New economic targets in the political battle against Russia?

While tensions with Russia continue to build, Western allies are under pressure to tighten ‘the financial screws’ against the country.

By: /
April 24, 2018
G7 foreign minister
Canada's Minister of Foreign Affairs Chrystia Freeland is joined by others on the first day of foreign ministers meetings from G7 countries in Toronto, April 22, 2018. REUTERS/Fred Thornhill

Group of Seven foreign ministers are unified in their views on “Russia’s malign behaviour,” calling out the country’s recent “pattern of irresponsible and destabilizing” activity in a communiqué issued during this week’s ministerial meeting in Toronto.

The meeting’s significant focus on Russia should come as no surprise, as public statements against the Kremlin have escalated in recent weeks. Last month, Canada and other UK allies followed Britain’s lead in expelling Russian diplomats after the brazen poisoning of former Russian spy Sergei Skripal and his daughter on British soil.

Russia continues to deny any role, but in coordinated statements, Western allies have plainly rejected those denials. And, after the United States, France and the UK hit Syrian targets on April 14 with missile strikes following reports that the Syrian government again used chemical weapons on its own people, anticipation has continued to build about what could come next.

So far, cooler heads have prevailed.

Canada’s tone following the attack on Skripal has been among the harshest. Foreign Affairs Minister Chrystia Freeland called it a “despicable, heinous and reckless act.”  

Going further, she said it was “a clear threat to the rules-based international order,” and placed the attack in a pattern of “unacceptable behaviour” by Russia including complicity with the Assad regime in Syria and support for “civil strife” in Ukraine, Georgia and other countries.

Global Affairs Canada reiterated its stance on April 16 by releasing a statement on behalf of G7 foreign ministers, declaring that the use of the military grade nerve agent is “abhorrent, completely unacceptable and must be systematically and rigorously condemned.”

“Although many countries just talked about doing this as an act of solidarity because of the use of a nerve agent, the reaction expressed by Freeland is much broader,” Andrew Robinson, a former Canadian ambassador to Ukraine, said in an interview following the expulsions.

“This really goes back to Russia’s rejection…of the rules-based order that we thought Europe had agreed on at the end of the Second World War.”

But with Russia responding in kind with diplomatic expulsions of its own, and Donald Trump reportedly reiterating an invitation for Vladimir Putin to visit the United States and being “glad to meet” the Russian president on a reciprocal visit to Moscow, questions have been raised about the effectiveness of the Western response and what options remain for deterring future brazen actions by Russia. At the very least, Putin’s continued denials and intransigence suggest the drama is far from over.

“I think we probably haven’t seen the end of the story,” said Susi Dennison, senior policy fellow at the London-headquartered European Council on Foreign Relations. “A lot will depend on what Russia’s next reactions are.” 

Taking the financial route

While diplomatic barbs continue to be traded, behind the scenes, pressure is quietly building to squeeze Russia financially and target its vulnerable economy. It’s a tactic that has been used sparingly in recent weeks. Several countries, Canada included, imposed economic sanctions against Russia following the annexation of Crimea. But since the poisoning, the EU has held off imposing any new sanctions, while earlier this month the US imposed limited new sanctions against seven key Russian oligarchs and 12 businesses they control.

In the UK, momentum has steadily coalesced around one strategy: shutting ill-gotten Russian money out of the country’s financial system, into which key Russian associates of Putin are known to invest huge sums.

Late last month, the UK Foreign Affairs Committee heard expert testimony that the equivalent of between CAN$21 billion and CAN$180 billion of Russian money of suspicious origin enters the UK financial system each year, mostly into the property market.

For one expert, going after the money is a no brainer.

“It’s the only lever we’ve got,” says former investment banker Tom Keatinge, who testified at the Foreign Affairs Committee hearing.

Keatinge, the current director of the Centre for Financial Crime and Security Studies at UK think tank RUSI, told OpenCanada in an interview that UK rules, which are lax compared to Canada’s, mean there’s much less scrutiny of the flow of foreign money into the UK. Large sums of cash, he says, can move in and out without any legal requirement for banks to report unless they feel a transaction is suspicious. 

"This is not drugs and thugs and cash in the car park, this is complex finance."

New laws introduced earlier this year, however, now allow authorities to demand to know the source of large sums of money entering the country. If authorities aren’t satisfied by the explanation, they can legally seize the assets.

That’s progress, Keating says, but it’s not enough. He stresses that a desperate lack of funding of British law enforcement agencies means they struggle to actually track much of the money coming in — making their new powers hard to actually use.

“This is not drugs and thugs and cash in the car park, this is complex finance,” Keating says, and it needs to be funded accordingly.

But what about the rest of the world? Keatinge says other UK allies could pitch in to tighten the financial screws against Russia. Countries with big financial centres like Germany, or even organizations like the Group of Twenty, he suggests, could commit to refusing to underwrite Russian debt.

But like any measure, there’s potential danger in an outsized response from Putin. Keatinge, however, argues that’s not likely.

“The major EU countries taking public stands against Russia are safe. They don’t have economic vulnerabilities to Russia.”

But further east in Europe, fears of those vulnerabilities abound.

The pipeline factor

Among the most worrying is the Russia-led Nord Stream 2, a proposed pipeline set to deliver natural gas from Russia to Germany. As plans for the project sail through the approval process, Ukraine and Poland are terrified it could rob them of lucrative transit fees and increase the entire continent’s dependence on Russian natural gas.

Under current arrangements, the original Nord Stream pipeline crosses Polish and Ukrainian territory, enriching those countries with billions in transit fees. But the new line is set to run underneath the Baltic Sea, cutting them out of the cash flow.

From the beginning, the pipeline has stoked fears of creeping control of the European fuel supply by Russia, which already supplies the continent with 40 percent of its natural gas. If Russia wanted to, Nord Stream 2’s critics say, it could be in a position to cut the gas supply in the event of a dispute. 

Canada chimed in on March 19, albeit quietly, on Ukraine’s behalf to say the Canadian government is “very concerned” that Russia could play politics with the gas supply. But so far, no official complaints have been made that oppose the project itself.

Brushing off the concern, Germany has steadfastly supported the project, exposing a vulnerability in European solidarity that Russia could try to exploit. Berlin has repeatedly said it views Nord Stream 2 as a purely economic project, and one that poses no threat to European energy security.

Germany’s proximity to Russia means it has always had a more complex relationship with Russia than some Western European countries, says Robinson.

“It’s geographically much closer to Russia and has a long history of relations. And there’s a recognition that in the long term the best thing for Germany and for Europe is to have reasonable relations.”

The rest of the European Union is divided over the project. Some members are pushing for limiting dependence on Russian gas, while others say any move to scrap the pipeline could wreak havoc on Europe’s energy markets. These fears are grounded in the fact that while the Nord Stream 2 is being built by Russian gas giant Gazprom, it is underwritten by five European gas companies.

These business ties have derailed previous attempts to target Russia’s economic vulnerabilities. Last year, the US Congress passed sanctions meant to punish businesses who help Russia export its natural gas. It struck a nerve in Europe, with the EU hinting that it would retaliate against any move to target European companies working on Russian gas projects. The new US sanctions law has yet to be used in connection with Nord Stream 2.

It’s just one example of how Russia-Europe commercial interests could complicate future efforts to impose costs on Russia. But if Europe and the United States could come together to target Russian gas revenues, they could do damage to a vital pillar of Russia’s otherwise laggard economy.

Until earlier this month, leading EU countries like Germany appeared ready to let domestic economic concerns take precedence over a strong response to Russia. But in recent weeks, Ukraine received a faint ray of hope. Standing next to the Ukrainian president at a Berlin press conference earlier this month, German Chancellor Angela Merkel surprised many by saying that Nord Stream 2 could not be possible “without clarity on the future transit role of Ukraine.”

"If Europe and the US come together to target Russian gas revenues, they could do damage to a vital pillar of Russia’s economy."

But the statement contained no specifics, no promises and did not address growing Russian control over the gas supply. With the project barrelling ahead, countries like Ukraine may yet still be left to fend for themselves.

“If I was advising the Ukrainian government,” said Robinson, “I would advise them to continue to organize [their] use of gas in a way that doesn’t expose them to Russian pressure. Because Russia under Putin will always be tempted to use the gas supply as an economic lever.”

Targeting Europe’s gas supply would be just one more example of what have come to be referred to as the ‘hybrid tactics’ Putin has used to advance Russian interests in recent years, and their impact has been hotly debated. The term has been widely used to describe Putin’s intermingling of the use of propaganda, cyber-attacks and conventional and irregular military tactics to achieve his aims — all while avoiding blame for the results. 

Putin has denied Russian links to the poisoning, but British officials reportedly see it as the latest use of hybrid tactics. Are they really working to Russia’s benefit, or has Putin actually been isolated by the fallout from the Skripal poisoning?

A testing technique

“I think [the poisoning] was a wake-up call for European leaders,” said Rosa Balfour, senior fellow at the German Marshall Fund of the United States in Brussels. “The use of hybrid tools to undermine the West is actually rather dangerous. I think in this case it backfired, but that doesn’t mean it will alter Russian policy.”

Some even argue that Putin has used the episode as an experiment to test the strength of UK-Europe relations in a post-Brexit Europe. Dennison, of the European Council on Foreign Relations, notes that it took over three weeks after the attack on Skripal for the EU and other UK allies to take concrete action. 

“We know that Russia sees the EU as a threat, as a rival for influence in its sphere in Central and Eastern Europe,” she said. “And we know that Russia has also viewed Brexit positively, and has been watching closely [to see] what the impact will be on the union as a whole.”

“I would wonder, if the UK weren’t on its way out of the EU, if [the poisoning] would be viewed the same way by member states,” she added, noting that it took almost two weeks for the rest of the EU and other UK allies to respond with expulsions after Britain initially threw out 23 diplomats on March 14.

Balfour says the EU’s low tolerance for risking escalation with Russia could play to Putin’s benefit. Putin seems ready to risk a potential backlash from Europe, but Europe seems too cautious to mete one out.

“Diplomacy is giving way to escalation in various parts of world, and the EU will definitely work against it,” she said. “It’s not just a question of energy security or business, it’s about making sure that things won’t get out of hand.” 

If that’s all true and Putin knows it, he may still have significant room to maneuver without triggering a more serious backlash against Russia. 

Canada, for its part, is likely to continue its strong stand against Russia, says David Plunkett, a former Canadian ambassador to the European Union, just as we have seen this week in Toronto.

“We are a G7 country, we have a leadership role to play in trying to get countries to comport themselves in a way that is what the international community at large thinks is acceptable behaviour.”

Plunkett says it’s hard to know exactly what is currently taking place inside Global Affairs headquarters in Ottawa, but that his guess would be that the government would be provided with a number of options that can be looked at as the situation continues to unfold.

Whatever comes next, reaching consensus on future coordinated Western action in response to Russia is sure to be a painstaking process. Western allies will have to contend with a widespread notion that they have not been able to contain Russia’s destabilizing behaviour, from the seizure of Crimea, to interference in the 2016 US presidential election, to the Skripal poisoning. The wheels may be starting to turn on concrete steps to deter Russia, but only slowly.

In his final speech as US national security advisor earlier this month, H.R. McMaster crystalized that sentiment in stark terms. 

“Russia brazenly and implausibly denies its actions, and we have failed to impose sufficient costs,” he said in Washington, D.C. 

The Kremlin’s confidence is growing."