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.
BLUF (Bottom Line Up Front)
Welcome to TDP’s third newsletter and the last one for 2023. In this issue, we look at the state of Russia’s missile arsenal as winter fast approaches, a season marked by the temperature rather than the calendar in Ukraine. With Russia already beginning to target Ukrainian energy infrastructure, we review Russia’s estimated stockpiles and ask whether Russia, which is already buying drones, ammunition and other munitions from Iran, will seek to tap into the Islamic Republic’s massive arsenal of ballistic and cruise missiles (in exchange for defense technology for Iran and proxies like Hezbollah) to keep the pressure on, and what can be done to frustrate a dangerous escalation in both Ukraine and the Middle East.
In the Digest, we look at a fascinating new paper from the German Council on Foreign Relations that calls for Germany specifically and all NATO members more generally to begin preparing now, both militarily and psychologically, for the next conflict with Russia. We review the UK’s Economic Crime and Corporate Transparency Act (ECCTA), which recently came into effect in the UK and provides the company regulator with important new powers to root out both fraud and sanctions evasion. And we look at Kyrgyzstan’s suspicious boom since early 2022 in imports of German vehicles and parts (spoiler alert: they’re headed to Russia).
In Qui Custodiet, we talk about the plea agreement by Binance’s founder (known as CZ outside of court documents) and the company’s settlement after the US authorities found the cryptocurrency exchange’s lack of anti-money-laundering controls had facilitated both sanctions evasion and funding going to terrorist groups. In the great state of New Jersey, tough local sanctions against Russia and Belarus have run up against court challenges and a judge’s wry comment that the state was pursuing its own foreign policy.
In Around the World, we look at Ukraine’s public discussion about the feasibility of carrying out presidential elections in the midst of a war. We talk about China’s economic and military support for Russia amid pledges it would never actually send arms (obligatory picture of Chinese mortar found in Ukraine here). We also review Kazakhstan’s recent ban on around 100 items being exported to Russia, while two Kazakh academics present evidence of the country’s massive expansion of trade since the full-scale war began, suggesting large-scale sanctions avoidance.
Finally, from all of us at TDP and our wider network of researchers and advocates, we wish you and yours a very happy holiday season!
Winter is Coming
As temperatures fall across Ukraine, few doubt that Russia will resume its attacks on power infrastructure designed to deprive civilians of heat and electricity and paralyze industry. Like so much else in Russia’s prosecution of this war, it’s a campaign of terror against civilians with little military rationale. Entering winter, marked in Ukraine by the activation of communal heating plants for schools and apartment blocks, there is the central question of whether Russia can refill its arsenals of cruise and ballistic missile levels at remotely the same pace as they expend them. A crucial corollary is whether Iran, with its arsenal of thousands of ballistic missiles (and growing cruise missile stocks), intends to plug any shortfalls or even help expand Russia’s arsenal.
In mid-September, the New York Times, citing anonymous US and European security officials, ran a story claiming that by late 2022, Russia had overcome sanctions to increase monthly missile production beyond pre-war levels. Notably, Ukraine’s Defense Intelligence (HUR) publicly contradicted some of this reporting, saying Russia was “nowhere close” to pre-invasion levels. More recently, it estimated that Russia has stockpiled around 800 missiles in occupied Crimea for wintertime attacks, and possesses 870 high-precision “operational-strategic and strategic-level” missiles overall. HUR noted this is below pre-war inventories while estimating that Russia made around 115 missiles in October alone.
The next question is whether Russia can acquire sufficient missiles abroad to maintain current inventories or replenish them after forthcoming attacks. China has shown few qualms about supplying critical tools, raw materials and components (see Around the World below) for Russia’s arms industry, although it loudly denounced US intelligence claims earlier this year that it planned to deliver actual weapons to Russia and pledged not to arm either side. North Korea is another candidate, although US intelligence, which reported a large shipment of “munitions” from the Hermit Kingdom to Russia in recent weeks, appears more concerned about Russia repaying in missile technology rather than receiving it.
Collaborating with Iran and Hezbollah
This crude process of elimination leaves Iran as a supplier of choice of both cruise and ballistic missiles. As we noted in our last newsletter, Russian and Iranian economic and security cooperation reached new heights following the full-scale invasion of Ukraine in February 2022. Iran began transferring military drones, including Shahed-129s, in August 2022. Reportedly, ammunition, artillery and guided aerial bombs have followed, and Russian Defense Minister Sergey Shoigu made a point of publicly visiting an exhibition of Iranian drones and missiles during a visit to Tehran this September.
Are missiles next? According to Iran Watch, the country has inventories of more than 3,000 ballistic missiles and burgeoning supplies of cruise missiles in deployment or late-stage development. Not surprisingly, the US has serious concerns. On November 21, US National Security Council (NSC) spokesperson John Kirby said that Iran may be preparing to “go a step further in its support for Russia” by supplying ballistic missiles. He noted concerns that Russia could offer Tehran “unprecedented defense cooperation” on missile technology, electronics and air defense. An exchange could also include completing the on-again, off-again deal for up to 50 Russian Su-35 Flanker jets (aircraft that may be available after Egypt, Algeria, and Indonesia canceled purchases before the full-scale invasion of Ukraine due to both sanctions and quality issues) as well as Mi-8 helicopters and other platforms.
This new phase of military cooperation is not only a threat to Ukraine. Kirby also noted reports that Russia’s Wagner mercenary group was preparing to deliver air-defense equipment to either Hezbollah or Iran, vowing to bring anti-terror sanctions against individuals or organizations for arming Iran or its proxies. Of course, Russia’s military, intelligence agencies and private military companies know Hezbollah all too well from cooperation in Syria, but the delivery of advanced weapons systems to Iran’s Lebanese proxy amid heavy fighting in Gaza is pouring gasoline on a fire. Tracking arms shipments via the expanding Caspian-Persian Gulf corridor will also tax intelligence agencies.
Endurance
Russia’s winter onslaught is already beginning. On November 25, Russia launched its largest single drone attack of the war against Kyiv, damaging power lines, residential buildings and a kindergarten. It’s not clear that this attack was targeting power infrastructure so much as terrorizing civilian neighborhoods. Strikes around the Khmelnytskyi nuclear power plant in October appeared less ambiguous. Ukrainian power company DTEK reported in late November that Russia had struck five power stations over the previous month.
The good news is that Ukraine is prepared. By August 2023, more than 80% of the country’s main power grids and high-voltage stations had been fully restored and over 62% of planned repairs at power stations had been completed after last winter’s attacks. Patriot missile systems protect some key targets but not most power stations or transmission infrastructure. Since last year, Ukraine has become ever more adept at shooting down Shahid drones (it claims to have shot down 71 of 75 drones used in the recent raid on Kyiv). Power-intensive industries, such as steel, may not be able to keep up production during blackouts, but planning and generators can prevent uncontrolled and damaging shutdowns.
The harder question is whether Ukraine’s allies are prepared for a long winter. John Kirby’s intervention was timely and important. Iran’s supply of Shaheds was a crucial boost for Russia during its darkest days of the war in 2022 and it has localized production in Russia’s Tatarstan region (amid reports Belarus may begin producing the drones). The supply of Iranian ballistic missiles, and potentially cruise missiles, could also prove transformative. Russia’s missile production may not be as resilient as the New York Times reported in September amid strains in Russia’s military-industrial supply chain. Iranian weapons could buy Russia crucial time to rebuild stockpiles without pausing strikes on civilian infrastructure.
While Iran’s sanctions regime is far more comprehensive than the sectoral patchwork deployed against Russia, it is hardly airtight, with serious gaps in Europe, where measures are much more narrowly applied to Iran’s weapons programs. According to Atlantic Council data, the US has designated 1,615 entities, while Europe has sanctioned 284, with Switzerland – a major global supplier of technology – blocking just 130 (as of October 6, 2023). Like Russia, Iran makes significant use of civilian front companies for its conventional and nuclear weapons programs and to support proxies such as Hamas and Hezbollah, a network the US has targeted much more ambitiously than European allies, while also comprehensively going after Iranian banks and other tentacles of the regime.
The confluence of the Ukraine war and the escalation throughout the Middle East should provide a moment of clarity among both US and European policymakers and a commitment to prevent further transfer of arms and technology between Russia and Iran. As we note in the Digest below, there are calls in Germany to change “mentality” to understand that we face a geostrategic threat in Russia, and this can be extended to Iran. This requires that Europe at least match US sanctions efforts against the latter. For our part, the OSINT community needs to continue to lead investigations of front networks used by both countries, flagging them to policymakers and denying their use for continued proliferation. If Iranian missiles begin falling on Ukraine, it will be a policy failure that will cost Ukrainian lives and threaten significant escalation in the Middle East.
Preparing for Russia’s next war
In a timely policy brief (“Preventing the Next War”) the German Council on Foreign Relations (DGAP) warned in November that NATO must start preparing for Russia’s next war. It predicted that Russia could reconstitute its armed forces in terms of personnel and materiel – primarily the land forces that have taken the brunt of losses over the past 18 months – in less than a decade. It calls for Germany, specifically, to “build up the Bundeswehr in terms of personnel, expand arms production, and improve resilience,” to ensure geostrategic deterrence of future Russian aggression.
The brief should be required reading in all 31 NATO member states, including the US. As DGAP notes, a build-up will require “a change of mentality in society” wherein we collectively understand that Russia is the primary geostrategic threat to the “Euro-Atlantic” zone. It also cautions that to achieve deterrence, NATO must complete its own repositioning at least one year before Russia reaches war capability. Notably, DGAP identifies an additional “option” of hampering Russia’s military production through widening the sanctions regime. As our first newsletter argued, Russia’s war machine remains dependent on advanced Western machine tools across the supply chain. Implied in DGAP’s recommendations is that the manufacturers of dual-use technology are giving up on the Russian market (always marginal in global terms) for the foreseeable future.
UK beefs up legislation to counter corruption
In late October, the UK enacted the Economic Crime and Corporate Transparency Act (ECCTA), ambitious legislation that promises “robust laws to fight fraud, counter corruption and bolster legitimate business.” Compared to the US patchwork of state registries, the UK’s Companies House (CH) portal is a model of user-friendly corporate disclosure. But, as the UK government agency that maintains the country’s company register, CH has lacked key powers as a gatekeeper and has few enforcement powers besides fines. As Global Witness pointed out in a 2019 investigation, more than 300,000 UK companies did not name beneficial owners (allowed if no owner’s stake exceeded 25%), thousands named beneficial owners who appeared to be nominees and many others disclosed a circular ownership structure or named an offshore entity the ownership of which could not be readily verified.
Key parts of ECCTA target fraud. For sanctions watchers, however, the most important steps include a crackdown on limited partnerships (LPs). LPs, with many set up in Scotland, consist of two or more partners that may be individuals or companies. This allows partners to use secrecy jurisdictions and enjoy benefits under UK law with few of the obligations. An investigation by Bellingcat published in early November found that UK LPs acted as intermediaries for over 17,000 imports into Russia between February 24, 2022 and March 31, 2023. More than 600 of these shipments concern items flagged by the EU and its partners as “High Priority” goods that are potentially dual-use and sanctioned. While CH extended annual beneficial ownership reporting requirements to Scottish LPs in 2017 (which have corporate personhood and beneficial owners, unlike other UK LPs), ECCTA now requires all LPs to disclose “fuller information about their partners and statements.” Violators can face stiff penalties and offending LPs can be dissolved. It is a long overdue step and crucially applies to existing as well as new LPs. But enforcement has long been the sticking point with the Crown Prosecution Office, the Serious Fraud Office and police failing to get the manpower and budgets needed to go after kleptocrats and sanctions evaders. As the FCPA blog asked in a recent post: “The question now is how much practical support the UK government will show for the enforcement agencies?”
Kyrgyzstan’s busy motorists
Looking at trade statistics in Central Asia for 2022 and 2023, you could be forgiven for thinking the region is experiencing an economic boom. Largely driven by commodity prices, the economies of the region are doing reasonably well at the moment. But while the IMF projects Kyrgyzstan’s real GDP will grow by a healthy 3.4% this year, the country’s drivers seem to be doing rather too well. Notably, German exports of motor vehicles and parts to Kyrgyzstan are up 5,500% since Russia invaded Ukraine. As Robin Brooks, the chief economist for the Institute for International Finance (IIF) who flagged the statistic in a recent tweet, noted: “You don’t have to be a rocket scientist to know that all this stuff is heading to Russia.”
In a future newsletter, TDP will be looking in-depth at Russia’s rampant sanctions avoidance through Central Asia and belated efforts to combat it. The statistic on Kyrgyz imports of cars and parts is just one data point, but it is a telling one. Kyrgyzstan has a population of under seven million people and a GDP per capita of around $1,800. German exporters have no reasonable expectation that their exports will be used in Kyrgyzstan and know that many of these exports, such as lubricants, tires and engine parts, for instance, have dual-use applications. As Brooks commented: “[These exports are] a rounding error for Germany.” The EU has pledged to go after Russia’s Central Asian intermediaries in its next sanctions package. But they may also want to look closer to home, as many Western companies, including ones that made a lot of noise about leaving the Russian market after the full-scale invasion of Ukraine, are profiting from a booming business in vehicles, components, electronics and much else that keeps Russian society and its war machine humming.
Binance founder pleads guilty in US sanctions and money laundering case
Changpeng Zhao (known as ‘CZ’ to friend and foe alike) pleaded guilty in late November to federal charges in the US related to his failure to maintain an adequate anti-money-laundering program at Binance, his cryptocurrency platform. His plea was part of a US$4.3 billion settlement that saw CZ ousted as chief executive but keeps Binance operational under “new ground rules.” Notably, some in the crypto world saw the pleas as an example of disproportionate punishment of companies in their space. But a review of the charges underlines how serious the consequences of lax controls at Binance were, permitting more than 100,000 suspicious transactions with organizations the U.S. described as terrorist groups, including Hamas, al Qaeda and the Islamic State of Iraq and Syria, and giving “sanctioned customers unfettered access to American capital and financial services.” A few years ago, even identifying Binance’s headquarters location was a parlor game (the trick answer was, apparently, that there wasn’t one). Notably, the US Department of Justice also cited transactions with sanctioned Russian-occupied regions in Ukraine, while chat rooms have speculated about late Wagner chief Yevgeny Prigozhin’s alleged Binance holdings. But the true scale of the use of crypto platforms by Russia and proxies in Ukraine and Syria is a story that has yet to be told.
New Jersey pauses sanctions enforcement
Cue the inevitable New Jersey jokes, but the state sent a serious message shortly after Russia’s full-scale invasion of Ukraine barred Russia and Belarus-tied companies from government dealings, including state and local government contracts, economic subsidies and receiving investments from the state’s pension fund. But as Politico chronicled in late November, NJ’s enforcement of the law has run aground in the face of legal challenges. Reportedly the state was poised to take action against several companies it determined had Russia ties, including JP Morgan Chase (reportedly for a local subsidiary, Xerox (which has since divested) and the US subsidiary of French flooring and turf company Tarkett. But it was a Japanese electronics company, Kyocera, that brought the suit that led a judge to halt implementation of the law amid remarks that NJ was pursuing its own foreign policy. American states implementing sanctions is nothing new (or even anti-sanctions, with around 35 American states passing laws that ban or deter anti-Israel boycotts). That the courts hold them to high legal standards should be welcomed and encourage states to craft them in ways that they can be enforced fairly and transparently.
Ukraine’s next elections
Ukraine’s next presidential elections are due to be held on March 31, 2024. According to multiple reports, as of November, President Volodymyr Zelensky has not made a decision about whether to hold the polls. Senator Lindsey Graham (R-South Carolina), a long-standing advocate for Ukraine on Capitol Hill, has been vocal in calling for the election to go ahead. Yet, the Kennan Institute’s Mykhailo Minakov concluded, in an essay for the Kennan Cable this month exhaustively weighing both the constitutional and legal basis for both sides, that the Ukrainian administration should postpone the elections under wartime conditions while addressing demands for the restoration of media pluralism and addressing legitimate grievances about public administration. Whatever Ukraine decides, its allies can advise. But they can help most by respecting its decision and ignore inevitable attempts by Russia and its Western political proxies to use either outcome to discredit support for Ukraine. Equally, we would hope Ukraine, whatever it decides, makes its reasons clear to both domestic and international audiences. If it is indeed postponement, clearly stating the conditions for the swift resumption of electoral politics will help Ukraine’s allies make their case to audiences at home.
China’s lifelines to Russia
In our In-Depth report, we noted that China denied US claims last spring that it planned to arm Russia. But this hasn’t prevented Beijing from providing economic and military lifelines to Russia since the conflict began. In the words of a recent paper from the Atlantic Council (“China’s support for Russia has been hindering Ukraine’s counteroffensive”), Western efforts are being “counterbalanced by Chinese imports—not of weapons, but of materials vital for Russia’s” war effort. This important paper takes a detailed look at Chinese exports of goods and how they have been used in the war. The list extends to ball bearings, electronics and – as we’ve pointed out in our coverage of computer numerical control (CNC) machines – Western equipment that companies can sell legally to China but not Russia. As the paper notes, beyond better enforcement of existing sanctions and export controls, there are not any simple remedies. In the official readout of President Joe Biden’s mid-November meeting with Chinese counterpart Xi Jinping, the US leader mentioned our commitment to Ukraine twice but did not allude to Chinese exports of dual-use items to Russia or diversion of Western products. It’s unknown if they discussed it off the record. Until the West collectively makes clear that the issue is central to our relationship with China, nothing is likely to change.
Kazakhstan restricts certain exports to Russia
Kazakhstan has found itself in an invidious position as a result of Russia’s invasion of Ukraine. As the wealthiest former Soviet state in Central Asia, it has strong commercial relationships with the West while also remaining a member of Russia-focused blocs such as the Eurasian Economic Union (EEU), the Commonwealth of Independent States and the Shanghai Cooperation Organization. President Kassym-Jomart Tokayev has sent strong public signals of displeasure with Russia’s invasion of Ukraine and refusal to support sanctions evasion without provoking a strong Russian response. In late October, the country said it would suspend exports to Russia of 106 items related to drones and electronic components, all of which come from abroad. Around the same time, Tokayev reiterated the public position that Kazakhstan would adhere to Western sanctions despite free-trade obligations under the EEU. Yet, as a deputy minister clarified to local media, “Kazakhstan exports all types of commodities, except for 106 specific types of goods [that] it has had to curb.” As two Kazakh academics pointed out in the Diplomat recently, “it is technically impossible to strictly adhere to a sanctions regime and simultaneously support comprehensive economic cooperation with the sanctioned country.” The result has been a surge in Kazakh trade activity amid only modest economic growth and high inflation (ruling out a surge in local demand) since the full-scale war began. There’s a much longer story to be told here. Watch this space. IIF’s Robin Brooks is on the case.
