The Western Oligarch Dilemma and the sobering reality of untangling sanctioned Russian assets from its very fabric
There’s an old Sicilian proverb, Successo ha nemici, which translates as Success has enemies. This is perfectly illustrated by the direct correlation between Dubai’s transition from an emerging economy to a world-class centre for trade, business, tourism and innovation, and its escalating portrayal from some U.S, U.K, EU, and Swiss-based stakeholders as a villain in an otherwise law-abiding world. This is the sentiment projected in Bloomberg’s latest piece, ‘Rich Exiles Put Dubai In Spotlight as World Chases Russian Money’, which once again pounces on Dubai, this time as a “more appealing” destination for Russian money in light of increasing U.S-led sanctions.
It would be naïve to think that there is any financial centre in the world, which is totally immune to dirty money, however, any discussion of illicit finances moving from Putin’s Russia that divides the globe into “the rest of the world” and Dubai is, in itself, signalling a strange distortion.
I should start by highlighting a neat trick that seems to have been overlooked, namely the convolution of “Russian” money and “illicit” money. At just five hours flight time from the Russian capital and with a one-hour time difference, the UAE has most certainly succeeded in attracting a large Russian expat population, which according to the Russian Embassy in 2019 numbered around 40,000. In addition, the UAE has continuously welcomed approximately 900,000 Russian tourists per year and engaged in a variety of social and educational agreements which vary from book fairs to universities. Unlike the unnuanced, increasingly Russia-phobic approach of the global media, which included Facebook and Instagram temporarily allowing calls for violence against Russians, Dubai and the UAE continues to distinguish the difference between the Russian people and the decisions taken by its leadership. If one were to imagine the atmosphere in Russia during the prelude to its invasion of Ukraine, you can hardly blame Russians of means for exiting the country, particularly to a nation where identity politics plays a less active role. As a side note, it is interesting that the digital sponsor at the time of reading happened to be Meta.
As a nation primarily comprised of expats, we are proud to welcome people of all nationalities, Russian and Ukrainian included, providing they adhere to the standards issued by our immigration authorities, and abide by our laws. The fact that the Bloomberg article claims that Russian money into the UAE had “accelerated over the past two weeks” as tensions escalated would hardly be a surprise, nor a contravention of any laws, although unlikely considering President Putin placed a ban on all residents from transferring money abroad on 28th February, approximately ten days before the publication of the article. The flow of Russian money is a legitimate subject for the media. But what data is there? What sources? Bloomberg only cites “people, who asked not to be identified discussing private transactions”.
Read further, and the piece goes on to suggest that Dubai’s status as a successful economy has in part been underpinned by illicit funds:
“The dilemma facing local authorities is whether to clamp down and risk losing a flow of money that’s helped underpin the economy or maintain the confidentiality that havens like Switzerland could no longer sustain. Dubai will still allow most wealthy exiles to live without fear of extradition – as long as they don’t run afoul of the local law – because they form an important pillar of the economy.”
Firstly, let us put aside the emirate’s excellent infrastructure, awarding-winning airlines, world-renown hospitality sector, stable economy, low tax base, enhanced labour and visa reforms, pleasant climate, low crime rate and easy accessibility from Europe, Asia and Africa as a potential draw for ordinary, law abiding citizens and ask, what proportion of Dubai’s 3.49 million residents, or 7.28 million visitors who came in 2021 would be required to make illicit funds an “important pillar”? It is absurd to suggest that lax enforcement has been a driver of Dubai’s economy as opposed to its attraction as a carefully thought out, high-quality business and leisure environment.
Secondly, while the article seems keen to imply that Dubai is a sanctuary for exiles, its recent high profile arrests and extraditions, which include a $150 million drug bust in coordination with Australian law enforcement and the arrest of Italian crime figure, Raffaele Imperiale, one of Italy’s most wanted men would suggest otherwise.
Thirdly, if President Putin banned the flight of capital well before the war, isn’t it logical to ask where this unquantified flow of dark/ illicit money is flowing from? London, Paris, New York? We are not really told. But if it takes a full-scale war to move it from one offshore location to another, then Dubai was evidently not the first choice. “Illicit” money has been, it appears, very comfortable outside the UAE, perhaps suggesting that Dubai’s approach to AML/CTF is misperceived by its critics.
It is worth mentioning that as of 22nd August 2021, Dubai Courts announced the establishment of a specialised new court that will focus specifically on combatting money laundering. In addition, to the earlier establishment of the Executive Office of Anti-Money Laundering and Counter Terrorism Financing, “these two developments together further demonstrate the UAE’s ongoing efforts to implement and maintain a sophisticated financial crime compliance framework that is in line with FATF’s expectations and recommendations,” as stated in The National Law Review in October 2021.
While I appreciate the unfortunate trend of publications such as Bloomberg resorting to more salacious comments and use of language in order to sell ads, its editors ought to remind themselves that they are a news agency. In reading the comments surrounding Dubai’s supposed “dilemma”, supplemented with other gems including: “The Gulf emirate catapulted itself from sleepy trade backwater to glitzy playground” or “Dubai’s status as a global financial hub also has a darker side...”, you’d be forgiven for thinking you’re reading a gossip column.
Although the article was unable to deliver the facts to sustain its headline, it did make me question which countries or cities should be in the spotlight when it comes to the illicit wealth of Russia’s ruling class. Certainly, financial institutions that stand on the frontline of transactional business would be a good place to start, so the fact that British banks such as HSBC are continuously slapped with fines for anti-money laundering failings, most recently for $85 million in December doesn’t bode well.
Other double standards hiding in plain sight include the decision of CME Group Inc and London Bullion Market Association (LBMA) to stand with the international community in suspending six Russian precious metals refiners for gold and silver; elements that are non-dependent on Russia, while Russian platinum continues to quietly trade from the same suspended refineries on the London Platinum and Palladium Market (LPPM) and COMEX as an element that is largely dependent on Russia as a source.
Other sectors that remain up in the air include Russian diamonds. According to a post by the Diamond Foundry: “Russian diamonds have been ok to import tariff free whereas polishing in China was massively penalized. And of course, now with the sanctions in effect, it still remains to be seen what happens to all these diamonds mined in Russia that are then polished in India -- where they thus become India-origin diamonds according to the U.S. Trade Office.”
According to a recent article published on Quartz, “Russian elites have been stashing their money abroad, often to the benefit of the Kremlin. According to the Atlantic Council, President Vladimir Putin, and his associates’ control about one-quarter of the estimated $1 trillion in Russian dark money hidden outside the country,” and while hiding offshore wealth isn’t unusual for many countries, Russia is unique in the sense that the bulk of the wealth is kept offshore. But where?
According to the Boston Globe, the United States remains a prime centre. “The sheer amount of Russian assets stashed outside the country — especially in the United States — is shocking. According to some estimates, Russia has more dark money hidden across the world than any other nation: about $1 trillion. But what’s damning for the United States are the loose financial regulations that allowed foreign oligarchs to so easily, successfully, and often legally keep so many of their offshore funds in American jurisdictions.” (The United States was ranked the second biggest promoter of financial secrecy in the world, after Switzerland and before the Cayman Islands upon original publication in 2018).
And the United States isn’t alone – according to an article published in The Economist in February 2022:
“London has long been a playground for oligarchs and other well-heeled Russians. The number flocking to the city climbed after the global financial crisis, as Britain courted foreign capital, for instance by selling residence visas to “investors”, with an easy route to eventual citizenship. Transparency International, an anti-corruption group, has identified £1.5bn ($2bn) of Russian money in London property, the majority of which is held by shell companies in offshore havens. In the borough of Kensington & Chelsea alone, some 6,000 properties are registered in the name of anonymously owned companies; many of these are thought to belong to Russians. As well as owning mansions, oligarchs from the former Soviet Union owned British football clubs: Roman Abramovich owned Chelsea until last week, Alisher Usmanov owned Arsenal till 2018. This was fine, until after a couple of decades in which Russia invaded Georgia and the Crimea, and poisoned various dissident Russians, the British suddenly noticed them this week. Russians’ own newspapers (Evgeny Lebedev), pay to have university departments named after them (Len Blavatnik), send their children to the swankiest schools, and cosy up to political parties, particularly the Conservatives, with donations. Oligarchs are among the heaviest spenders on British law firms, PR consultants and other reputation-launderers.”
In fact, such is the ease of “Londongrad” as a destination for oligarch wealth that a report by Parliament’s intelligence committee in 2020 concluded that London was a “laundromat” for tainted Russian money. Even if you were to take the New York Times’ recent article, “How a Playground for the Rich Could Undermine Sanctions on Oligarchs” as gospel, which references “linking 38 businessmen or officials linked to Russia’s president,” who own “dozens of properties in Dubai collectively valued at more than $314 million,” it pales into insignificance against other international centres such as London, which are not only where Bloomberg’s spotlight ought to be shining, but economies that have come to rely on foreign cash to balance its trade deficits; a topic sublimely covered by The Guardian’s economics editor, Larry Elliott.
According to a survey published by Ernst & Young and international real estate broker Tranio in 2019, albeit based on Russian high-net worth individuals, i.e. not necessarily oligarchs, Cyprus and Latvia have been favoured havens for Russian money, however many started to look to move their funds out of Cyprus in line with “more stringent financial accountability rules, while Latvia has been rocked by huge money laundering scandals that have led to greater scrutiny.” In terms of foreign assets, Russians lean towards bonds, followed by real estate, businesses, shares and finally lifestyle items such as yachts, before precious metals and gems. According to the same report, the most in-demand destinations for Russian money were Switzerland, the United Kingdom, and Malta. Switzerland was the most popular place to open a bank account (98 percent), followed by the U.K. (66 percent). After Cyprus, with the most-favored countries to gain tax resident status were Malta (42 percent), the U.K. (31 percent), and Switzerland (25 percent).”
The real challenge in seizing assets is that they are often hard to trace. For example, in the 2016 Panama Papers leak, Russia’s former deputy prime minister and his wife were using a £37 million jet, even though the couple’s combined wealth was only about £634,000 on paper. It wasn’t listed under their name, but through a Bermudian company of which they were beneficial owners. Another recent example included a $14 million townhouse in the West Village neighbourhood of New York City, believed to be linked with Oleg Deripaska, an oligarch targeted for sanctions over supposed Russian interference in the 2016 US Presidential election. Although a spokeswoman for Deripaska told the New York Times that “the property belonged to one of his relatives” an FBI raid unveiled property records showing that the home was registered under a shell company.
There is no doubt that all economies around the world have an element of exposure to illicit funds, but to suggest that Dubai is either the problem or a primary destination for bad actors is factually erroneous and while I applaud the very recent efforts of countries like the United States and the United Kingdom (albeit not from their own initiative, but due to international pressure) to finally address the serious problems they have with providing a home for the illicit funds of Russia’s ruling class, you will forgive me for thinking that it may be a little premature to start virtue signalling.
It is perhaps worth pointing out that there are several Ukrainian oligarchs with equally colourful pasts, who have also interwoven their way into the highest echelons of western society, great examples being Dmytro Firtash and Victor Pinchuk. Fortunately for both, neither are Russian.
Ultimately, the biggest difference between the UAE and countries including the U.S and U.K is that no amount of foreign money or influence has ever been allowed to integrate into its social or institutional fabric. There are so many examples across the western powers, such as Mikhail Fridman‘s involvement with Council on Foreign Relations, an American think tank specialising in U.S. foreign policy and international relations through to British Prime Minister, Boris Johnson’s support of Russian-born media mogul, Evgeny Lebedev’s peerage. These are just the tip of the iceberg when it comes to the true extent of how dirty (or potentially dirty) money has infiltrated and influenced foreign policy, in the case of Mr. Johnson against the advice of MI6.
Ultimately, as an autocracy which ensures one of the highest standards of living for its people and those who choose to reside within its borders, the UAE doesn’t have the same challenges faced by other countries to whom they are accountable to their tax paying public. Instead, the UAE remains a cosmopolitan nation, which is incentivised to improve its financial systems, while cooperating with the international community to ensure greater transparency in order to protect its rightful and well-earned position as a global hub for business, trade, and investment.