Moscow's Gold: Russian Corruption in the UK Contents

2Making sanctions more effective

22.The EU and US introduced the first set of sanctions against Russia in March 2014 in reaction to the annexation of Crimea, targeting

persons and entities responsible for action against Ukraine’s territorial integrity, persons providing support to or benefitting Russian decision-makers and 13 entities in Crimea and Sevastopol that were confiscated or that have benefitted from a transfer of ownership contrary to Ukrainian law.34

Wider sectoral sanctions were then introduced in July 2014, and reinforced in September 2014, in response to Russian activity in eastern Ukraine. The EU sectoral sanctions, to which the UK is bound until its exit from the EU, target five Russian banks, three energy companies, and three defence companies.35

Devising a better sanctions regime

23.Sanctions are most effective when allies act together. The EU and US have been relatively united on the need to maintain sanctions against Russia since 2014. However, the US and EU take slightly different political and legal approaches to sanctions, particularly since the passage of the Countering America’s Adversaries Through Sanctions Act (CAATSA) in August 2017. The EU ties both sectoral and individual sanctions to particular Russian state actions in Crimea and Ukraine, meaning that sanctions can be lifted if specific and named actions are taken (e.g. compliance with the Minsk Agreements). The US, meanwhile, has begun to issue sanctions more generally against any actors associated with the Russian regime, in response to Russia’s aggressive foreign policy, disinformation campaigns and interference in Western democratic processes.36

24.On 6 April 2018, the US Treasury announced the introduction of new sanctions targeting seven oligarchs thought to be close to the Kremlin and 12 of their businesses, as well as 17 Russian Government officials and two state-owned companies.37 The impact was immediate. On 9 April, the first trading day after the sanctions were announced, Russian stocks suffered their worst session since the 2014 invasion of Crimea, and the rouble slid by 4.1% against the dollar.38 As Dr Emile Simpson told the Committee:

There are two lists within the US sanctions regime. One is the [“Specially Designated and Blocked Persons” (SDN)] list … which targets individuals, and individual entities and companies. That is very serious, because US persons cannot really engage in the vast majority of business transactions with that entity. Then there are the sectoral sanctions. Both the EU and the US sanctions prohibit buying or dealing in bonds and equity, with some exceptions, but otherwise one can engage in normal business with those entities.

The really key element of the 6 April move by the US Treasury was to put not just people such as Oleg Deripaska but his companies, such as Rusal and En+, on the SDN list. That is what created a huge ripple in the markets—Rusal lost 50% of its value within almost a week.39

At the time of their issue, the 6 April sanctions did not outline what the sanctioned entities would need to do in order to see the restrictions lifted. However, on 23 April—following a global spike in the price of aluminium—the US Treasury announced that it would cut or lift the sanctions against Rusal if Oleg Deripaska sold his stake in the company by 7 May.40 On 27 April, reports suggested that Mr Deripaska had agreed to reduce his share in En+ to below 50% in an effort to have the sanctions lifted,41 and on 2 May the US Treasury extended until 6 June the deadline for Deripaska to divest from the company.42

25.Witnesses suggested that the US approach, as signalled in its most recent sanctions, is useful insofar as it has had a clear and direct impact on the Russian economy and on the Kremlin. Dr Emile Simpson, for example, said:

When a major Russian aluminium company takes that much of a hit, it is hard to imagine that it doesn’t have an effect, but we will see. What is objectively clear is that this move is far more materially significant than anything the EU has done thus far and perhaps alerts us to the need to toughen our own part and get the UK to toughen EU sanctions, if that is politically possible—if the UK does want to send a tougher message.43

26.Similarly, Dr Mark Galeotti said:

May I make a plea for being more aggressive and carnivorous in our approach? … Now, when I look at how the Russians perceive it, the Russians consider themselves to be in a political war with us—the number of times that Russians are absolutely open about saying that. In those circumstances, we should be thinking about asymmetric responses ourselves and not thinking purely that we have to be sort of slaves to a direct connection across. Okay, it would be vastly harder in the context of the European Union to broaden the sanctions regime under the current circumstances, but on the other hand the UK could. … Russian interests do not have to be involved directly with attacking UK interests to be considered to be potential targets.44

27.Dr Galeotti also warned, however, that the EU approach of linking sanctions relief to specific behavioural changes should be maintained. He said:

Well, it would be nice to think we can change the whole nature of the Putin regime and save Russians from Putin, but we are not going to do that. Instead, we have to define a set of realistic, specific goals and make it absolutely clear that we have specific requirements, because so much of this at the moment is not clear.45

Asked what kinds of goals could be included, he said:

They will range from the negative ones, such as: stop the following series of behaviours that we are clearly seeing, such as state-sanctioned cyber-attacks, state-sanctioned disinformation of a certain level and so on. Those are the negative, “stop it” ones. Then there are the more positive ones, which are things such as what we expect to see in Syria and elsewhere. It needs to be very clear. There is no point in having a secret policy. It needs to be explicit.46

28.The Sanctions and Anti-Money Laundering Bill, introduced in the House of Lords on 18 October 2017, is among the major items of legislation that the Government considers necessary to put in place before the UK leaves the EU. The vast majority of UK sanctions are currently implemented through EU legal acts, so the Bill is necessary to put in place a legal framework for the UK to impose, implement and amend its own sanctions regimes after leaving the EU. The Bill arrived in the House of Commons in January 2018, and completed its Report stage on 1 May 2018. At the time of publication of this report, the Bill has returned to the House of Lords, where it awaits consideration of the amendments made in the Commons.

29.At the time of publication of this report, the Sanctions and Anti-Money Laundering Bill (2018) is entering the final stages of its passage through Parliament. The passage of the Bill marks an important opportunity for Parliament and the Government to assess the strengths and weaknesses of our existing sanctions regime, and to ensure that sanctions remain an effective part of the UK’s foreign policy toolkit. We welcome the Bill’s broad definition of the purpose of sanctions regulations, which will give the Government the power to introduce sanctions for a range of reasons including to further UK foreign policy objectives, to promote national and international peace and security, and to promote respect for human rights, democracy, the rule of law and good governance.

30.The significant impact of the newest US sanctions on Russia demonstrates the potential value in targeting Kremlin-linked individuals as a way of putting pressure on the regime to change its aggressive and destabilising behaviour. At the same time, making sanctions relief conditional on specific actions enables the EU to send clearer signals than the US does about how that behaviour should change. Since sanctions are most effective when the US and EU act together, the UK should make it a priority to identify ways to encourage and adopt best practices from both types of sanctions regime. The Government should also use the G7 format to encourage unity of action among the world’s largest economies, in order to exert maximum financial and economic leverage over the Kremlin.

31.We call on the Government to broaden its approach to sanctions by including individuals closely connected to hostile regimes, where appropriate, while retaining the practice of linking sanctions relief to specific actions. The UK should work with EU partners, both before and after leaving the EU, to identify and sanction the individuals and entities on whom the Kremlin relies in carrying out its acts of aggression—including, but not limited to, destabilisation of its neighbours, disinformation campaigns, interference in democratic processes and assassination attempts on foreign soil. This should be done in close consultation with the US Treasury and intelligence agencies. Such sanctions should be linked to specific desired changes in the Russian state’s behaviour, and should be reviewed annually against progress towards those outcomes.

A UK Magnitsky list

32.Witnesses were united in their view that the inclusion of a Magnitsky-style amendment in the Sanctions and Anti-Money Laundering Bill would be a positive step in enabling the UK to hold human rights abusers accountable for their actions.47 Journalist Luke Harding said:

It seriously annoys Vladimir Putin, and I therefore think it would be a very effective measure. I think it would have to be public. It could be a template not only for the Russian Federation but for human rights abusers everywhere. You have to have a named list, and you have to give a reason, as the US has done, for why you are including someone on the list, but I think it would be a deterrent and also a message to the Russian elite that, in a way, they have to choose. It is this old dilemma between wanting to live the lifestyle of members of the international super-elite, while being patriots and nationalists at home. You can’t have it both ways if you are going to support a regime with an egregious human rights record.48

33.On 1 May 2018, during the report stage of the Sanctions and Anti-Money Laundering Bill, the House of Commons unanimously agreed to a cross-party amendment to the Bill that would enable the Government to sanction individuals in order to

Provide accountability for or be a deterrent to gross violations of human rights, or otherwise promote—

i)Compliance with international human rights law, or

ii)Respect for human rights.49

The FCO Minister of State, Sir Alan Duncan, told the Chamber that “any person sanctioned under this Bill will have their name published on an administrative list, which will be publicly available.”50 It is not yet clear, however, where that list will be published, how it will be maintained, or how it will differ (if at all) from the existing consolidated list of financial sanctions targets in the UK, maintained by the Treasury.51

34.It is also not yet clear which Minister or Department will take the lead in identifying and designating individuals who have committed, or are likely to commit, gross violations of human rights. When we asked the Foreign Secretary on 23 March 2018 who would be responsible for such a designation, he said, “That will obviously be a matter for our law enforcement agencies to determine”.52 This may be true for the final designation, but the information required for the agencies to determine this will require assistance and the detailed knowledge of individuals’ activities abroad that can only come from the FCO and intelligence agencies.

35.The Bill also requires the Government to report regularly to Parliament on the use of the power to make sanctions regulations, identifying specifically regulations relating to gross human rights violations. Moreover, it makes provision for the sanctions to be reviewed by a Parliamentary committee, and requires the Government to respond to any recommendations made by that committee. This may be an existing committee of either or both Houses, a joint committee, or a new structure.53

36.Human rights abusers and their money are not welcome in the UK. We applaud the inclusion of a Magnitsky clause in the Sanctions and Anti-Money Laundering Bill, allowing sanctions regulations to be made for the purpose of preventing, or in response to, a gross human rights abuse or violation. This long-overdue measure sends a powerful signal of support to victims of human rights abuse around the world.

37.We welcome the Government’s promise to publish a list of individuals sanctioned specifically because of gross human rights violations, comparable to the US Magnitsky list. This list should be published and maintained by the FCO and should be distinct from the general list of individuals under financial sanction that is maintained by HM Treasury.

38.In determining whether to sanction specific individuals to provide accountability for or be a deterrent to gross violations of human rights, the Government should co-ordinate as closely as possible with the US, EU, G7 and other allies. Individual sanctions are most effective when a united front can be presented.

39.We welcome the Government’s recognition of the need for parliamentary scrutiny of the use of sanctions powers, and to respond to recommendations made by any committee undertaking such scrutiny. Sanctions are primarily an instrument of foreign policy, and only the FCO has the network and intelligence necessary to identify individuals and entities who should be subject to sanctions for the purposes set out in the Bill. The Foreign Affairs Committee is therefore the most appropriate committee to conduct reviews of the Government’s use of sanctions and we stand ready to discuss how such reviews might most effectively be conducted.

Russian sovereign debt

40.Unlike the major Russian banks, Russian state debt is not subject to sanctions. Russia is therefore free to raise funds, including hard currency, by selling bonds on US and EU markets. As Dr Emile Simpson told the Committee, this creates a major weakness in the global sanctions regime, because the Kremlin has used the money raised from sovereign debt issuances to support its sanctioned banks with loans (via intermediary banks).54 Closing that loophole by sanctioning Russian sovereign debt would, Dr Simpson said, “send a significant political message about the seriousness of the sanctions regime”.55

41.Sanctioning Russian sovereign debt will only be effective if the US and EU act together. It is unclear, however, whether there would be international support for such a measure. In February 2018, the US Treasury Secretary Steven Mnuchin said the US would not pursue sanctions against Russian sovereign debt, days after the publication of an internal memo warning that such a move would have “negative spillover effects” on both the Russian and US economies.56

42.There are measures short of full sanctioning that could make it more difficult for Russia to issue new sovereign debt. Sanctioned Russian banks such as VTB, which are not allowed to access US and EU capital markets on their own behalf, are nevertheless permitted to act as book runners for the sale of Russian state bonds.57 Russia depends on these banks, since western banks have been unwilling to act as book runners for the sale of Russian debt since 2014.58 Dr Emile Simpson suggested to the Committee that prohibiting persons in the EU from buying Russian debt when the book runner is a sanctioned entity would make it much more difficult in practice for Russia to issue new bonds.59 He also suggested banning the main clearing houses in Europe, Clearstream and Euroclear, from making Russian debt available on the secondary market.60 This would be likely to require the support of the EU as a whole.

43.Russia’s ability to issue new sovereign debt on global markets with the assistance of sanctioned banks undermines the global sanctions regime and supports the aggressive behaviour of the Russian state. Any action taken to limit or prohibit the issuance of Russian debt on global markets, however, must be taken jointly by the EU, US and other international partners in order for it to be effective.

44.The Government should work with the EU, and with the US, to prohibit the purchase of bonds in which a sanctioned entity has acted as book runner. It should also seek EU agreement to bar the European clearing houses from making available Russian sovereign debt.

35 Emile Simpson (RSC0008) para 5

36 Emile Simpson (RSC0008) paras 8–10

38 Financial Times, Russian markets hit by US sanctions and Syria, 9 April 2018

40 Financial Times, Aluminium falls on US signals over Rusal sanctions, 23 April 2018

47 In 2012, the US passed the world’s first “Magnitsky Act”—the Russia and Moldova Jackson-Vanik Repeal and Sergei Magnitsky Rule of Law Accountability Act. Named for the Russian lawyer Sergei Magnitsky, who was arrested in 2008 and died in 2009 after alleging large-scale corruption on the part of the Russian state, a Magnitsky Act gives a government the power to freeze or seize the assets and impose visa bans on specific individuals involved in gross human rights abuses. The names of the individuals sanctioned for gross human rights abuse are published on a publicly-available list.

50 HC Deb, 1 May 2018, col 144 [Commons Chamber]

51 HM Treasury, Consolidated list of financial sanctions targets in the UK, last updated 15 May 2018

52 Oral evidence taken on 21 March 2018, HC (2017–19) 538, Q187

57 See para 16

58 Emile Simpson (RSC0008) para 38

Published: 21 May 2018