UK, Russian oligarchs & Law of Unintended Consequences

The British government’s threats and actions against Russian oligarchs could bring in their wake the Law of Unintended Consequences.

The aim is to clamp down on oligarchs who are close to President Vladimir Putin’s regime. The retaliatory move is based on the allegation that some of these individuals are hiding and investing the Russian leader’s wealth. Despite persistent denials by Moscow, the Russian government is accused of attempting to murder former Russian agent Sergei Skripal and his daughter in Salisbury, England.

The UK move dovetails US sanctions against some super-rich Russian individuals. They are also accused of corruption and helping Mr Putin. The view is that if life is made difficult for the oligarchs, Mr Putin and his coterie will be hurt.

There are of course good grounds for Britain taking retaliatory action against Mr Putin’s regime’s alleged immorality and unsavoury domestic and international acts.

Unfortunately, the result may have unintended adverse consequences for the UK economy.

For decades, Britain has experienced wide balance of payments current account and budget deficits. Capital inflows and foreign investment and spending helped finance the twin deficits. A sizeable amount of money came from oligarchs, other wealthy Russians, their staff and advisers. They were welcomed for more than a generation with very favourable tax incentives, business and investment opportunities. Some 57 Russian companies are listed on the London Stock Exchange, the largest number outside Moscow.

Multi-billionaire Roman Abramovich, for example, bought Chelsea Football Club and pumped millions into the club, players and managers. Out of the blue, Mr Abramovich was denied his UK visa. He couldn’t even attend the recent FA Cup final between Chelsea and Manchester United. Mr Abramovich has now obtained an Israeli visa and will be able to enter the UK on short visits. The initial outcome is that Mr Abramovich has halted a planned £1 billion (S$1.8 billion) redevelopment of Chelsea’s Stamford Bridge stadium.

Implications for inward investment & property market

The question is whether other oligarchs will also cut investments or sell them. Billions in Russian money are invested in UK property and other assets. The holders are not only oligarchs and other super-rich tycoons, but thousands of Russian bankers, business people, professionals and students. Many of those who arrived in the UK do not have good relations with Mr Putin’s regime. They left Russia because they were disenchanted with his autocratic government’s alleged corruption.

According to real estate advisory firm Property Vision, London house and apartment prices have fallen by 21 and 15 percent on average since the peak in 2014. Agents cite high stamp duties and Brexit, but another key factor relates to Russian and other wealthy foreigners’ fears that they are no longer welcome.

For years, there were accusations of money laundering into the UK, but no action was taken. Last year, the UK Parliament passed the Criminal Finances Act that allowed the UK National Crime Agency (NCA) to investigate the funding sources for property and other assets. According to some reports, some 130 individuals – mainly Russians – are under investigation. Pending proof of corruption, the investigations and publicity are not only likely to discourage wealthy Russians from investing in the UK, but could also raise concerns of potential investors from China, the rest of Asia, Middle East, Africa and South America.

This article first appeared as an editorial in The Business Times Singapore

 Neil Behrmann is London correspondent of The Business Times.  Jack of Diamonds, his thriller on global diamond mining and smuggling, has just been published. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner

 

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