London is, according to Bloomberg, “the undisputed foreign hub for Russian business.” That’s where Russian companies hire law firms and investment bankers to handle takeovers. That’s where rich Russians like to live with their families or just hang out and have fun. That’s where they like to spend lots of money.
But the sanction spiral has already – and very inadvertently – accomplished one of the big goals, not of President Barak Obama or Chancellor Angela Merkel, but of President Vladimir Putin: encourage Russian money to stay in Russia, and perhaps even bring back some of the hundreds of billions of dollars that have washed offshore over the years.
Capital flight, particularly from the vast underground economy, is one of Russia’s most pressing economic problems. And Putin’s angle of attack has been, well, brutal in its own way:
The spectacular collapse of the Cypriot banks last year took down much of the “black money” Russians and their mailbox companies – there were over 40,000 of these outfits in Cyprus – had on deposit there. Instead of bailing out the cesspool of corruption that these banks were, or even the nation, with another emergency loan as Russia had already done before, he just smiled and let it happen. And much of the money of his compatriots was allowed to evaporate.
Perhaps he’d read Global Financial Integrity’s report – designed to advise the Russian government on these issues – that called Cyprus “a Money Laundering Machine for Russian criminals.” And so the sanction spiral against Russian oligarchs and their companies fits neatly into his overall long-term isolationist design.
It includes the de-dollarization of world trade – an endeavor where he found new friends even in the French political class, after megabank BNP-Paribas agreed to pay a $8.9 billion penalty to the US Government. China has been working furiously to elevate its own currency to a world-trade currency to rival the dollar and the euro, though it still has a long ways to go. Putin has been eager to switch the oil and gas trade with China away from the dollar, and progress is being made on a daily basis.
And it includes getting Russian companies and rich individuals, by hook or crook, to leave at least some of their money in Russia and perhaps even repatriate some of the money now invested elsewhere so that it can do its magic in Russia and propel economic development to the next level. Once in Russia, the money would presumably remain more accessible to the Russian government, which these very oligarchs have seen is not a great situation to be in, if they end up on the wrong site of Putin. Russia’s legal system can be a hazard to their health and wealth, and banks can be iffy. Hence the prevailing wisdom to send overseas every ruble, dollar, or euro that isn’t totally nailed down.
So Putin has been pushing Russian companies to cut back on doing business with overseas banks and bring some of that business home. With some effect.
And London has suffered collateral damage. Takeovers involving Russian companies plunged 39% to $16.6 billion in the first half of 2014, Bloomberg reported. London being the “undisputed” center for Russian finance took much of the hit. Raising money in London is getting tougher too for Russian companies: two megabanks, HSBC and Lloyds Banking Group got spooked by the sanctions and the willingness by the US Government to exact its pound of flesh from banks that violate sanctions. They pulled out of a loan deal for as much as $2 billion for BP and Russian oil-major OAO Rosneft, “according to a person with knowledge of the matter,” Bloomberg reported in June.
The consequences are ricocheting through London, from law firms and investment banks to retailers of luxury goods and dealers of exotic cars. In another indication, the amount that Russian visitors spent in retail stores between January and May, according to tax-rebate services company Global Blue, plunged 22% from the same period last year.
It shows up in all sorts of venues: “We’re seeing a lot less Russian surnames on the booking sheet,” Michael Evans, creative director of a nightclub called Mahiki, told Bloomberg. A somewhat tony place where a bottle of Roederer Cristal Champagne will set you back $719, and I’d guess that’s what the girls like to drink. “It’s very easy to see what’s going on in the world from the markets we attract,” Evans explained.
And London real-estate insiders are fretting that Russians might no longer buy overpriced homes in ultra-pricy areas, and that there would be no one else to fill their big shoes and munificent habits. “The Russian market was like a Champagne fountain,” Peter Wetherell, CEO of real-estate agency Wetherell, told Bloomberg. “The money was coming into the top and flowing down.”
That appears to be over. The sanction spiral is having its effects. London is paying a price. Other cities too. Russia’s economy, short term, has been hit and may be slithering into a recession. Some companies are squealing.
But for Putin’s long-term master plan, it has been a godsend. If the collapse of Cyprus has demonstrated to his compatriots that their money and its legal status might be even less secure in overseas tax havens than in Russia, the sanctions spiral has introduced them to new risks and has made doing business with already frazzled Western banks more difficult. One more reason to use Russian banks and keep their money working in Russia. And if the sanction spiral can accomplish that, Putin will have another strategic trophy to hang on his wall.
“An epidemic of the world economy” is what Putin called offshore jurisdictions. And he must have sported his wicket smile when he said, “We Have to Think About How to Take this Money.”