THE DEKLEPTOCRACY REPORT
June 27, 2024
Welcome to The Dekleptocracy Report! The Dekleptocracy Project (TDP) is a 501(c)(3) following the authoritarian money from 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.
BOTTOM LINE UP FRONT
Welcome to our 17th newsletter. Our in-depth topic this week is the impact of recent US sanctions on Russia’s equity, currency and other exchanges and settlement system. This includes an examination of the Russian claim that they have already replaced the US dollar with the Chinese Yuan as a benchmark currency, while they have also looked to fellow “BRICS” countries for other solutions to US dominance of the global financial system. TLDR? They haven’t solved it yet.
In the Digest, we look at the landmark sanctions in the latest EU package of measures that target, for the first time, Russian transshipment of LNG through European ports. While it does not address continued imports of LNG for domestic use by European countries – in particular France, Spain and Germany – the measures promise to have a significant impact on Russia’s Yamal and Arctic LNG-2 projects. We also examine the results of the European Parliamentary elections earlier this month, the gains by far-right parties, and France’s gamble with a snap parliamentary election. What will this mean for anti-corruption efforts and, in particular, moves to prevent Russian and Chinese malign interference?
In Qui Custodiet, we look at the launch of legislation governing the EU’s Anti-Money Laundering Agency, a welcome and, we believe, overdue step. We also read about a reported US deal in the works with controversial (and litigious) Israeli businessman Dan Gertler that would see sanctions on him reduced in exchange for the sale of his assets in the Democratic Republic of Congo. In Around the World, we look at the alleged involvement of a troubled US hospital group in, er, a Maltese scandal. And we ask why after a decade, only one Russian mobile phone operator has only just now decided to act as if occupied Crimea is part of Russia for billing purposes (hint: it has to do with US sanctions).
IN-DEPTH: TARGETING RUSSIA’S EXCHANGES AND THE LIMITS OF THE YUAN
Two weeks ago, the US government dropped the most extensive package of sanctions against Russia so far in 2024. Most coverage focused on the expansion of Executive Order 14114 from late 2023, guiding the Office for Foreign Asset Control (OFAC) to impose secondary sanctions on foreign financial institutions (FFIs) that work with sanctioned Russian entities (not just arms companies as before). But the sanctions also targeted Russia’s largest stock exchange, the Moscow Exchange (MOEX), including platforms for equity, fixed income, derivative, foreign exchange, and money market trading, as well as the two primary clearing and settlement systems. According to the US government, it was a significant blow, hitting, among other things, halting currency markets for the US dollar and Euro. Lines formed that day at currency exchanges across Russia. For its part, the Central Bank of Russia (CBR) played down the impact, saying that it planned to adopt the Chinese yuan to ruble as a benchmark as a further blow against US domination of the global financial system. While Russian regulators and investors have had two and a half years to brace for such a move against MOEX, there’s little sign the country and its authoritarian allies had used that time to devise a credible alternative to Western market institutions.
MOEX has proven resilient since Russia’s full-scale invasion of Ukraine in February 2022. The composite equity MOEX Russia Index hit all-time highs in late 2021 of over RUB4,200, before declining below RUB2,000 in the early weeks of the invasion as Western money left the market amid sanctions and pressure to divest from Russia. It had rallied as high as RUB3,500 in recent weeks before the sanctions announcement caused a dip but not a crash. Reasons for the rally include high oil prices, indications from the CBR that high interest rates could fall, and local retail investors looking for a safe spot amid the war-driven economic boom. In the meantime, a Reuters round-up of initial and secondary public offerings (IPOs and SPOs) announced this year indicated more than 20 companies planned to raise money by selling shares. Most are consumer or other “new economy” shares but also include some US-sanctioned entities. It is likely not all will happen as planned, but the development reflects both investor appetite and restricted options, as it is far harder for Russian funds and individuals to invest in Western equities and debt.
Does this mean Russia is booming, as Vladimir Putin regularly boasts? In January, he scoffed: “We have growth, and they have decline… They all have problems through the roof, not even comparable to our problems.” Citing Russian official data, the International Monetary Fund predicts the country will grow by 3.2% this year, buoyed by record military spending and stable and relatively high prices for oil amid the decision by the OPEC+ cartel (which includes Russia) to maintain steep cuts in output into the first quarter of 2025. Western actions such as the G7 price cap on Russian oil have proven only partially effective at best, as Russia has mobilized a ghost fleet of tankers to deliver crude to mostly Asian markets. Russia’s economy may be overheating, reflected by stubbornly high inflation, as at least 40% of the state budget or 8% of GDP goes to military spending. But it all somehow continues to tick over, allowing Russia to continue to prosecute its war in Ukraine.
De-throning King Dollar
After a day or two of lines at currency exchanges and a modest decline in the benchmark equity index, Russia appeared to shrug off the impact of the US sanctions on its key exchanges. Western money in Russian shares can’t flee, as it has already been segregated in special accounts (‘C’ accounts) that most forecasters predict the Russian government will seize as and when the US and EU begin to collateralize loans to Ukraine with interest earned by frozen CBR assets abroad, as outlined at last week’s G7 meeting. Russian equities appear set to raise funds from mostly domestic investors in the coming months and war spending will continue to drive the economy forward for now.
So, was designating MOEX a case of too little too late? Arguably, it should have been done two years ago but wasn’t for a variety of reasons, including avoiding the retaliatory confiscation of US assets, although Putin signed a decree in May creating the mechanism for doing precisely this. And the CBR is boasting that the yuan already accounted for 54% of currency trades last month, well before the latest sanctions. Russia has also said it is working with other countries in the so-called BRICS bloc (Brazil, Russia, India, China, and South Africa) to develop payments platforms to bypass the dollar. However, most observers outside Russia remain deeply skeptical of the project to de-throne the dollar as the world’s currency for central bank reserves and trade.
In a May podcast, analysts from Morgan Stanley set out the case for the dollar’s continued dominance. First, they point out that the yuan lacks liquidity due to strict capital controls, and few analysts believe these will be relaxed amid significant short and long-term challenges to the Chinese economy ranging from a toxic property market to demographic factors that won’t change anytime soon. The analysts also note that while the US faces record debt and possible continued fiscal expansion after the presidential election, markets perceive that the Federal Reserve will be able to continue to contain inflation, which has been falling in recent months. And while crypto-currencies have helped Russia with its shadow trade for weapons parts, there is no prospect of crypto displacing any major currency for the foreseeable future as a store of value.
Dependency economy
The idea of Russia creating new payment systems with trading partners is not new. For instance, Iran and Russia said they had linked interbank communication systems in early 2023. In terms of multilateral schemes, the BRICS Pay system was launched in 2018 with the goal of “allowing businesses and consumers to securely and seamlessly make and receive payments in their local currency.” This March, a Russian official talked about making BRICS Pay a blockchain-based system that would be an analog to the ubiquitous SWIFT payment system. But for the foreseeable future, most analysts perceive that the yuan will be the dominant currency for trade among BRICS countries, given the relative size of the Chinese economy in the grouping.
So, what are the practical effects of the move against MOEX? Russian equity markets appear mostly unfazed, in part because sanctions and capital controls deter the ability to make alternative investment choices in Western markets. Russian media has focused on “adaptations” in currency markets, where the halt in US and Euro trading hasn’t made these hard currencies vanish, rather making it harder to establish reliable conversion rates with the ruble. And the first part of the sanctions package passed two weeks ago – targeting FFIs doing business with designated entities – provides a real stumbling block for Russia’s plan to rely on the yuan. On Monday, Russian business daily Kommersant reported that a Bank of China subsidiary managing payments between the two countries had halted operations with sanctioned Russian banks.
It is important to remember that the US has not sanctioned all Russian banks, or even most of them. Carnegie Russia Eurasia Center fellow Alexandra Prokopenko a and others have speculated about the emergence of new, hybrid institutions designed especially for this trade to reduce risk to other Chinese banks. For instance. If MOEX had been sanctioned in the early months of the war, the fallout for equity, currency and other markets would have been far greater, along with the potential of collateral damage to some Western players. The action taken two weeks ago has simply made Russia incrementally more reliant on China and increased calls for the BRICS countries to take more radical steps. The fact that the BRICS grouping is little more than a loose grouping of diverse countries – a Goldman Sachs analyst invented the term two decades ago – rather than a unified geopolitical force reduces the likelihood of an efficient alternative payments system suddenly emerging. Instead, Russia’s war-fueled economy will continue to paper over widening cracks. Targeting FFIs through secondary sanctions and designating mega-projects designed to boost revenues through LNG, for instance, can help hasten the arrival of the day that the economy and the war machine it fuels run out of tricks to survive.
EU sanctions Russian LNG
Under a deal struck last week between ministers of EU member states, the bloc is imposing restrictions on Russian natural gas as part of the 14th package of sanctions against Russia adopted earlier this week. The measures ban Russian exporters from using EU ports to transfer liquified natural gas (LNG) for transportation to third countries outside of the bloc. This is an important provision as warm-water EU ports provide the most cost-effective way for Russia to transship gas from Yamal LNG, its primary LNG facility in the north, and Arctic LNG-2, its facility expected to make initial shipments as warmer weather frees the sea of ice, as previous sanctions have blocked the delivery of ice-class tankers. In addition, the EU added 27 vessels, including LNG and oil tankers, many perceived to be part of Russia’s “ghost fleet” of tankers evading existing restrictions, to its sanctions list.
The measures are welcome and important as the EU is a primary transshipment point for Russian LNG heading to Asia and other markets. But it does not address Russian LNG deliveries to EU countries. As the Financial Times noted, the bloc remains concerned that it will not have enough gas for the winter. One solution is increased imports from the US, although the Biden administration has halted the issuance of new LNG export licenses. Environmental groups point to various measures that EU countries are already implementing to reduce gas consumption. The Institute for Energy Economics and Financial Analysis noted that in July 2022, member states agreed to reduce gas demand by 15% during the fall and winter of 2022-23, and delivered a savings of 18% compared to the average consumption rate for the five years through 2022, although this data relies on countries’ own reporting and methodology. A third reduction target of 15% was announced for the period ending March 2025. Still, the EU continues to source around 15% of its total gas supply from Russia, albeit mostly via pipeline, down from 45% in 2021. This means Russia will continue to have a major say in EU energy policy, either until the US increases supplies or focused energy savings can free European countries once and for all from a dangerous reliance on Russian energy.
Right-wing parties gain in European parliamentary elections
As polls predicted, far-right parties made gains in the European parliamentary elections held earlier this month, sending political shock waves across the bloc. Although the center-right European People’s Party remains the largest single faction in the European Parliament, and, conversely, left-wing candidates made gains in some Nordic countries, the bottom line is a decisive rightward shift for the continent. The results have been far-reaching, prompting French President Emmanuel Macron to call a snap parliamentary election within weeks, in a quixotic bid, it appears, to channel mainstream outrage at the strong performance of Marine LePen’s National Rally party (RN). German Chancellor Olaf Scholz said in recent days that he was “concerned” about a far-right win in the domestic polls in France. In diplomatic-speak, that’s not far short of panic. Meanwhile, Scholz saw his own party perform poorly and get overtaken in terms of seats by the far-right Alternative for Germany (AfD). Italian Prime Minister Giorgia Meloni saw her right-wing allies expand their mandate. Still, this was not the case for every country. Slovakia, which has seen a populist prime minister and then president take power since last fall, saw good results for liberal parties, amid turnout of just 34%. Overall, however, as Christopher Caldwell wrote in the New York Times, parties that hold the EU “in contempt” prevailed in the elections. And there is evidence that Russia was spreading disinformation ahead of the polls, including using AI to generate stories.
What does this mean for campaigners focused on kleptocracy? The rise of more extremist parties generally favors Russia and its agenda, and some figures like France’s Marine LePen have accepted more direct support and reportedly took a loan from a Russian bank. At the same time, Italy’s Giorgia Meloni, whose political party has fascist roots, has defied expectations and been a vocal supporter of the EU and NATO and has been one of the most outspoken critics of Russia in her first 18 months in office. Ultimately, it can be argued that the more radical tilt of the European Parliament reflects local frustrations in European member states about issues such as inflation, crime and immigration, rather than any direct commentary about the direction of the EU itself, which has limited powers to address these issues. It will be important to watch how the French electorate react to the snap election and if Germany and other member states feel pressured to move towards the right (or left) domestically. This will affect how these countries treat authoritarian states like Russia and China, with the latter seeking to replicate its success in turning Hungary into both a production and political base in Europe. What is certain is that Europe is in for several months of political instability.
EU outlines role for anti-money laundering agency
Last week, the EU published new legislation governing anti-money laundering (AML) provisions, according to the AML Intelligence newsletter. Under the legislation, which came into force this week, the Anti-Money Laundering Agency (AMLA) is charged with supervising companies in the financial industry that are perceived as having a higher risk profile as they operate in six or more EU countries. This provision aims to overcome concerns that fragmented cross-border supervision inherent in regulating institutions operating across national borders. The new agency will begin full operations in 2025 and be based in Frankfurt and have over 400 staff. If the new agency is able to staff-up fully, it will provide welcome additional muscle to European regulation of financial institutions. National agencies inside the EU and around its periphery, such as in the UK, home to several institutions that also span several European countries, have chronically suffered from staffing and budgetary shortfall, sharply limiting enforcement.
US cuts deal with controversial mine owner Gertler
Israeli tycoon Dan Gertler could receive US$300 million and sanctions relief if he divests mining assets in the Democratic Republic of Congo (DRC) under a deal with the US, the Financial Times reported recently. How one describes Gertler is important – he reportedly sued a Congolese coalition for defamation, along with an African website, London-based Global Witness and Israeli newspaper Haaretz last year for certain allegations brought against him. The businessman now appears close to a deal with the US authorities to sell “three royalty streams” back to the Congolese government and grant him a general license granting him access to the US financial system, following his sanctioning in 2017. For the US government, the move ensures access to critical minerals and stabilizes markets, in line with concerns that the war in Ukraine, along with instability in the DRC itself and other regions has upset markets, provoking additional downstream effects. The US government, according to the FT, will still keep Gertler on a list and claims his license can be revoked if he violates its terms. The deal is an interesting and rare example where, in public at least, the US government has negotiated with a high-profile sanctioned individual for re-admittance to the US, and by extension, international financial system.
US hospital group linked to Maltese corruption scandal
Reporting by the Organized Crime and Corruption Reporting Project (OCCRP) and its dogged local reporters have unveiled emails that allegedly show how a US hospital group paid millions to a Swiss firm that in turn paid consultancy fees to former Maltese Prime Minister Joseph Muscat. The latter is now on trial for corruption. The US group, Steward Health, is in the midst of an unrelated bankruptcy that has sent shock waves through the US healthcare sector, especially in states like Massachusetts where it runs many hospitals. Its failure has also raised concerns about the efficacy of real-estate investment trusts (REITs), whereby hospitals sell and leaseback their properties to holding companies, or REITs. In response to Steward Health’s bankruptcy, the state government of Massachusetts has sought to ban REITs from owning hospitals. In the Malta case, the OCCRP reporting noted that there is no evidence that Steward Health’s executives knew the fees would be going to the Maltese PM or any other official. The deal emphasizes the problems facing countries when they open up national hospital systems to external investors, given the narrow margins and other challenges inherent in the business.
Russian telecoms group decides Crimea is local
Russian maps and commentators will tell you in no uncertain terms that Crimea is an integral region of Russia, whatever Ukraine and the rest of the world might say. Yet, tellingly, Russia’s big four mobile operators – MTS, Megafon, Beeline and Tele2 – have since 2014 treated the peninsula as “roaming” from a billing perspective, translating into higher prices for Russian tourists visiting the region. The distinction? Russian operators have been loath to be seen as openly violating international sanctions on operating in occupied Crimea, so they have offered roaming rates with a local operator, as if the subscriber has entered another country. Now, Tele2 customers will still connect to a local operator, in this case, Miranda, but billing will be according to their domestic billing plan, according to Russian business newspaper Vedomosti. Other operators, according to the newspaper, would not comment on their own plans. Why has it taken a decade for one of the major operators to make this step? We speculate that a major concern is the ability for the companies to keep buying imported telecommunications gear. All four companies have so far avoided sanctions designation and keeping it that way will keep the cost and ease of operating down. Tele2 is unusual because it is owned by Rostelecom, an arm of the state that also reportedly owns around 20% of Miranda. Notably, Tele2 did not answer Vedomosti’s questions about whether they would launch similar services in other occupied Ukrainian regions. In those areas, local operators have sprung up, although many are believed to have links with more established individuals and companies. In the meantime, three of four Russian telecommunications companies will continues to act as if Crimea is Ukraine, even if they can’t say it out loud.