The Kremlin Playbook 2

March 11, 2019

“Foreign politicians talk about Russia’s interference in elections and referendums around the world. In fact, the matter is even more serious: Russia interferes in your brains, we change your conscience, and there is nothing you can do about it.”
– Vladislav Surkov, Adviser to Russian president Vladimir Putin1


“Where Russia can work in darkness, Russian agents systematically exploit democratic institutions to acquire influence […] using corruption.”
– U.S. Senator Sheldon Whitehouse (D-RI)2


“Illicit money enables bad people to do the worst of things in this world. Where does it come from, where does it go, and who has it now? [. . .] Getting this right, saves lives. Period. This is a bi-partisan issue. This is both an American and global issue.”
– U.S. Senator Mike Crapo (R-ID)3

Introduction



The Kremlin has developed a pattern of malign influence across Europe. It does so through the cultivation of “an opaque network of patronage across the region that it uses to influence and direct decision-making.” 4 This network of political and economic connections—an “unvirtuous” cycle of influence—thrives on corruption and the exploitation of governance gaps in key markets and institutions. Ultimately, the aim is to weaken and destroy democratic systems from within.

There has been a visible political awakening to the national security threat posed by this widespread and insidious Russian malign influence since 2016. From the Countering America’s Adversaries Through Sanctions Act of 2017 to strengthened anti-money laundering rules in the European Union, the transatlantic community has taken some steps to address this threat. But to truly eradicate this threat, Western democracies must acknowledge their enablement of malign economic influence and uproot it from their financial systems.



Key Definitions

Enabler: One that enables another to achieve an end. Especially: one who enables another to persist in self-destructive behavior [. . .] by providing excuses or by making it possible to avoid the consequences of such behavior.5

Illicit financial flows: The World Bank defines illicit financial flows as “cross-border movement of capital associated with illegal activity or more explicitly, money that is illegally earned, transferred, or used that crosses borders.” This involves three main dynamics: (1) “the acts themselves are illegal (e.g., corruption, tax evasion)”; (2) “the funds are the results of illegal acts (e.g., smuggling and trafficking [. . .])”; (3) “the funds are used for illegal purposes (e.g., financing of organized crime).”6

Money Laundering: Interpol defines money laundering as “any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources.7



The Enabling Ecosystem



Enablers of Russian malign influence allow the Kremlin to achieve its end and avoid some of the consequences of its behavior. By aiding and abetting Russia’s malign influence, enablers assist the Kremlin in self-destructive behavior that siphons funds offshore (often in or through Europe) and depletes the Russian tax base at a time of dire economic conditions. Crucially, by allowing Russian economic influence to cycle through their systems, enablers actively participate in the weakening and discrediting of their own democratic structures.



Key features of the enablers:

  • Open economies with developed financial and banking systems that are part of the core European financial infrastructure.
  • Sophisticated, permissive, at times opaque business and legal environments with regard to company law, taxation, and incorporation.
  • Highly developed corporate service provider sectors (lawyers, accountants, incorporation agents, etc.) support complex financial schemes and company structures.
  • Highly developed corporate service provider sectors (lawyers, accountants, incorporation agents, etc.) support complex financial schemes and company structures.
  • Powerful national economic players with ties to Russia who provide Russian-owned companies with broad access to the European markets through mergers and acquisitions.

These key features coupled with the concentration of financial and corporate services provider industries and activities, and energy ties to Russia, Italy, Austria, and the Netherlands have become enabling hubs for Russian economic influence.


The Illicit Finance/National Security Nexus



When enablers facilitate or aid illicit financial flows, they jeopardize the integrity of open market economies and, ultimately, create a threat to national security.8 State-owned enterprises and large companies play an important role in the furtherance of Russian malign economic influence because of their dominant positions, the large financial flows they oversee, and their ability to distort market competition.

“It was major deficiencies in controls and governance that made it possible to use Danske Bank’s branch in Estonia for criminal activities such as money laundering.”
–Danske Bank9

Every year, billions in investment and profits move in and out of European countries through the enablers’ financial systems. These financial systems offer specific tools that are designed to obscure the origins of certain investments and conceal illicit financing. It has become almost impossible to disentangle Russian capital outflows from other financial flows, including for the most capable oversight bodies in the world.10

Russian private holdings abroad total an estimated $1 trillion.11 These significant capital flows create a potential dependence on illicit funds in which the enabler and the Kremlin both benefit from and are dependent on the systems that help these flows transit in and out of Russia and Europe. Illicit finance, particularly money laundering, can damage national security by corrupting government officials who can alter policies, impeding the free flow of capital, reducing the efficacy of sanctions regimes, and distorting entire markets and industries.12

Tactics that remove profits from the reach of tax authorities (and thus state revenue) are not necessarily illegal. Yet in the case of malign influence, tactics are designed to operate just below the threshold of illegality within a “financial gray zone.” Industries like corporate service providers (CSPs) assist in this task by feeding the enabling ecosystem with complex, cross-border transactions and company constructions.

These types of complex ecosystems have grown exponentially in the past three decades, aided by rapid globalization and by Russia’s deep integration within the global financial system.


Channels of Influence



Though capital inflows in Central and Eastern Europe have grown substantially since 2005, it is in several Western European countries that Russian companies have retained most of their assets and funds. In Italy, Austria, and the Netherlands alone, Russian foreign direct investment (FDI) stocks have expanded from just €5.4 billion in 2006 to close to €160 billion at the end of 2017. In the Netherlands, Russian companies’ assets have jumped from €13.2 billion in 2007 to around €96 billion in 2017, including through the use of letterbox companies13 for tax optimization purposes. Russian assets thus represented roughly 13 percent of Dutch nominal GDP in 2017, despite the fact that only around 20,000 people work for Russian-owned companies in the Netherlands.

The sheer size of financial flows and FDI exposes the Kremlin’s reliance on the enablers’ financial networks to invest and send money across Europe and abroad to offshore centers.

Enablers also present some level of corporatism. The proximity of national economic champions (majors) to political power provides a sort of covert guarantee of support and protection from the enabler’s government for Russian strategic projects in which its national champions are involved. These business-political networks can ensure the country’s strategic policies are in line with these economic projects, and by extension, with Russian objectives.

An excellent example of this is the Austrian energy company OMV. In addition to its long-time strategic partnership with Gazprom, OMV enjoys close ties with the Austrian People’s Party (OVP), the leading party in the current government led by Chancellor Sebastian Kurz. Several high-level politicians, including successive Austrian chancellors and foreign ministers, have publicly supported Russian gas pipeline projects, including Nord Stream 2 most recently. Austria has opposed the application of EU market rules on the offshore section of the Nord Stream 2 pipeline and is likely one of the member states that refused to give the Commission a mandate to negotiate with Gazprom.14

One particularly attractive feature of enablers like Austria or OMV for Russian malign influence is their deep connections throughout the European Union, particularly through companies that have an extensive network of branches and subsidiaries across Europe.

Enablers sometimes help obscure the Russian origin of political malign influence through the use of high-level political figures who have been engaged in the amplification of Russian soft power. For example, the Dialogue of Civilizations (DOC) is a research institute headquartered in Berlin (with an office in Vienna) and led by former KGB member and Russian Railroads head Vladimir Yakunin. Under U.S. sanctions, though not European sanctions, Yakunin was granted a six-month German visa in 2018.15 Walter Schwimmer, a conservative Austrian politician and former secretary general of the Council of Europe, was a co-founder of the institute.16 Every year the Institute organizes the Rhodes Forum in Greece, which has been described as a “Kremlin propaganda-fest and a hotbed of Russian nationalists” by some news outlets.17

Finally, an underappreciated element of Russian malign influence is the exposure of European businesses to the Russian market (particularly in enabling countries), and their long-standing business ties with Russian companies. Manufacturing giants like Pirelli, Fiat, and Unilever export a large share of their production to Russia. Some of the largest Austrian banks and insurers generate the bulk of their profits in Russia. The international arm of Raiffeisen Bank, the second-largest Austrian banking group, made 78 percent of its corporate profits in Russia in 2014.18 Outbound investments from the Kremlin’s enablers are a catalyst for the co-mingling of public and private interests, as companies invested in Russia with access to high-level officials sometimes attempt to soften their governments’ approach to Russia.19


Adaptation of Influence



The Czech Republic, Montenegro, and Romania are potent examples of the adaptability of Russian malign influence in countries that have maintained their Euro-Atlantic orientation.

Montenegro has significant exposure to Russian economic influence, particularly in the real estate sector: an estimated 70,000 properties belong to Russian owners, and Russian businessmen have been acquiring valuable hotels in attractive locations since 2006.20 Montenegro also has a strong cultural link with the Kremlin through the Serbian Orthodox Church.

The Czech Republic is both a recipient (through its nuclear power and financial sector) and a conduit for Russian economic influence—a hybrid model of sorts. It has seen large investments in the engineering sector. An example of this is the acquisition of one of the largest suppliers of heavy vehicle parts in nuclear energy, Pilsen Toll, by a Russian state-owned bank. At the same time, the Czech banking sector has been used to transit funds through to offshore accounts.21

Romania has the weakest political and economic ties to Russia of all the case study countries, but Russian malign influence has still entered the country’s bloodstream through the exploitation of institutional, political, and societal weaknesses—particularly corruption. For example, non-transparent privatizations have opened the door to Russian investors, particularly in the metallurgy sector.22

The common thread in each of these countries lies in the vulnerabilities created by institutional and governance gaps, especially their lax approaches to tackling corruption and state capture. The Kremlin exploits these weaknesses, tailoring societally divisive strategies through a variety of malign instruments.


Countering Russian Economic Influence



Of all the nations currently under Western sanctions, Russia is one of the most integrated into the U.S. financial system. The Kremlin has repeatedly used this integration to exploit institutional weaknesses from within, through the corrosive effect of corruption and illicit financial flows.

“In order to hide Ukraine payments from United States authorities, […] MANAFORT and GATES laundered the money through scores of United States and foreign corporations, partnerships, and bank accounts.”
– Indictment of Paul J. Manafort, Jr. and Richard W. Gates III23

Faced with complex schemes that are designed to cross many borders and operate below legal thresholds, U.S. and European law enforcement and financial oversight bodies struggle to get a complete picture. When one jurisdiction attempts to improve standards, malign actors redirect their networks to other areas in a never-ending game of whack-a-mole. Illicit finance reaps the benefits of a globalized financial network, while law enforcement and national security actors remain bound by national rules and borders.

“[…] the anti-money laundering regime must constantly innovate to keep up with the bad actors that continuously update their methods of accessing the U.S. financial system.”
– U.S. Senator Mike Crapo (R-ID)24

Russian malign economic influence and illicit finance operate in a financial gray zone that is a clear and present danger to U.S. national security as well as transatlantic security. Simply put, if we are at war and illicit financing is a critical battle space, we must re-conceptualize our deterrence and offensive tools. To detect and deter the adversary, we must model the integration of intelligence, surveillance, and reconnaissance that has been used in military arenas. By taking this approach to the financial gray zone, we can improve our ability to connect the dots of Russian malign economic influence. It is time for the United States and Europe to initiate a massive transparency and accountability offensive at home, focusing first and foremost on enablers.

Key Recommendations:

  • Create a transatlantic Intelligence, Surveillance, and Reconnaissance (ISR) system for financial flows that would provide an integrated database and a common operating picture for national security, financial intelligence, and law enforcement actors.
    • The U.S. Treasury Department’s Office of Terrorism and Financial Intelligence would manage this system in cooperation with the Treasury’s Financial Crimes Enforcement Network (FinCEN), and the Department of Justice’s National Security and Asset Recovery Divisions.
  • Elevate money laundering as a priority threat to national security within the Treasury and Justice Departments and encourage European allies to do so in their national jurisdictions.
  • Reform and considerably strengthen the European Union’s AML/Counter-Terrorism Financing system by ensuring much stronger coordination between the European Union and national banking and financial supervisors and the European Union and national security agencies.25
  • The EU should strengthen its reporting and regulatory requirements for ultimate beneficial ownership (UBO) by closing disclosure loopholes in a number of tax-treaty jurisdiction.
    • The United States should work with European partners to create international standards for UBO disclosure, limiting the use of nominee directors and standardizing disclosure requirements for foundations and trusts.
  • Improve the tracking of tax evasion and enhance asset recovery efforts across borders. Tracing and seizing stolen assets and proceeds of crime remains a crucial part of tackling transnational organized crime, money laundering, and corruption.
  • Elevate the risk level of corporate service providers in illicit finance and money laundering activities for both the United States and the European Union.
  • Address the key risks and loopholes allowing the evasion of sanctions. Remove bilateral exemptions and loopholes that have exempted grandfathered deals from the sanctions regime, particularly in the European Union. Joint projects between European and Russian companies have also created potential gaps in the sanctions regime.
  • Harness the potential of the Global Magnitsky Act, particularly Section 3(a)(3) and (4), in targeting human rights violators and kleptocrats, as well as nominees for and people who assist these perpetrators.26
    • Encourage European allies to speed up the development and adoption of an EU-wide Magnitsky Act.
  • The European Union must end the use of the so-called golden visas, and the United States must increase the transparency of investment visas.

Transparency rebuilds confidence in democratic institutions. Enforcement of our rule of law system guarantees trust in the system. In this fight, democracies win; if “democracy dies in darkness,”27 then in the light it will thrive.


Download the full report

Find the key takeaways and recommendations here: The Kremlin Playbook 2: The Enablers


To learn more about Russia’s evolving pattern of malign influence in Europe, check out CSIS’s groundbreaking 2016 study: The Kremlin Playbook: Understanding Russian Influence in Central and Eastern Europe.


About the Authors



Heather A. Conley

Senior Vice President for Europe, Eurasia, and the Arctic; and Director, Europe Program | CSIS

Heather A. Conley is senior vice president for Europe, Eurasia, and the Arctic and director of the Europe Program at CSIS. Prior to joining CSIS as a senior fellow and director for Europe in 2009, Conley served four years as executive director of the Office of the Chairman of the Board at the American National Red Cross. From 2001 to 2005, she was deputy assistant secretary of state in the Bureau of European and Eurasian Affairs with responsibilities for U.S. bilateral relations with the countries of Northern and Central Europe. From 1994 to 2001, she was a senior associate with an international consulting firm led by former U.S. deputy secretary of state Richard L. Armitage. Ms. Conley began her career in the Bureau of Political-Military Affairs at the U.S. Department of State. She was selected to serve as special assistant to the coordinator of U.S. assistance to the newly independent states of the former Soviet Union, and she has received two State Department Meritorious Honor Awards. Ms. Conley is frequently featured as a foreign policy analyst and Europe expert on CNN, MSNBC, BBC, NPR, and PBS, among other prominent media outlets. She received her B.A. in international studies from West Virginia Wesleyan College and her M.A. in international relations from the Johns Hopkins University School of Advanced International Studies (SAIS).

Full Bio Here


Donatienne Ruy

Research Associate, Europe Program | CSIS

Donatienne Ruy is a research associate with the CSIS Europe Program, where she provides research and program support on issues ranging from political developments in the European Union, the migration crisis, Russian influence in Europe, and transatlantic relations. She previously worked at the World Bank on disaster risk financing in francophone African countries, drafting situation reports on natural disaster preparedness in Senegal and Madagascar. Ms. Ruy received her B.A. in political science from the Université Libre de Bruxelles in Belgium and her M.A. in global affairs from the Jackson Institute for Global Affairs at Yale University.

Full Bio Here


Ruslan Stefanov

Director, Economic Program | Center for the Study of Democracy

Ruslan Stefanov is the Director of the Center for the Study of Democracy’s Economic Program. He co-directed and co-authored The Kremlin Playbook and is the knowledge and development coordinator of the Southeast European Leadership for Development and Integrity (SELDI.net), the largest regional civil society anticorruption network in the Eastern Neighborhood. Mr. Stefanov is also a member of the Free Enterprise and Democracy Network and the Development Institute of the Center for International Private Enterprise in Washington, D.C. He holds a Master’s degree in Economics and Business Administration from the University of National and World Economy in Sofia, Bulgaria.

Full Bio Here


Martin Vladimirov

Analyst, Economic Program | Center for the Study of Democracy

Martin Vladimirov is an analyst at the Center for the Study of Democracy’s Economic Program. He focuses on energy security in Europe and the Balkans, the energy transition, alternative energy technologies, and the geopolitical dimensions of energy and financial markets. Mr. Vladimirov has worked as an energy analyst for The Oil and Gas Year, which produces in-depth overviews of the energy sector and major oil and gas producers around the world. He co-authored the 2016 study The Kremlin Playbook. He holds a Master’s degree in International Affairs from the School of Advanced International Studies at Johns Hopkins University.

Full Bio Here

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