By Wolf Richter: London is, according to Bloomberg, “the undisputed foreign hub
for Russian business.” That’s where Russian companies hire law firms and
investment bankers to handle takeovers. That’s where rich Russians like
to live with their families or just hang out and have fun. That’s where
they like to spend lots of money.
But the sanction spiral has already – and very inadvertently –
accomplished one of the big goals, not of President Barak Obama or
Chancellor Angela Merkel, but of President Vladimir Putin: keep Russian
money in Russia, and perhaps even bring back some of the money that has
wandered astray over the years to seek greener pastures elsewhere.
Capital flight, particularly from the vast underground economy, is
one of Russia’s most pressing economic problems. And Putin’s angle of
attack has been, well, brutal in its own way:
The spectacular collapse of the Cypriot banks last year took down
much of the “black money” Russians and their mailbox companies – there
were over 40,000 of these outfits in Cyprus
– had on deposit there. Instead of bailing out the cesspool of
corruption that these banks were, or even the nation with another
emergency loan, as Russia had already done before, he just smiled and
let it happen. And much of the money of his compatriots was allowed to
evaporate.
Perhaps he’d read Global Financial Integrity’s report – designed to
advise the Russian government on these issues – that called Cyprus “a Money Laundering Machine for Russian criminals.” And so the sanction spiral against Russian oligarchs and their companies fits neatly into his overall long-term design.
It includes the de-dollarization of world trade – an endeavor where
he found new friends even in France, after French megabank BNP-Paribas
agreed to pay a $8.9 billion penalty to the US Government. China has
been working furiously to elevate its own currency to a world-trade
currency to rival the dollar and the euro, though it still has a long
ways to go. Putin has been eager to switch the oil and gas trade with
China away from the dollar, and progress is being made on a daily basis.
And it includes getting Russian companies and rich individuals, by
hook or crook, to leave at least some of their money in Russia and
perhaps even repatriate some of the money now invested elsewhere so that
it can do its magic for the economic development of Russia, and propel
the country forward. Once in Russia, the money would presumably remain
more accessible to the Russian government, which these very oligarchs
have seen is not a great situation to be in, if they end up on the wrong
site of Putin. Russia’s legal system can be a hazard to their health
and wealth, and banks can be iffy. Hence the prevailing wisdom to send
overseas every ruble, dollar, or euro that isn’t totally nailed down.
So Putin has been pushing Russian companies to cut back on doing
business with overseas banks and bring some of that business home. With
some effect.
And London has suffered collateral damage. Takeovers involving
Russian companies plunged 39% to $16.6 billion in the first half of
2014, Bloomberg reported.
London being the “undisputed” center for Russian finance took much of
the hit. Raising money in London is getting tougher too for Russian
companies: two megabanks, HSBC and Lloyds Banking Group got spooked by
the sanctions and the willingness by the US Government to exact its
pound of flesh from banks that violate sanctions. They pulled out of a
loan deal for as much as $2 billion for BP and Russian oil-major OAO
Rosneft, “according to a person with knowledge of the matter,” Bloomberg reported in June.
The consequences are ricocheting through London, from law firms and
investment banks to retailers of luxury goods and dealers of exotic
cars. In another indication, the amount Russian visitors spent in retail
stores between January and May, according to tax-rebate services
company Global Blue, plunged 22% from the same period last year.
It shows up in all sorts of venues: “We’re seeing a lot less Russian
surnames on the booking sheet,” Michael Evans, creative director of a
nightclub called Mahiki, told Bloomberg. A somewhat tony place where a
bottle of Roederer Cristal Champagne will set you back $719, and I’d
guess that’s what the girls like to drink. “It’s very easy to see what’s
going on in the world from the markets we attract,” Evans explained.
And London real-estate insiders are fretting that Russians might no
longer buy overpriced homes in ultra-pricy areas, and that there would
be no one else to fill their big shoes and munificent habits. “The
Russian market was like a Champagne fountain,” Peter Wetherell, CEO of
real-estate agency Wetherell told Bloomberg. “The money was coming into
the top and flowing down.”
The sanction spiral is having its effects. London is paying a price.
Other cities too. Russia’s economy, short term, has been hit and appears
to be slithering into a recession. Some companies are squealing. But
for Putin’s long-term master plan, it has been a godsend. If the
collapse of Cyprus has demonstrated to his compatriots that their money
and its legal status might be even less secure in overseas tax havens
than in Russia, the sanctions spiral has introduced them to new risks
and has made doing business with already frazzled Western banks more
difficult. One more reason to use Russian banks and keep their money
working in Russia.
X art by WB7
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