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Punish the Oligarchs, Not the Poor

Western sanctions that drive ordinary Russians into poverty would be both wrong and ineffective – it’s time to hit Putin’s real base of power: Russia’s 500 richest oligarchs.

Vladimir Putin looks on during the Opening Ceremony of the Beijing 2022 Winter Olympics at the Beijing National Stadium on 4 February 2022. (Matthew Stockman / Getty Images)

Economic sanctions are often thought of as the refuge of the weak. When the West has neither the necessary cohesion nor the domestic support to wage outright war, it wages economic war instead.

Of course, the economic dominance of the Global North was itself secured by decades of war and exploitation. The wealth of the rich world—and the poverty of the rest of the world—is a function of the hierarchical structure of the world economy, with the most powerful countries able to extract natural resources and labour power from everywhere else.

Economic sanctions represent an important departure from normal imperialism not because they harm poor people in poor countries (we do that all the time anyway), but because they have the potential to create some blowback and harm the economies of the rich world too.

Russia is not a third world country by any stretch of the imagination. It is the 11th largest economy in the world—though it comes in at just 57 when countries are ranked in per capita terms. While it is heavily reliant on natural resource revenues (see Adam Tooze on the case for referring to Russia as a ‘petrostate’), it is also a mostly industrialised nation.

It is a semi-peripheral economy that occupies a similar position in the world economy to, say, Brazil or South Africa. The Global North needs these economies, not just for raw materials and some manufactured commodities, but also to act as a bridge between the Global North and the Global South and protect and maintain capitalist social relations in their ‘backyards’.

The potential blowback from imposing sanctions, combined with the political turmoil going on at the time, was why Russia was able to get away with invading Georgia all the way back in 2008. The world applied some sanctions to Russia in 2014 after its invasion of Crimea and these did have a significant impact on the Russian economy at the time.

But the European sovereign debt crisis weakened the political will to tighten the noose. And Germany especially has been hugely reluctant to do anything to jeopardise its ability to secure access to Russian energy, as evidenced by the decision to go ahead with Nordstream 2 in 2015.

All this means that economic sanctions are anything but a weapon of the weak for the West when applied to a country like Russia. They require a significant amount of political will to implement, which is why Russia was able to get away with Georgia, Crimea, and the Navalny and Skripal poisonings.

It’s also why the initial round of sanctions over its aggression in Ukraine were much weaker than many were calling for—initially focused on a few large Russian banks.

These early actions appear to have aligned with Putin’s expectations. Ever since 2014, he has been building up substantial international reserves to strengthen Russia’s ability to withstand another round of sanctions (a good indication that Putin never saw the Minsk II agreements as a long-term settlement).

By this year, Russia had amassed ‘somewhere between $469 and $630 billion in foreign exchange reserves, depending on what you count’. Had the West stuck with the initial set of sanctions, this would have been more than enough of a cushion to allow the Russian economy to continue to function while Putin waged war in Ukraine.

But Putin didn’t count on the fact that the West might go further. Reserves like those Russia have built up are not all stored as dollars in the central bank, they’re parked in different assets all around the world—including in Europe and the US.

Surprisingly to Putin—and to many other onlookers—the West went for the nuclear option when it opted to ‘weaponize’ the central bank. A communique issued by the EU and the UK, Canada, and the US over the weekend stated that they would impose measures to prevent Russia from being able to access its international reserves.

Restricting Access to Reserves

What all this means is that Russia will struggle to access dollars, the international reserve currency that is required to settle most international transactions and service foreign debts.

As James Meadway argues in this great piece for Jacobin, the combination of shutting Russia out from the international payments system SWIFT with these measures targeting the central bank have dealt a dire blow to the Russian economy.

Unable to access dollars, the Russian state will be unable to continue to prop up the value of the ruble, and Russian firms and financial institutions will struggle to access dollars to service international obligations. As Meadway writes:

‘That, in turn, threatens a bank run, as depositors look to remove their increasingly worthless rubles from bank accounts, and turn them into more valuable and stable currencies—like the dollar or the euro. A run on Russian banks may, at the time of writing, already be underway, with queues at banks reported over the weekend.’

While Meadway is right to argue that a bank run in Russia does not directly threaten the West, ongoing economic instability in Russia most certainly does—especially in the midst of such a fragile recovery. The world economy is too integrated for the economic collapse of its 11th largest member not to spread significant ripples around the rest of the world.

And then there’s the ongoing impact on energy prices, which are the single most significant factor driving up prices in the Global North. Goldman Sachs expects inflation to peak at 7% in the US in the near future, and it may already been at those levels in the UK today.

The aim of imposing such harsh sanctions is to weaken Putin’s legitimacy. As Adam Tooze argues in a recent piece, this rests on a bargain with the population that looks something like: ‘You provide for us and leave our Soviet-style social handouts alone, and we’ll vote for you and take no interest in your stealing and bribe-taking’.

Naturally, all out economic collapse threatens the Russian economy’s very foundations, let alone Putin’s ability to service this bargain. On top of the already not insignificant opposition to the conflict within Russia, this could spell the beginning of the end for Putin’s reign.

But not before it weakens the global recovery, and the rest of the Russian population experiences significant hardship and pain. Even if the sanctions do succeed in weakening Putin’s legitimacy, the average Russian is not going to forgive the West for waging an economic war that could permanently damage their lives and those of their children. The chances of Putin being replaced with an equally zealous and militaristic nationalist are high.

This is not, of course, a good reason not to respond to the plight of the Ukrainian people. If the West wants to hit Putin where it hurts, they have to tackle the real foundations of his power. While he is popular among some sections of the population, this is not what allows him to retain his dominance over Russian politics; it is his fragile bargain with a group of around 500 extraordinarily rich oligarchs.

Oligarchs in London

Most of these oligarchs keep their money outside of Russia. And most of that money is kept in London—or, as it is affectionately known in the US state department, Londongrad.

The British state—and its outgrowth, the Conservative Party—have long been aware of the treasure trove of dirty Russian money stored up in the capital. A Parliamentary report from 2018 found that the UK has ‘turned a blind eye’ to Russian money laundering in London.

Some of this money comes to the UK directly, and is used to purchase houses and luxury goods and pay for private school fees. But some comes into the country indirectly. Over the past decade, around £68 billion of Russian money has entered the UK’s network of offshore secrecy jurisdictions, seven times more than the amount that has come into the UK directly.

This money does not, of course, stay in Jersey or the British Virgin Islands. Shell companies that obscure beneficial ownership are created and used to purchase assets in London—generally property. One in ten houses in central London are owned by such offshore companies—and at least 6,000 houses in Kensington and Chelsea alone.

Naturally, a lot of very wealthy and powerful Brits benefit from these transactions. House prices are also kept artificially high in some areas, which benefits the other wealthy people who live there.

Russian oligarchs are notoriously generous with their political donations, having provided at least £2 million to the Conservative Party since Boris Johnson became Prime Minister. And let’s not forget all the powerful Russian oligarchs with links to Putin who own our newspapers and football clubs.

All of this perhaps explains why the UK has been so reluctant to clamp down on the wealth of Russia’s elite in London. Boris recently announced a raft of measures aimed at tackling ‘kleptocracy’, but as Oliver Bullough has forcefully argued, these do not go nearly far enough.

Most of the legislation required to tackle the problem was already in place. What was required was the funding to allow the NCA and the SFO to go after those suspected of wrongdoing. The underfunding of these agencies, Bullough argues, amounts to a form of legalisation.

It would be easy for the UK government to work with others around the world to expropriate and, perhaps more importantly, humiliate these oligarchs. It would be one thing to freeze any suspect assets; it would be another thing to strip these people of their connections to London ‘society’—the membership of which provides them with a sense of their significance within the global elite.

If there is one thing the super-wealthy hate more than anything else, it’s being made to feel like they’re the same as everyone else. The anger and outrage directed towards Putin would likely reach fever pitch.

Such a strategy would also have important implications for Russian politics by centring the power and influence of a small number of extraordinarily wealthy and corrupt people—many of whom don’t even live in Russia—in the country’s politics. The anger of the average Russian would then be more likely to be directed towards Putin and his cronies, threatening his legitimacy even further.

It would be easy to dismiss waging an all-out war on Russia’s kleptocratic elite as rearranging the furniture while the house burns. But this perspective fails to account for both the huge power wielded by wealthy oligarchs within Russian politics, and the likely success of a strategy that squeezes them both financially and reputationally.

Perhaps the reason our politicians don’t want to face up to the fact that attacking Russia’s billionaire class would be the best way to threaten the Russian government is that doing so might shine a light on the close links between our own political elite and the world’s billionaire class. I’m sure Western governments really do want to punish Putin for this war; but they do not want to do so at the expense of threatening the legitimacy of global capitalism.