The United States and its allies are not going to intervene with their own forces against Vladimir Putin’s invasion of Ukraine. I will leave it to others with experience in the matter to make the guess as to whether we will send more weapons to the Ukrainian government or, in the event that the Russian attack quickly achieves its objective, we will help arm the Ukrainian resistance.
However, the West’s response to Putin’s brutal aggression will consist primarily of financial and economic sanctions. To what extent can these sanctions be effective? The answer is that they can be very so if the West is willing and willing to own up to its own corruption.
By conventional standards, the Putin regime does not seem very vulnerable, at least in the short term. It is true that Russia will end up paying a high price. There will be no more agreements on gas pipelines and hardly any foreign direct investment. After all, who would want to make lasting commitments to a country whose autocratic leadership has shown such reckless disregard for the rule of law? But these consequences of Putin’s aggression will take years to become visible. And when it comes to trade sanctions, it seems that the scope is limited. For this we can and should blame Europe, which has far more trade relations with Russia than the United States.
Unfortunately, the Europeans have unnecessarily allowed themselves to become hugely dependent on Russian natural gas imports. This means that, in the event that they tried to cut off Russian exports altogether, they would impose scarcity and sky-high prices on themselves. If the provocation reaches a sufficient level, they could get to do it; modern advanced economies can be incredibly resilient in times of need.
But even the invasion of Ukraine may not be enough to persuade Europe to make such sacrifices. It is revealing, and not in a good way, that Italy wants luxury goods — which the Russian elite love to buy — excluded from the sanctions package.
Financial sanctions, which would reduce Russia’s ability to raise and move money abroad, are easier to apply, and indeed on Thursday President Biden announced he would crack down on Russian banks. But the effects will be limited unless Russia is excluded from Swift, the Belgium-based interbank payments system. And Swift’s exclusion could effectively mean the disruption of Russian gas supplies, which brings us back to the problem of Europe’s self-inflicted vulnerability.
He knows in depth all the sides of the coin.
But the world’s advanced democracies have another powerful financial weapon against the Putin regime, if they are willing to use it: they can go after the vast overseas fortunes of the oligarchs who surround Putin and help him stay in power.
Everyone has heard of these characters’ gigantic yachts, their sports franchises and their incredibly expensive residences in multiple countries. In Britain there is so much Russian money on display that some talk of Londongrad. And they are not isolated stories.
Filip Novokment, Thomas Piketty, and Gabriel Zucman have pointed out that Russia has run huge trade surpluses every year since the early 1990s, which should have led to a large accumulation of foreign assets. However, according to official statistics, Russia’s assets outside its borders only moderately exceed its liabilities. How is it possible? The obvious explanation is that rich Russians have been taking large sums and depositing them in other countries.
The figures in question are mind-boggling. Novokment and co-authors calculate that, in 2015, the hidden fortunes abroad of wealthy Russians were equivalent to about 85% of their country’s GDP. To put things in perspective, it’s as if the cronies of an American president have managed to hide $20 trillion in offshore accounts. Another article co-signed by Zucman found that, in Russia, “the vast majority of major fortunes are held abroad.” As far as I know, the visibility of the Russian elite abroad is unprecedented in history, and creates an enormous vulnerability that the West can exploit.
Now, can democratic governments go after these assets? Yes. As I see it, the legal basis already exists, for example, in the Countering America’s Adversaries Through Sanctions Act, and also the technical capacity. Indeed, Britain froze the assets of three prominent Putin cronies earlier this week, and could do the same to many others.
So we have the means to put enormous financial pressure on the Putin regime (and not the Russian economy), but are we willing to do it? This is the trillion ruble question. Two uncomfortable facts present themselves at this point. The first is that there are quite a few influential people, both in business and politics, who share deep financial entanglements with Russian kleptocrats. This is especially true in Great Britain. The second is that it will be difficult to go after laundered Russian money without making life difficult for everyone who launders, wherever they come from. And while the Russian plutocrats may be the world champions in this sport, they are certainly not the only ones: the mega-rich all over the planet have money stashed away in offshore accounts.
What this means is that taking effective action against Putin’s weakest point would require confronting and defeating the West’s own corruption. Can the democratic world rise to this challenge? We will see in the coming months.
Paul Krugman He is a Nobel laureate in economics. © The New York Times, 2022.
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