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The reason why sanctions against Russia are failing

Kleptocracy corrodes democracy and benefits autocrats, argues Raymond Baker in Invisible Millions. Joe Biden should be taking notes.

By Ben Judah

It’s obvious by now: sanctions on Russia haven’t lived up to expectations. Disaster for Vladimir Putin had been anticipated. Expert chatter in Washington, a step removed from sanctions experts themselves, was excitable a year ago. It was considered likely that this, the biggest, most sophisticated sanctions package ever, would force a savage recession, even bank runs, upon Russia. And it was obvious that snarled-up supply chains in aviation, computing, even baking would start to break down; planes would be grounded, software unable to be updated, ovens worn out. We aren’t there yet. Talking to experts and officials today paints a concerning picture. Russia has proved much more adept at evading sanctions because it is manipulating something decades of Anglo-American policymakers have chosen to ignore – financial secrecy.

Consider a familiar story: a Russian company wants what it can’t have. Instead of throwing up its hands at a Western bank refusing its sanctioned transactions, the equivalent of a fairytale invisibility cloak is easily at hand. With a few calls to a few lawyers and incorporation agents the same company finds itself concealed by a string of anonymous shell companies hiding, matryoshka-like, one inside the other. This entity is now undetectable as a Russian company – it’s probably being aided by corporate structures bought off the shelf in the Cayman Islands, the British Virgin Islands or other vestigial British Overseas Territories that are an empire-sized source of financial crime. This story is tediously familiar because these methods have been abundantly used by global kleptocrats for decades.

Raymond Baker’s Invisible Trillions: How Financial Secrecy is Imperilling Democracy and How to Renew Our Broken System explores this dirty game, while providing an explanation for the disappointing results of sanctions. It’s the same anonymous shell companies that have been used for decades by Western elites, and corporations big and small, to conceal profits and inheritances that are now being used to deliver to Russia the chips, components and payments it needs to keep its war going. This gets at the fundamental contradiction of what both Washington and London are in the world. Political elites cast themselves on the one hand as the defenders of the “rules-based international order” of territorial integrity, but are on the other hand the guardians of the global financial secrecy system, an opaque, ungoverned space, enabling kleptocracy, sanctions evasion and illicit finance on a Putin-level scale.

[See also: “Russia cannot afford to lose, so we need a kind of a victory”: Sergey Karaganov on what Putin wants]

Baker hurls his grenade of a book at this contradiction. How can Western countries both be an African development sponsor and be responsible for the secrecy system that extracts far more from the continent than it receives in aid? How can Western democracy pledge itself to the rule of law and tolerate financial structures that enable the wealthy to avoid so many of those laws? Baker, who is a similar age as President Biden and has quite a few of the same mannerisms, has spent a lifetime confronting himself with these questions that seem to little trouble the occupant of the White House. If confronted with the suggestion of reading a 278 page book about financial secrecy the former senator for the notorious shell company factory known as Delaware would probably roll his eyes. That would be foolish, as there are few books Biden would benefit from more.

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Team Biden view themselves as fighting a global, multi-dimensional battle for democracy. Export controls on China are required to stop an authoritarian rival. Otherwise, the world order will start to tilt precariously away from the democracies. Military donations to Ukraine and sanctions on Russia are essential to stop an authoritarian invasion. Otherwise, Ukrainian democracy will fall and other Eurasian democracies will be at risk. Investment and spending at home are necessary to stop a demagogic populist. Otherwise, a renewed Donald Trump will reassemble an embittered majority and American democracy itself will be at risk. What makes Baker’s Invisible Trillions obligatory reading is that it connects the dots between these grand strategic priorities and leads them right back to the financial secrecy system. Not only can you not properly enforce sanctions with such a system, you’re going to struggle to compete with China. Worse still you’re going to continue to see democracy corrode at home.

Baker likes to recount that he graduated from Harvard Business School under the Eisenhower administration farmed with a breezy post-war confidence that American capitalism and democracy were naturally symbiotic and self-enriching. It’s this original post-war vision that Biden believes in. It would pay for him to read Invisible Trillions because it is really two things: a story not just of a loss of easy faith in the American way, but a loss of faith in American elites. Baker believes that unless they can be forced to act against this system populist insurgencies will keep coming and kleptocracy will keep thriving. The offshore-fuelled property developer known as Donald Trump, you realise, isn’t a uniquely rotten apple but a structural manifestation of what American capitalism really is.

Biden’s grand strategists find themselves with an unenviable task, left to think through how to deal with Russian and Chinese revanchism, and the climate crisis and decarbonisation. These great challenges have something in common: they can only be managed, mitigated or slowed. They cannot be stopped completely by the United States and its allies acting decisively. This, Baker reminds us, is not the case with the financial secrecy system. This really could be switched off. All the US has to do is refuse to accept any transaction from an anonymous shell company. But vested interests and vociferous lobbying have left this solution – the exact one Biden needs to enact to stop domestic and international authoritarianism – feeling far out of reach.

I left Invisible Trillions asking: how committed are the American super-elites to their project? It is an open question. Russian sanctions evasion, Chinese technology theft, Iranian arms acquisition – at some point all of these are likely to touch either the US dollar, or anonymous shell companies. Both continue to operate in our system, in order to keep billionaires and corporations comfortable. Will the next generation of American presidential candidates pick up Baker’s challenge and run with it? Or will they conclude that cutting into elite privileges is too hard politically? Even at the cost of the sanctions regime on Russia, or the one to come on China, falling apart.

[See also: Russia and the new language of war]

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