The big news yesterday in the ongoing Crimea crisis was that President Obama has authorized targeted sanctions against “individuals and entities responsible for violating the sovereignty and territorial integrity of Ukraine.” Though the official list of people and companies has not yet been released, and though Press Secretary Jay Carney later clarified that Putin’s own personal wealth would not be targeted, all told this was a solid first step, especially when compared with the tepid response European leaders came up with: a pause to talks with Russia about trade and visa liberalization.Why are the Europeans being so timid? The casual American reader might guess that it has something to do with Europe’s reliance on Russian energy, or with Germany being Russia’s primary trading partner—or even with a general tendency among European powers to squabble rather than to coordinate. Though all of these factors undoubtedly contribute, not enough attention is being paid to just how dependent European financial centers appear to have become on the profits derived from managing and safeguarding Russian billionaires’ dirty money.The way former Ukrainian president Viktor Yanukovych was tending to his accounts is right out of the tried and true playbook Russian oligarchs have perfected over the years since the fall of the Soviet Union. As Bill Browder explained to us a few months ago:
Because all this money was effectively stolen in Russia—either stolen from the government, or stolen by Putin from the oligarchs who stole it from the government—no one feels safe keeping their money in Russia, because at any point it could be stolen from them. As a result, most of it is in the West, where it is protected by the rule of law and can’t so easily be taken.
And the Europeans have always been perfectly willing to look the other way. Even before Yanukovych fell, journalists were reporting that he had squirreled away billions in Switzerland and Lichtenstein. Documents have since emerged showing that Yanukovych was using shell companies in the UK and Austria to hide his shady real estate deals and mining interests. And a report from yesterday alleged that Yanukovych’s dentist son was using a Dutch tax haven to embezzle funds.Eager to show that they’re doing something substantial, Europeans announced that they would freeze the assets of the Yanukovych family and a handful of other high-ranking officials suspected of plundering the Ukrainian state. This will be comparatively painless to do, of course, as it will likely have a negligible impact on business as usual in European financial capitals. Yanukovych, however, is just the tip of the iceberg—an iceberg that as a whole appears too big for the Europeans to directly confront.There are plenty of hints as to what’s really going on if you know where to look. For example, earlier this week journalists in London managed to photograph the briefing notes of a UK government official leaving Downing Street. The photos, once blown up, revealed that David Cameron’s government is anxious to prevent a potential sanctions regime that would keep Russian money out of the City. The UK is recovering from the recent financial crisis reasonably well, but the recovery is still thought to be weak enough that a shock to the financial lifeblood of London could push the country back into recession.Furthermore, as recent reports indicate, Russian money is flooding back to Cyprus in a big way, this time in the form of shell companies rather than as bank deposits. Cyprus is still in terrible shape, with youth unemployment at 40 percent and total unemployment somewhere north of 17 percent. An attempt to keep Russian money out could profoundly damage Nicosia’s balance sheet, plunging Cyprus into even deeper despair and creating yet another dependent south European state for the North to sustain.These are not trivial problems or considerations for the EU to confront. Moreover, this is not just a European problem. By some measures, the United States is a bigger tax haven than Switzerland or Lichtenstein, and it is probably only its comparatively smaller exposure to Russian money that allows Washington to proceed forthrightly while its European allies dither.But the old excuses just won’t cut it any more. By acting as he has in Crimea, Putin has amply demonstrated just how confident he is that he has the West over a barrel. As TAI board member Anne Applebaum beautifully put it in the Washington Post a few days back:
Without sending a gunship or pressing a reset button, we could change our relationship overnight with the Russian government — and with ordinary Russians — simply by changing our attitude toward Russian money. […]This is our wake-up call: Western institutions have enabled the existence of a corrupt Russian regime that is destabilizing Europe. It’s time to make them stop.