Kleptocracy corrodes democracy and benefits autocrats, argues Raymond Baker in Invisible Millions. Joe Biden should be taking notes.
It has become clear: sanctions against Russia are not living up to expectations. Predictions of disaster for Vladimir Putin have failed to materialize. A year ago, many experts in Washington, far removed from actual sanctions specialists, believed that these unprecedented sanctions would push Russia into a deep recession, trigger bank runs, and cripple industries like aviation, computing, and food production. The assumption was that supply chains would break down, planes would be grounded, software updates would cease, and ovens would stop working. Yet, none of this has come to pass. The reality today paints a troubling picture. Russia has proven adept at evading sanctions, primarily by exploiting an overlooked vulnerability in Western policies: financial secrecy.
A common scenario illustrates how Russia sidesteps sanctions. When a Russian company faces a Western bank refusing its business due to sanctions, it does not give up. Instead, it can easily create a series of anonymous shell companies, layering them like Russian dolls, to conceal the original Russian entity. A few phone calls to lawyers and corporate agents, and the company can quickly establish a complex network of offshore entities, often using financial havens such as the Cayman Islands or the British Virgin Islands. These regions, remnants of the British Empire, have long been hotspots for financial crimes, and the resulting shell companies are virtually undetectable as being linked to Russia.
This process has been used by global kleptocrats for decades, allowing illicit financial flows to remain hidden. Despite the West’s efforts, Russia’s manipulation of these financial loopholes has proven more successful than anticipated. The lack of proper scrutiny over offshore financial systems has allowed the country to sidestep the sanctions meant to punish it. This evasive tactic has allowed Putin’s regime to maintain its grip on power while circumventing the economic pressures that were supposed to weaken it.
Raymond Baker, in his book Invisible Millions, argues that this financial secrecy system, which enables kleptocracy, corrodes democratic institutions and benefits autocratic regimes like Russia. This is a lesson that the U.S. and its allies have yet to learn fully. Biden’s administration, for all its commitment to sanctioning Russia, has largely ignored the deep-seated issue of financial secrecy that makes these sanctions ineffective. Until this system is properly addressed, Russia will continue to find ways to bypass sanctions and sustain its economy.
While sanctions can certainly cause disruptions, they are only effective if they are properly enforced and if they target the heart of an autocratic regime’s financial network. Without tackling the secrecy that enables global kleptocracy, sanctions are doomed to fail. If the West is serious about undermining Russia’s ability to continue its aggressive actions, it must look beyond traditional sanctions and address the opaque financial systems that enable Putin and other autocrats to hide their wealth.
This failure to fully address the role of financial secrecy is not just a Russian issue; it is a global one. Kleptocrats from many countries, not just Russia, use these same methods to conceal their illicit wealth and evade international regulations. The U.S. and its allies have a responsibility to reform the global financial system to make it more transparent and accountable. Until this is done, the effectiveness of sanctions will remain limited, and the global struggle against autocracy will continue to be undermined by the very systems that are supposed to prevent it.
The situation with Russia serves as a stark warning to the West: economic sanctions alone will not bring about the desired change in autocratic regimes. The financial networks that enable these regimes must be dismantled. Until that happens, sanctions will remain an incomplete tool, one that allows authoritarian governments to survive despite their international isolation.
