Russian president Vladimir Putin. Photo / Getty Images
OPINION:
The brute truth is that Vladimir Putin's Russia is a classic kleptocracy where oligarchs — and politicians — have been bleeding the nation dry for decades with their own grand version of "pay to play".
Now Putin wants to take another step towards re-establishing the old Soviet empire by taking control of Ukraine, which has fabulous and under-exploited resource wealth. He has invaded and it is now up to the West to try to constrain him by sanctions. So far, not by expending "blood and treasure", which it will come to if full-scale European war emerges.
Coming on top of a global pandemic, now into its third year, this is adding extraordinary new stress to the international order and global economy which is already experiencing major inflation. It will also further test globalisation, as nations such as Germany reconsider whether it makes sense to have a reliance on Russian gas, and others look to hedge their vulnerabilities by resourcing from within their own borders.
As US President Joe Biden put it: "Putin is the aggressor. Putin chose this war. And now he and his country will bear the consequences."
The US sanctions include export blocks on technology — such as military products and semiconductors — that Biden said would severely limit Russia's ability to advance its military and aerospace sector. He has also applied sanctions on Russian banks and "corrupt billionaires" and their families who are close to the Kremlin.
These include Russia's biggest bank, Sberbank, and 25 of its subsidiaries, all of which account for more than a third of Russia's financial assets. Other major financial institutions that the US will fully restrict include VTB Bank, Bank Otkritie, Sovcombank OJSC, and Novikombank.
These moves would, said Biden, "impose severe cost on the Russian economy, both immediately and over time." Boris Johnson is following suit now that he has rediscovered Britain is "a continent" and put the Brexit rhetoric to one side.
But seriously, why has it taken an invasion for the US and others to crack down on the Russian banks and "corrupt billionaires"? The West — via financial secrecy — has sheltered their ill-gotten gains for years by turning a blind eye to transnational money-laundering.
In 2016, analysis carried out by Columbia University professor James S. Henry for the Tax Justice Network showed that by the end of 2014, US$1.3 trillion of assets from Russia alone was sitting offshore. That has since grown.
We can't get too sniffy on this. The Panama Papers also revealed New Zealand was involved in sheltering offshore income, with Mossack Fonseca ramping up interest in using this country as one of its new jurisdictions in 2013, offering extremely private, zero-tax foreign trusts.
New Zealand business leaders got a taste of the Putin style at Vladivostok when he hosted Apec in 2012.
International investors — including a leading NZ player — were stunned when Putin's people asked for substantial sums of money (running into thousands of US dollars) to attend a private dinner with the Russian President.
The fee for the New Zealand businessperson alone was said to be US$300,000. He declined.
Putin went on to say publicly that New Zealand was a "traditional partner" of Russia's, and "we must resolve all problems that hinder the development of free trade" between the two countries. Free trade talks were put on ice when Putin annexed Crimea in 2014.
In Vladivostok, the head of Russia's largest bank urged chief executives who were paying $1000 a night to stay in dorm rooms to imagine they were back in their university days and use the event to re-energise themselves.
Lavish entertainment — everything from "ballerinas", to mounds of caviar, the best champagne and excursions to parties on oligarchs' yachts — more than made up for the low-rent accommodation and no doubt oiled the wheels of commerce for those there to make major resource deals.
That has been the established pattern for years. It is how Putin's Russia courts international investment.
Will the sanctions work?
Sanctions often hit hard on a country's civilians. The United Nations established the Oil-for-Food Programme in 1995 to allow Iraq to sell oil on world markets in exchange for food, medicine and other humanitarian needs for ordinary Iraqi citizens without allowing Iraq to boost its military capabilities.
However, the programme turned into a scandal when various companies paid kickbacks to the Iraqis which were reimbursed via higher goods payments.
One clue: Biden has held back from imposing sanctions on Putin himself. He has also not proceeded with a proposal to disconnect Russia from the Swift international banking system which allows transfers of money from bank to bank around the globe. There was pushback from Europe.
By slamming sanctions on Putin's inner circle, this disrupts his support base.
In a White House briefing statement, Biden said that for months the US had been building a coalition of partners representing well over half of the global economy. "Twenty-seven members of the European Union, including France, Germany, Italy — as well as the United Kingdom, Canada, Japan, Australia, New Zealand, and many others — to amplify the joint impact of our response."
In this country, Jacinda Ardern has pointed to travel bans, export controls, diplomatic measures like calling in Russia's ambassador as measures within New Zealand's toolkit that "we are willing to use".
It is a challenging time. Forecasts are for a rise in gas and energy prices and other commodities. Stock markets are roiling.
The Ukrainian economy suffered a severe downturn in 2015, but by 2018 it was growing rapidly and reached almost 80 per cent of its size before it was slammed by the global financial crisis in 2008. The country is extremely rich and has mineral resources in high concentrations and close to each other.
There are abundant reserves of coal, iron ore, natural gas, manganese, salt, oil, graphite, sulphur, kaolin, titanium, nickel, magnesium, timber, and mercury. Invest Ukraine boasts, for instance, that the country is the world's 7th largest for iron extraction, 6th for titanium extraction and 13th in the world for power plant coal extraction. Importantly, it holds 10th place for uranium extraction.
So there is a resource imperative as well as a geostrategic play.
Geopolitical tension has a tendency to spread.
The sanctions will be disruptive and upset global supply chains which are already under pressure.
Diplomacy has been tried before with earlier limited sanctions. But hitting Russia's elite financially might just work.
Let's hope so.
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