For decades, Russia’s wealthiest have flocked to London once called ‘Moscow-on-Thames’, snapping up mansions, sending their children to top private schools and taking advantage of the capital’s status as a global financial hub. The UK has now threatened to ratchet up pressure on the Kremlin thousands of miles away in the up-market enclaves of London.
In response to Russian action in Ukraine, Prime Minister Boris Johnson had no alternative than to impose severe sanctions against Russian banks, businesses and oligarchs, especially those with ties to President Vladimir Putin. He told parliament the sanctions would be “the largest and most severe package of economic sanctions that Russia has ever seen”.
It’s a little unclear at present how far the government will go or what further sanctions could possibly be imposed amid fears it will damage London’s attractiveness as a financial centre. For the sanctions to have any effect the government would have to be prepared to sanction around 100 powerful Russians, including their wider families, according to Thomas Mayne, an expert in corruption studies at the think-tank Chatham House.
He said: “What kind of pressure that exerts on Putin, who knows? Perhaps nothing. But it is something that should be tried”. Campaign group Transparency International UK says Russians accused of corruption or with links to the Kremlin have bought £1.5bn in property since 2016.
Russian companies have long used London to tap funds. Russian companies continue to raise money from foreign investors, often through London-based arms of investment banks. Last year, Russian companies and financial institutions raised 17.6bn abroad, the highest in four years, according to Dealogic.
There are 24 Russian companies listed on the London Stock Exchange, including the bank Sberbank and JSV VTB bank, Russian state-controlled energy giant Gazprom and oil company PJSC Lukoil. Recently toughened rules now allow sanctions to be placed against anyone doing business of “economic significance to the government of Russia”, including owners, directors and trustees of businesses.
In practice, sanctioned individuals could be barred from selling property, as banks wouldn’t be able to process the transactions. UK companies would be barred from transacting with sanctioned entities anywhere in the world.
Last month, the UK shut down its investor visa programme, which had been popular with wealthy Russians as a way to get residency. The government says it will publish a register of who owns property and businesses through offshore shell companies.
“It remains to be seen how aggressively the UK government uses these powers,” said Alexandra Melia, a partner at the law firm Steptoe & Johnson. The sanctions could, for instance, be applied to British offshore locations including the British Virgin Islands and the Cayman Islands, she said, potentially freezing a chunk of offshore Russian wealth.
The threat of sanctions spurred a flurry of activity, with UK-based businesses reviewing loans and derivatives contracts with Russian clients, to insert clauses to better allow them to claw money back if those Russians are suddenly frozen out of the financial system, said Bruce Johnston, a partner at law firm Morgan Lewis.
Since Moscow annexed Crimea in 2014, the number of Russians getting UK investor visas has fallen sharply. The number of Russians in private schools is down by more than a third since its peak in 2015, according to a study by the Independent Schools Association.
While Russian companies continue to raise money through London, the amount has declined somewhat since 2014. Critics may say Russians came to London because of a lack of regulation and political will to scrutinise the origin of foreign funds.
In a 2015 report, Deutsche Bank analysed unrecorded financial inflows into the UK through balance-of-payment data and concluded that a “good chunk” of the £93bn in hidden capital coming into Britain between 2006 and 2015 was related to Russia. (The writer is our foreign correspondent based in the UK)
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