going after Russian Dark money could cause house prices in Central London to crash overnight. Rents could plummet, jeopardising the livelihoods of tens of thousands of landlords. Hold Mr Putin to account, robustly, by all means. But do so sensibly. Pragmatically. Declare war.”
There’s some truth to that―enough that the United Kingdom has started to move along long-delayed legislation that would create a register of overseas property ownership. Data released by the Land Register last year shows that property owned by individuals with primary residences in Russia has jumped from 86 to 1,127 over the past ten years, but that this figure doesn't capture land held by corporations, a key blindspot given the importance of shell corporations and trusts as revealed by the Pandora Papers.
"Rich people have wealth in different assets: art, shares, real estate, yachts, bank accounts—there's all sorts of different assets. But at the moment, we have very little transparency into what they own,” Faccio told Motherboard. “The political willingness to tackle some of these [offshore] structures is blocked because a number of politicians and rich people in the West use these structures themselves—in the past there has never really been a stigma around using tax havens.”
For years, the ICRICT has been advocating for a similar register on a global scale to curb tax avoidance and evasion, undermine financial crimes, and shed light on how wealth is used to undermine or distort the politics of various countries. Such measures are gaining support now, even if the target seems to be focused on Russia; this week, Italian Prime Minister Mario Draghi proposed the creation of an international public register of wealth for Russian oligarchs whose wealth exceeded 10 million euros.
“Too much wealth is owned through tax havens, through the use of bank accounts, companies and trusts that clearly aim to keep their final beneficiaries unidentifiable,” said José Antonio Ocampo, Chair of ICRICT and Professor at Columbia University in support of Draghi’s proposal. “A global financial registry of the real and final individual beneficiaries of these companies, trusts, bank accounts would be a crucial measure to deal with illicit financial flows, including tax evasion and avoidance, money laundering, and the financing of terrorism. It would allow governments to identify where wealth is owned and use such information to impose sanctions where appropriate.”
For many parts of the global offshore network, basic transparency is such a minimal step that would go a long way. One of the Pandora Paper’s key findings was mapping out that while the United States, Luxembourg, Ireland, Switzerland, and Hong Kong played key roles in the global offshore system, it was the British network―with London as its nerve center―that was the largest and likely the most important thanks to its opacity. In the dessicated remains of the British empire sits a smaller empire of far-flung island territories where the sun never sets on tax havens. It should be no surprise then that exploits like the “London loophole” have allowed the city to enjoy status as a key hub for tax avoidance.
In the wake of the leaks revealing these networks, we’ve seen some action taken. The 2016 Panama Papers investigation revealed a global web of networks funneling money through shell companies and tax havens that implicated world leaders, major corporations, and public figures. Over the next year, we saw a high-profile resignations, the shuttering of the law firm at the center of the vast shell corporation network, and the assassination of the journalist who led the investigation.
Now, despite the resistance and mind-boggling sums of money involved, there are ways forward. Earlier this week economist Thomas Piketty—who also serves as an ICRICT commissioner—proposed a series of moves that could narrow sanctions to fall on Russian oligarchs while broadening them to eventually move against the rest. A financial registry of assets sitting at the center of a global tax regime would be a good start, but still the greatest barrier in implementing these basic steps may be our own oligarchs.
“This is one of the main contradictions of our time. The confrontation between 'democracies' and 'autocracies' is overplayed, forgetting that Western countries share with Russia and China an unbridled hyper-capitalist ideology and a legal, fiscal and political system that is increasingly favorable to large fortunes,” Piketty writes in Le Monde. “In Europe and the United States, everything is done to distinguish useful and serving Western 'entrepreneurs' from harmful and parasitic Russian, Chinese, Indian or African 'oligarchs'. But the truth is that they have much in common.”
Thanks to decades of intensified privatization, cronyism, corruption, and deregulation, Russia’s oligarchs enjoy unimaginable wealth that can be leveraged as political power while the rest is hidden just out of reach. This has gone a long way to create an elite insulated enough from any sort of measure of accountability to carry out imperial adventures on a whim. And even in the face of historically unprecedented protests at home or at great cost to civilians there or abroad, the wars continue. Sound familiar? It should.