THE DEKLEPTOCRACY REPORT
February 8, 2024
Welcome to The Dekleptocracy Report! The Dekleptocracy Project (TDP) is a 501(c)(3) based in Virginia. We’re on a mission to show how existing levers of accountability can protect democracy and prevent authoritarians, their networks, and enablers from exploiting or circumventing the US system. As always, please sign up and forward this newsletter.
BLUF (BOTTOM LINE UP FRONT)
Welcome to the newsletter! In this issue we’re focusing on Russia’s claim that it can seize US$288 billion in assets from the US, EU, other G7 countries, Switzerland, Australia and New Zealand in response to US-led plans to seize Russian sovereign assets parked abroad. It’s quite a claim and our investigation of its origins and the underlying numbers suggests it’s another bit of Russian misinformation that has found its way unexamined into the public debate.
Unfortunately, the paralysis in Washington DC is driving other important developments. In the Digest we look at European countries committing to arms production both to supply Ukraine with badly needed munitions and to replenish national stockpiles. It is a needed step but also reflects real fear among NATO allies that the US, mired in pre-election legislative paralysis, might not only fail to live up to its pledges in Ukraine but under a future administration might not honor its NATO commitments. We also look at a recent International Money Fund forecast that Russia’s could grow twice as fast as expected. Beyond very valid concerns about the validity of forecasts based on suspect Russian data, we suggest that sanctions aren’t failing, they just aren’t being used to their full potential.
In Qui Custodiet, we look at the launch of what is being dubbed as the “British OFAC” with the aim of complementing the UK’s tough sanctions regime with tougher civil enforcement on the ground. Also, the UK and the US have teamed up to sanction Iranian officials over a brazen and worrying assassination plot against exiled dissidents and the arrest of two Canadian gang members allegedly recruited for a hit in the US. As The Insider (a TDP network partner) has chronicled in startling detail, Russia’s own Unit 29115 has also carried out a campaign of terror abroad, suggesting Russia and Iran remain prepared to use assassinations and terror around the world to silence critics of autocratic regimes at home
In Around the World, we review a mWashington Post examination of Russian government plans to expand the BRICS club to countries in the Global South, noting the strange fate of a 2001 Goldman Sachs research report that birthed the BRICS concept that Russia has used to revive Soviet-era fantasies of banding together against the decadent West. And finally we see how two high-profile spy scandals in the Baltics largely pale against Russia’s open influence buying in Western Europe, including the funding of extremist political parties in France, Italy and elsewhere, again chronicled in almost daily scoops from The Insider.
Russia’s US$288 Billion Inception
In Christopher Nolan’s 2010 movie Inception, corporate spies enter the mind of a rival to “incept” an idea into his subconsciousness. Russia, likewise, has a long history of incepting ideas in the public consciousness of its rivals through disinformation. As the US and its allies consider confiscating $300 billion in frozen Russian sovereign assets, Russia is trying to do so with the idea that it can retaliate to any seizure of its sovereign wealth abroad by seizing $288bn of investment in Russia from so-called “unfriendly” countries (yes, there’s an official list). But closer scrutiny of the claim indicates it may be less inception than deception.
On January 24, the Senate Foreign Relations Committee passed the Rebuilding Economic Prosperity and Opportunity for Ukrainians Act – wryly dubbed the ‘REPO Act’ – giving the American president the authority to seize Russian sovereign assets frozen in the US and transfer them to Ukraine for its reconstruction. The EU, United States, Japan and Canada froze Russian sovereign assets worth around US$300 billion abroad shortly after the launch of the full-scale invasion of Ukraine in February 2022. On January 21, as REPO was making its way through committee, RIA Novosti, a Russian state-owned newswire, dropped a bombshell: its own investigation had found “at minimum” US$288 billion in assets from G7 countries, the EU, Australia and Switzerland “in the Russian economy” at the end of 2022 that could be seized in response.
It is hardly the first time Russia’s made the threat, although it appears to be the first time they put an exact number on it. Back in December, Russian presidential spokesperson Dmitry Peskov said darkly that the Kremlin has a list of Western assets that Russia could seize in retaliation. These aren’t sovereign assets – the ruble is not a reserve currency, and the Federal Reserve and European Central Bank haven’t found an occasion to park US$200 billion in the Central Bank of Russia (CBR).
In fact, Russia has been engaged in an ongoing ‘collection’ of Western assets since mid-2022. A New York Times investigation in November 2023 calculated from financial reports that companies leaving the country have declared US$103 billion in losses since the start of the war and the Russian treasury has gained US$1.25 billion in taxes on companies on their way out. The Kremlin is dictating the terms of deals for the sales of everything from breweries to energy plants. In one illustrative moment, a pro-Kremlin rapper and friends of a senator picked up Russia’s Starbucks chain in the fire sale. There are many more such stories. Beyond fleecing Western companies, the process has become yet another elite asset grab that leaves ordinary citizens out in the cold. Loans-for-shares in the 1990s, Yukos in the 2000s, BP-TNK in the 2010s – Russians have seen this movie before.
Math is hard
Over the past ten days, the figure of US$288 billion has gained, erm, currency in US and European reporting on REPO and renewed European debate over seizing the roughly US$200 billion in the custody of Euroclear, a Brussels-based clearance and custody system. If the Russian claim were remotely accurate it would represent a stunning level of symmetry, especially given that Western institutions were paring down their exposure to Russia and writing-off what they couldn’t get out of the country long before the end of 2022, the reporting date relied on for the Russian numbers. Russia is trying to “incept” a scenario of financial mutually assured destruction into the Free World’s public (sub)consciousness.
Where did the team from RIA Novosti get their figures from? In the original story, the agency writes that they got the figures of “direct investment” from “national statistical data” from G7 countries, the EU, Australia and Switzerland (dubbed “unfriendly countries”). They define direct investment as: “Direct investments are investments in enterprises that provide control of at least 10% of its shares or capital,” in essence foreign direct investment (which differs from portfolio investment). They also nod to the latter by saying the figure could “grow significantly” from the seizure of so-called ‘C’ accounts. In short, these are accounts where non-resident portfolio investments in Russian securities from unfriendly countries are parked, where interest and dividends accrue but can’t be transferred out of the country. The Russian Ministry of Finance has mooted exchanging blocked funds in Russia for blocked funds abroad. RIA Novosti reckons that $6.5 billion is in these accounts.
Meanwhile, RIA Novosti provides very specific numbers for direct investments from unfriendly countries. Notably, the largest single source is Cyprus, with US$98.3 billion, trailed in Europe by the Netherlands (US$50.1 billion), Switzerland (US$28.5 billion) and Germany (US$17.3 billion). It cites 2021 data for the UK (US$18.9 billion), while the US (US$9.6 billion) and Japan (US$4.6 billion) trail in the G7. The data aren’t made up – the US figure is from the Office of the US Trade Representative, the UK figure is from the Department of Business and Trade. But whose money is it?
The Cyprus, Swiss, Dutch and UK numbers are striking. All are countries that Russians have used as safe havens for the past 30 years. Despite periodic campaigns of “de-offshoring”, tens of billions of dollars of “foreign” investment in Russia has been its own money circulating back into the country after being siphoned away years earlier. These countries have track records of either secretive or sloppy disclosure of ultimate beneficial owners, pro-business tax regimes and strong court systems committed to protecting property rights. Until the full-scale war, they were happy to issue passports or at least long-term visas to wealthy Russians.
These are not vague allegations. For example, the International Consortium of Investigative Journalists (ICIJ) has published a series of sprawling investigations, including the Cyprus Confidential leaks, into Russian networks in Cyprus funneling billions of dollars through the island where Russia allegedly accounts (Putin’s own words) for up to 80% of foreign investment. Seizure of Cypriot assets is, crudely speaking, robbing Pyotr to pay Pavel. Even if it is not recycled Russian money, many of the assets presumably come from companies that have resolved to stay in Russia and provide crucial tax revenues and services to the Russian economy, like PepsiCo, Mondelez and Mars, all of which remained in Russia after the full-scale invasion and saw business boom. Is RIA Novosti suggesting that the Kremlin would nationalize these assets? Or will the Russian state spend many months sorting the names of Russians and their collaborators out of the seizure list? Is that Peskov’s list? What would the totals be then?
Providing cover
In reporting on the $288 billion figure Reuters has made clear that it could not verify the data cited by RIA and the headline for the story made clear the claims come from a Russian government mouthpiece. In truth, the author of the RIA Novosti story would be aware, as is virtually any educated Russian, that huge swathes of foreign investment are indeed monies earned or looted domestically. We don’t know how much research RIA Novosti did on this story, beyond googling “direct investment” and country names, if any. So, as another drip from the Russian misinformation firehose, does it matter?
Sadly, it does. The figure has been widely reported in US and European media. It is cited in coverage of the REPO Act, and it’s a safe bet that it will continue to be cited in the absence of any rival numbers. It provides some policymakers with cover to oppose the seizure of Russian state assets. When Belgian Finance Minister Vincent van Peteghem raised the issue of financial market stability in the event of confiscation in a recent interview with Reuters, the news agency cited the $288 billion as context, not flagging it as propaganda, but merely as “some reports”. Rather than an analysis of what concrete market instability could actually ensue from a seizure of Russian sovereign assets and a Russian response, despite all parties having many months to plan for such a scenario, we see what appears to be a bogus number.
Western companies have already written off more than $100 billion of Russian assets, leaving markets unruffled. There is room for informed public discussion about the legal and practical effects of seizing sovereign assets. If a concerted move by the G7 to seize the assets could destabilize financial markets, then the Fed and ECB should make it clear that they are on the case. But when we see anonymous European officials worrying out loud about the stability of Euroclear – which handles around $40 trillion in assets annually – we have to ask about their underlying motives.
Russia’s figure, which takes actual numbers but distorts them beyond coherence, provides a convenient way not to talk honestly about the real risks. Otherwise, it could appear that there are many European officials who do not want to seize Russian assets because they believe that the day after this war ends, business as usual can resume, the money can begin moving again, and the Russian state can benefit from the accrued redemptions, coupons and dividends from its investments as if nothing has happened. But Putin’s continuing efforts to wipe Ukraine off the map has guaranteed that that cannot happen. Policymakers should take note of the purpose of this disinformation campaign. While denying a game changing windfall to Kyiv, Russia’s also fighting to keep Russia’s place as a respectable member of the post-Second World War financial order and the access to institutions, benefits and protections that this entails. Without this status, Russia becomes Iran, a power that relies on subterfuge, selling its mineral resources at steep discounts and where the elite and their children can no longer live openly on their looted riches in Paris or London.
Europe is rearming
Europe’s largest military powers are sending a clear message. Rzeczpospolita, Poland’s paper of record, announced in mid-January that “Polish Factories Go to War.” The French coalition Pour l’Ukraine (For Ukraine) made an appeal in France’s Le Monde, on January 31, for a significant increase in arms production and deliveries to Ukraine, echoing a speech by French President Emmanuel Macron on January 19 at the Cherbourg naval base calling for French arms makers to expand production and send a signal that: “We can’t let Russia think that it can win.” In the meantime, Germany’s largest arms producer, Rheinmetall, announced plans to build a new arms plant in Germany “in record time to create strategic security of supply” while expanding an existing ammunition plant in Hungary.
The pledges reflect a grim reality on the ground in Ukraine, where the continued suspension of most US aid has led to munitions famine and grim forecasts that Russia will soon take the battered remnants of Avdiivka, once an industrial city in the Donetsk region that has successfully resisted since 2014. Europeans are also facing the reality that US electoral politics are likely to jam up most military aid for months and a change of president after the November 2024 elections could see the US withdrawal from supporting both Ukraine and NATO. As reported in our previous issue, European war planners see a growing and near-term risk of Russia taking advantage of trans-Atlantic weakness to attack NATO countries. Denmark’s Defense Intelligence was the latest to raise the alarm, with a report published in local media that it now believes Russia is “very likely” to use “actual military force” (as opposed to just hybrid tactics) against NATO countries. Amid American paralysis, the system is blinking red in Europe.
Russia says it’s beating sanctions
In late January the International Monetary Fund (IMF) upgraded its forecast for Russian real GDP growth in 2024 by a whopping 1.5% to 2.6%, following a projected 3.0% in 2023, according to the Financial Times. This outstrips the forecasts for the US (2.1%) and the Eurozone (0.9%). Cue gloating from Vladimir Putin: “We have growth, and they have decline… They all have problems through the roof, not even comparable to our problems.” It’s no surprise, then, that US and European commentators are again questioning whether sanctions are working. However, in addition to the fact that the reliability of Russia’s statistics that underpin current data and forecasts is questionable, it should be noted that Russia is slated to spend around 40% of its budget on military needs this year, which, combined with private expenditure, could reach 10% of GDP, according to a Kennan Institute analysis in September 2023. Commodity markets, Russia’s primary source of revenue, remain firm amid Western reticence to take steps that will upset markets.
Still, as a Carnegie analysis from October 2023 shows, Russia’s arms sector is woefully inefficient, with ever more money going into badly run state companies to meet frontline needs at all costs. Moreover, dependence on foreign parts and equipment – much of it sanctioned – raises costs further. As a result, defense conglomerates like Rostec, United Shipbuilding Corporation and aerospace agency Roscosmos were in the red despite record output in 2022. Further pressure on Russia’s war machine can be exerted, not by hand wringing over sanctions, but by tightening enforcement of sanctions and focusing on Russia’s myriad points of vulnerability. Expanding the scope of sanctions, underlined by the December executive order giving US agencies the authority to pursue foreign financial institutions, has already delivered results, as banks in China and elsewhere abandon Russian clients. The bottom line is that Russia cannot beat sanctions; the question is whether it can beat Ukraine before sanctions are backed up by international military aid sufficient to ensure Ukraine can prevail and Russia can be contained.
UK to launch ‘British OFAC’
As the UK begins prepping for the next General Election, due by late January 2025, stalwart support for Ukraine remains – unlike in the US – a rare subject of agreement for the three largest political parties. The current government has set an aggressive tone for its enforcement agencies and implemented sanctions, export controls and general prohibitions on doing business with Russia that are often more far-reaching than US or EU moves. These steps have signaled a genuine transformation in a country that until recently has been a go-to for wealthy Russian businesspeople to park their money and buy up real estate. But enforcement on the ground in terms of actual fines, seizures and prosecutions of sanctions violators has been almost non-existent. As City A.M. recently reported, compared to the US Office for Foreign Asset Control (OFAC), the UK has imposed a mere £20.8m (around US$26 million) in fines since 2019, compared to OFAC’s haul of around US$2 billion. Now the British government is launching Office of Trade Sanctions Implementation (OTSI) to carry out the civil enforcement of trade sanctions, with the power to level monetary penalties, which one senior UK lawyer dubbed a “watershed moment in UK sanctions policy”. As always in the UK the trick will be resourcing, especially attracting talent for an agency amid broader austerity in the civil service.
US and UK sanction Iranians over assassination threats
Iran and Russia continue to demonstrate their willingness to kill dissidents and other enemies around the world. In late January, the US and UK sanctioned two Iranian officials accused of threatening to kill two émigré journalists on British soil, as well as four individuals accused of killing an Iranian dissident in Turkey and the head of a drug cartel who allegedly planned attacks on Iran’s behalf. The sanctions underline that Iran, like Russia, is willing to carry out brazen killings not only in neighboring countries but also in Western Europe, a practice that led to a global reign of terror beginning after the 1979 Iranian Revolution that has taken the lives of around 400 people through targeted killings. This campaign has even reached North America; in recent days, the US Department of Justice charged two members of a Canadian biker gang with plotting the assassination of an Iranian dissident and his wife living in Maryland. Meanwhile, over the past month, The Insider has chronicled in astonishing detail and scope the operations of the Russian military intelligence (GRU) Unit 29115 – the perpetrators of the 2018 Salisbury attacks in the UK and penetration and influence operations around the world. The bottom line is that Iran and Russia have demonstrated that they will back up their campaigns of strategic corruption with assassinations and terrorism, including on US soil. The only question is whether they will broaden the attacks from killing dissidents to targeting the foreign journalists and activists who expose their influence campaigns beyond the current campaigns of smears and threats.
Russia divides the West against the rest
While Russia is fighting to keep its sovereign assets in accounts with European Central Banks needed to facilitate trade, it is also pursuing a longer term game to shift the international financial order away from the dollar and perceived Western domination. This is according to a trove of documents from Russia’s Security Council obtained by the Washington Post that outline how the expansion of the so-called BRICS grouping – Brazil, Russia, India, China and South Africa – to include Iran, Saudi Arabia, the United Arab Emirates, Egypt and Ethiopia would promote “sovereign equality.” Arguably, the very concept of BRICS, which originated two decades ago from a Goldman Sachs research report, was always more rooted in financial theory than political reality. However, this does not deter the Russian analysis or its fetishization of the idea. One document outlines how Beijing and Moscow can create a new financial system and a Eurasian digital currency based on alternative payment systems, such as blockchain. Notably, China’s trade with the US was around US$760 billion in 2022, and US$920 billion with the EU, compared to record Sino-Russian trade of US$190 billion, suggesting that this long mooted project may never get off the ground – and that there are real opportunities for policymakers to leverage that interdependence to limit Russia’s “no-limits partnership” with its most important ally. The real worry for the West and its allies is not Russia’s fantasy of leading a coalition of the Global South, an ambition the Soviets pursued with mixed results, but America’s abdication of leadership due to internal divisions. A recent Politico article, headed “Why the World Is Betting Against American Democracy”, laid out the problem, quoting oneEuropean ambassador as saying, rightly, that the US’s very public war with itself is “hurting its security, its economy, its friends and its standing as a pillar of democracy and global stability.” American weakness, not Russian strength, stands today as the greatest threat to the post-Second World War global security and financial infrastructure.
Baltics spy scandals
In yet another scoop, The Insider, working with Baltic and Swedish investigative outlets, published detailed evidence in late January that Tatjana Ždanoka, a Latvian member of the European Parliament (MEP) worked as “a trusted asset” for Russia’s Federal Security Service (FSB) for more than a decade. The evidence includes leaked email correspondence with two handlers documented to be FSB officers. Ždanoka has denied the charges. Notably, Ždanoka was one of just 13 MEPs, out of more than 700, who voted against a March 2022 resolution condemning Russia’s full-scale invasion of Ukraine. The European Parliament is investigating. This scandal follows the arrest earlier in January of Viacheslav Morozov, a professor of international relations at Estonia’s University of Tartu. As Estonia’s domestic spy service, the ISS, noted: “This recent case follows a few dozen others and illustrates Russian intelligence agencies’ desire to infiltrate different walks of life in Estonia, including academia.” At the same time, unlike Ždanoka, the professor reportedly did not espouse anti-Estonian or pro-Russian views, an exiled Russian academic told Politico. The cases highlight the degree of penetration of Russian security services of neighboring countries. But, as The Insider has chronicled in an investigation of the role of an FSB agent in the funding of Italy’s Far Right Liga Party, or the well-documented large loan to France’s National Rally in 2014, Russia’s penetration extends throughout Europe, with an unknown number of covert agents representing an ongoing security threat alongside the overt sponsorship of extremist parties.