Atlantic Council EURASIA CENTER ISSUE BRIEF How the United States Can Combat Russia’s Kleptocracy JULY 2018 ANDERS ÅSLUND Executive Summary ussian President Vladimir Putin’s regime is characterized by a combination of secret police and organized crime, which the late scholar Karen Dawisha named “kleptocracy.” This kleptoc- racy can be seen as a system of three key circles. The first circle Ris authoritarian control over the state, including law enforcement and the courts. The second circle is the big state companies that Putin con- trols through their chief executives, his loyal appointees, who extract funds from the companies for their personal benefit. The third circle consists of Putin’s old friends from the St. Petersburg business world who obtained companies that greatly benefited from public procure- ment and asset stripping from the big state companies. This system cannot function without a fourth circle, offshore assets. Ironically, the Kremlin’s executive control of the courts has deprived Russia of real property rights, and not only ordinary rich Russians but also its rulers transfer their assets abroad to keep them safe. They have three requirements for their money’s destination: the country must have sound rule of law, allow anonymous ownership, and have deep asset markets, because their assets are substantial. Many years of fighting against shell banks and repeated financial crashes have minimized money laundering through dubious jurisdictions. Today, few countries with sound rule of law allow anonymous ownership on a large scale. Generally speaking, the only ones that do are countries with The Eurasia Center’s mission is to Anglo-American legal systems. The remaining financial centers of sig- enhance transatlantic cooperation nificance are Cyprus, Malta, Dubai, Singapore, Hong Kong, the British in promoting stability, democratic values and prosperity in Eurasia, Virgin Islands, the Cayman Islands, the United Kingdom (UK), and the from Eastern Europe and Turkey in United States. So far, the financial flows seem to overwhelmingly end up the West to the Caucasus, Russia, in two countries, the United States and the UK. and Central Asia in the East. ISSUE BRIEF How the United States Can Combat Russia’s Kleptocracy St. Petersburg, the city where Putin developed close relationships with his inner circle of kleptocrats. Photo credit: Good- FreePhotos.com. Introduction In the United States, the concentration of large amounts of anonymous capital owned by Kremlin kleptocrats Under President Vladimir Putin, Russia has been trans- is a major national security threat. The assets they formed into an authoritarian kleptocracy.1 Putin has have stashed here mean these kleptocrats can buy successfully fused the old secret police, the KGB, with many American decision makers. However, the United organized crime—first in his home city of St. Petersburg, States can defend itself against these kleptocrats if and then in the whole of Russia. His Kremlin now con- it mobilizes the will to do so. The obvious weapon is trols the state through law enforcement agencies, the requiring transparency of business ownership and of courts, and the big state companies. capital flows. The European Union (EU) adopted an anti-money laundering directive in 2015, which is sup- The aim of this regime, however, is not developing the posed to lead to the revelation of all beneficiary own- Russian nation, but maintaining the power of the ruling ers of assets in the EU. The United States should do elite and immensely enriching it. The irony is that hav- the same. It should also introduce controls of monetary ing abolished the rule of law in Russia, the ruling elite inflows that now bypass ordinary bank regulation— cannot secure its own property rights in the country, namely, asset flows into real estate in the United States and must keep its assets in safer places abroad. These and flows that pass secretly through law firms on the assets are vast and can be deployed for all kinds of basis of attorney-client privilege. To enforce this trans- subversive political purposes abroad, such as the cor- parency, the enforcement agencies, notably the US ruption of leading politicians in other countries and the Treasury Financial Crime Enforcement Network, need financing of election interference, cyber aggression, to be greatly expanded. mercenaries, and many other activities. 1 I have greatly benefited from conversations with the late Boris Nemtsov, Vladimir Milov, Andrei Illarionov, Evgeniya Albats, Gary Kalman, and Clark Gascoigne for this report. 2 ATLANTIC COUNCIL ISSUE BRIEF How the United States Can Combat Russia’s Kleptocracy Sergei Ivanov, a former KGB general, member of the Rus- Igor Sechin, CEO of state oil company Rosneft and a loyal sian Federation Security Council, and close associate of associate of Vladimir Putin Photo credit: Wikimedia Com- Vladimir Putin. Photo credit: Wikimedia Commons. mons. The Kremlin’s skill and ingenuity in these activities was done stealthily. For years, Putin claimed that he must not be underestimated. Since 2014, the Atlantic favored private enterprise and a free economy, until fi- Council has published several reports on various forms nally it became clear that he did not. of nefarious Russian interference abroad. This issue brief focuses specifically on one crucial aspect: how During Putin’s second term, 2004–2008, it appeared the Kremlin and its cronies transfer money abroad, and as if he aspired to state capitalism, which was coined what can be done to expose and disarm that system, “Russia, Inc.”3 Andrei Illarionov, Putin’s personal eco- for the sake of greater national security.2 nomic advisor, 2000–2005, has formulated possibly the best characterization: The first section of this issue brief explains the nature of the Russian kleptocracy. Section two shows how Russia today is not the same country it was only six capital flows out of Russia. Section three offers an -as years ago, when Vladimir Putin became president. sessment of the size of the assets transferred out of Back then, the country was unsettled, tumultuous, Russia. Section four presents what has been done to and impoverished, but it was free. Today Russia is stop Russian money laundering. Section five focuses richer—and not free. on the key problem: the proliferation of anonymous companies. Section six discusses current US efforts to A new model of Russia has taken shape. The combat Russia’s kleptocracy. Section seven concludes state has become, essentially, a corporate enter- with policy recommendations for how large flows of prise that the nominal owners, Russian citizens, anonymous Russian money can be brought under con- no longer control.…State-owned companies have trol in the United States. become the assault weapons of this corporate state. Having mastered the main principle of state 1. The Nature of Russia’s Kleptocracy corporatism—“privatize profit, nationalize loss”— they have turned to taking over private-sector President Vladimir Putin’s regime has from the out- companies, sometimes at cut-rate prices. Their set been characterized by its simultaneous use of se- victims include major industrial companies like cret police and organized crime. Putin himself played Yuganskneftegaz, Sibneft, Silovye Mashiny, Kamaz, a major role in developing this model, much of which OMZ, and Avtovaz.4 2 Some relevant reports are: Anton Barbashin, “Improving the Western Strategy to Combat Kremlin Propaganda and Disinformation,” June 11, 2018; Daniel Fried and Alina Polyakova, Democratic Defense Against Disinformation, March 5, 2018; Alina Polyakova et al., The Kremlin’s Trojan Horses 2.0, November 15, 2017; Alina Polyakova et al., The Kremlin’s Trojan Horses, November 15, 2016; Alan Riley, Ukraine v. Russia and the Kleptocrats, April 5, 2016; Maksymilian Czuperski et al., Hiding in Plain Sight: Putin’s War in Ukraine, October 15, 2015. 3 Andrei Illarionov, “Russia, Inc.,” New York Times, February 4, 2006, https://www.nytimes.com/2006/02/04/opinion/russia-inc.html. 4 Andrei Illarionov, “Russia, Inc.,” New York Times, February 4, 2006, https://www.nytimes.com/2006/02/04/opinion/russia-inc.html. ATLANTIC COUNCIL 3 ISSUE BRIEF How the United States Can Combat Russia’s Kleptocracy Hong Kong is one of the financial hubs through which Russians channel their illicit funds. Photo credit: Wikimedia Com- mons. However, this was hardly real state capitalism, because However, the entire law enforcement system, includ- it did not serve the state. The ultimate beneficiaries ing the courts, prosecutors, investigative committee, of the state’s largesse were not the Russian people national guard, and Ministry of Interior, works under but Putin and his friends. The Russian dissidents Yuri Putin’s direct control, each component led by one of Feltshtinsky and Vladimir Pribylovsky named it “The his close associates. The three most powerful people Corporation,” in their 2008 book of the same name.5 in this circle appear to be the current chairman of the The Guardian’s Moscow correspondent Luke Harding FSB, Aleksandr Bortnikov, and his two predecessors, gave more details in his 2011 book, The Mafia State.6 Sergei Ivanov and Nikolai Patrushev. All three are KGB Masha Gessen presented a similar picture in her 2012 (Komitet gosudarstvennoy bezopasnosti) generals book.7 But it was the late scholar Karen Dawisha who and Putin’s contemporaries from St. Petersburg, and gave it the appropriate name, titling her book Putin’s they are all currently members of the Security Council, Kleptocracy.8 Russia’s top ruling body. The system is quite distinct, as Putin has built it care- The second circle includes the big state companies fully and with great skill during his long presidential that Putin controls by having appointed his loyal as- terms. It can be seen as three circles. The first circle sociates as chief executives. These executives extract is authoritarian control over the state, including law large funds from the companies for their personal ben- enforcement and the courts.