September 14, 2018 / 8:26 PM / in a month

COLUMN-Commentary: Was there another target in the Skripal poisoning?

(Steven E. Halliwell was corporate finance head of Central and Eastern Europe for Citibank N.A. and Chief Financial Officer of The U.S.-Russia Investment Fund. The opinions expressed here are his own.)

By Steven E. Halliwell

Sept 14 (Reuters) - The poisoning of former Russian double agent Sergei Skripal and his daughter Yulia has taken yet another dramatic turn. After UK authorities named two Russians – both said to be from the GRU military intelligence service – as suspects in the attack, Vladimir Putin said Wednesday that the pair were civilians, not criminals, and that he hoped they “will turn up themselves and tell everything.”

While Moscow has denied involvement in the Skripal attack, the evidence of Russian complicity seems convincing. The Russian suspects were tracked arriving from Moscow, traveling briefly to Skripal’s home town of Salisbury at the time of the poisoning and returning to Russia within hours. Putin’s latest comments, which became top news on Russian TV, add another dimension to the mystery.

Russian intelligence agencies presumably must have realized that the poison attack in Salisbury would be traced back to Russian actors, given the origin of the toxin and how publicly the assault was executed. On one level, that might have been intended to serve as a warning from Putin to any other spies thinking of changing sides that Moscow could find them anywhere.

But the Russian government may have had a broader target in mind as well.

Those most likely to suffer from the consequences of the poison attack are not the small group of agents like Skripal, but the thousands of rich Russians living in elegant London neighborhoods, sending their children to the best schools, collecting major works of art and traveling the world in style. These Russians are now under increasing pressure from the UK government to explain the source of their wealth. After decades of lax monitoring of inflows into London banks from dodgy companies based in tax havens, Britain recently approved legislation requiring disclosure of “unexplained wealth.” Fraudulent transfers by wealthy Russians are clearly intended as one of the targets.

Although Putin is loath to admit it, Western sanctions and Russia’s anemic economy are putting enormous pressure on the Kremlin. Projected growth has just been revised downward, defense spending has grown, and social welfare costs remain high. Over a trillion dollars is estimated to have left Russia since the collapse of the Soviet Union, much of it since Putin took power in 2000. By angering the UK government and motivating them to crack down on Russian oligarchs, Putin may be hoping that the UK retaliation to the Skripal poisoning could push the expats to repatriate some of that money.

Capital has poured out of Russia during the Putin years for two reasons. One, corrupt businessmen want the comforts and status of life in the West after years of Soviet penury; second, Western countries offer security via a legal system and an independent court system, as well as more reliable banks than those in Russia. Putin could not have stopped the outflow without fomenting a revolt against him.

With so much money outside the country, there is little investible capital available in Russia. Projected economic growth has just been officially revised downward to 1.8 percent in 2018 and 1.3 percent in 2019. (U.S. growth by contrast is about 4 percent this year, and likely to slow to 3 percent in 2019.) Russia’s Central Bank, fearing a freeze on U.S. dollar transfers now being considered in the U.S. Congress, has stopped rebuilding its dwindling foreign currency reserves and is ramping up its purchases of gold.

Putin desperately needs some of that offshore money to come back home. In a March address to the nation, he called for $340 billion in new investment during the rest of his presidential term, of which private businesses should pony up $130 billion. For an economy that has a GDP below $2 trillion, that’s a great deal of money.

But if history is any lesson, the Russian moneyed business class will not cooperate with Putin’s demands. A similar effort a few years ago to bring offshore money back – under the awkward slogan of “de-offshorization” – had only limited success. After the August round of sanctions, Putin offered Russian business another deal – offshore status in various protected domestic enclaves – again to little effect.

If anything, more money is expected to flee Russia. The ruble has weakened and a Russian ministry estimates that capital outflows will more than double, from $18 billion to $41 billion, in 2018.

Putin needs new capital to paper over the failures of the domestic economy. His recent attempts at pension reform stumbled as his popularity took a nosedive and there is little likelihood that U.S. President Donald Trump will be able to provide any relief on sanctions.

Putin should not expect, however, a wave of capital voluntarily coming back to Russia. Newly rich Russians are not a timid lot, having found their wealth by whatever means necessary in a highly corrupt environment.

It is a sign of the depth of the economic crisis growing in Moscow that Putin seems willing to jeopardize his affluent allies, breaking his earlier promise to leave them alone if they stayed out of politics. The Putin regime is not crumbling, but the risk of domestic protests is escalating if inflation rises and pensions are not funded. Faced with serious domestic opposition in the streets, nerve agents will be of little help. (Reporting by Steven E. Halliwell)

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