How Offshore Finance Sank Western Soft Power

Kleptocratic Capital Flight

By Ben Judah

This piece was originally published by The American Interest.

For a long time now, the West has lived off its Cold War reputation in Eastern Europe: looked to as a beacon of democracy or the defender of the dissident underground. But this reputation is now spent, thanks to Western complicity in offshore finance’s pillage of post-Soviet states.

When most people think about offshore finance, they don’t think about the future of Europe: They think about palm trees, about shell corporations headquartered in a P.O. Box, and about secret Swiss bank accounts. But this is not what people in Eastern Europe think.

When Russians, Ukrainian, Azerbaijanis—I will spare the reader from a roll call of the 15 fraternal republics—when these countries think offshore finance, they think about their stolen futures. But isn’t that a good thing? Won’t that make them realize that West is best?

Not so fast. First, a few figures. The offshore economy has grown into a gargantuan parallel financial system. There may be more than $20 trillion hidden in more than fifty tax havens. The colossal treasure hidden in British tax havens alone is more than $7 trillion. And a disproportionately large share of that money is Eastern European. Take Russia’s missing $211.5 billion:  That’s the conservative estimate for illicit financial flows out of Russia alone between 1994–2011.

The conventional wisdom is that ordinary citizens of these states—feudally ruled, politically pillaged—will become obsessed about corruption. So far, so good: You cannot talk about politics in Russia, Ukraine, Azerbaijan, and the rest without talking about corruption. But beyond this, the conventional wisdom—that the middle classes, the young, or the globally connected will then demand a new, Western-style government—breaks down.

The reason this logic doesn’t hold is that East European corruption fighters are discovering that Western countries and their systems of offshore economies have enabled the colossal theft of their countries’ resources. Bubbling up from beneath the surface of both the Russian opposition and the Ukrainian Maidan is a new sense of disdain for the West.

Imagine you spent the past decade fighting Ukrainian corruption. The model of good governance you looked up to was Britain or Germany. You applied for European Union funds. You were trained by Western foundations and EU funded think-tanks to follow the money stolen by your state. But then you discovered something horrible: the money was flowing right back to the West. Those models of good governance you looked up to turned out to be providing money-laundering services to the very people and institutions stealing your country’s future.

This is what happened to Daria Kaleniuk at Kiev’s Anti-Corruption Action Centre. The director of one Ukraine’s most important NGOs battling corruption spent years investigating how corruption actually works. But the more she learned, the more she viewed both America and the European Union as hypocrites.

Kaleniuk explains:

What we found was that the money stolen in Ukraine was heading into British and European tax havens and hidden using shell companies inside the European Union. This was very uncomfortable to find out. What we felt is the Western elites were being hypocritical to us—preaching anti- corruption but allowing this offshore world to flourish.

Kaleniuk’s outrage is increasingly being felt across Ukraine—and not just in the think-tank world but increasingly in politics as well. Heavily involved in activism during the Maidan protest movement, Ukrainian MP Lesya Orobets is running for Mayor of Kiev on a platform that flirts with nationalist outrage. She is enraged by Western complicity with the offshore black hole into which Ukraine’s national wealth has long disappeared:

What you need to understand is that Western tax havens have resulted in Ukrainian deaths. Take for example the theft of Ukraine’s HIV budget. The national budget for fighting HIV was stolen and hidden in tax havens and in Great Britain. But this has consequences—we are now approaching a 2 percent HIV infection rate in Ukraine, which is near the no-return point of pandemic. This corruption will kill British men too. I hear they come to Ukraine. But they also return home. What will happen if the British do not close down their tax havens? I will be deeply, negatively, impressed.

Talk to any Ukrainian revolutionary and you soon realize that offshore finance is rapidly undermining Western soft power. Take activist blogger and journalist Mustafa Nayem, one of the most charismatic protest leaders in the early stages of the Maidan who first called out the protestors onto the streets. He is exasperated with Western offshore hypocrisy.

Why do they only now investigate the hidden fortunes that were stolen and hidden in Austria and in Switzerland? We told the Europeans and we told their embassies a hundred times this money as stolen and hidden in their countries. And nothing happened. Now that the regime has fallen, they suddenly—in a matter of days—can reveal the stolen money. But why did they not do this before? They are guilty—guilty of leaving us alone with these thieves. They are guilty of allowing them to plunder us.

Behind the scenes, many in the new government feel the same way. But because they are financially dependent on the West when it comes to staving off economic collapse, few American and European diplomats have picked up on what’s really going on. Talking to revolutionary minister Dmytro Bulatov, it comes up quickly enough: “Ukrainian money was stolen and taken to Austria and Switzerland and British tax havens. But we want that money back.”

Ukrainian media have also picked up on this story. The liberal activist station Hromadske has held discussions and even invited a British activist on air to discuss how Western offshore financing works and how to fight back. In the press, pieces linking Ukrainian corruption to Austrian banks and British tax havens have caused the reputations of those nations in particular to plummet.

The Russian opposition is even angrier. Russian oligarchs like to parade their lavish lifestyles in London on Russian television, so the welcome reception they are given by British elites is well known. Because this money is universally believed to be stolen, Britain’s moral authority among Russians has collapsed: Both Downing Street and the Foreign Office are widely mocked, and London is known as “the capital of Russian corruption.”

The charismatic opposition leader Alexey Navalny expresses frustration in private with Western law enforcement and feels that his and his colleagues’ endless petitions to investigate corruption are being ignored.

Navalny aspires to be Russia’s post-Putin President. But what would he do about offshore finance if he were to enter the Kremlin? “My dream,” he once told me, “Would be to bring the money back.” Navalny is exasperated at the scale of stolen Russian money flooding into Western tax havens and European capitals. “How can they be so stupid? Do they really think this is empty anonymous cash? Do they not realize it is stolen money from the Russian budget?”

For a long time now, the West has lived off its Cold War reputation in Eastern Europe: looked to as a beacon of democracy, or the defender of the dissident underground from Moscow to Baku. But this reputation is now spent, thanks to Western complicity in offshore’s pillage of post-Soviet states.

The West has gotten used to enjoying a hero’s reputation amongst Eastern European democrats. But get to know the Moscow opposition or the Maidan and you soon learn that London is now a byword for corruption, and the names of whole European countries—Luxemburg, Cyprus, Switzerland, Andorra, and even the Netherlands—are synonymous with “theft.”

Ben Judah is the author of Fragile Empire: How Russia Fell In And Out Of Love With Vladimir Putin. He is now writing a book about London.

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