Guest post by Menevis Cilizoglu and Chelsea Estancona
More than 1,000 individuals and entities have now been targeted with sanctions since Russia’s invasion of Ukraine, including more than 50 oligarchs close to Putin and their families. These measures include the freezing of assets in international banks, seizure of yachts, private jets, and luxury real estate, and travel bans. Western policymakers hope that targeting a wide network of Russian political and economic elites, including oil executives, steel tycoons, media moguls and high-level intelligence officers will isolate Putin and pressure him to reverse course. The million-dollar question is, can these targeted measures actually hurt Russian oligarchs, let alone pressure Putin?
Sanctions are the foremost policy tool available to Western leaders short of entering the war alongside Ukraine. However, sanctions on individuals, especially asset freezes, are only effective when there is complete transparency over where the assets are. The sheer amount of assets that are held anonymously or concealed through hard-to-trace shell and front companies present significant challenges for freezing assets as a coercive measure. It is estimated that over $1.3 trillion of assets from Russia are held in offshore accounts. As long as the assets of oligarchs remain untouched, sanctions cannot hurt them.
One interesting example of how Russian oligarchs creatively use offshore financial services in circumventing economic sanctions was publicized in a US Senate report in July 2020. The report revealed how Russian oligarchs used transactions involving high-value art to evade US sanctions imposed in response to Russia’s annexation of Crimea. Specifically, the report traced over $91 million of purchases of high-value art to anonymous offshore shell companies linked to sanctioned Russian oligarchs, which significantly undermined US sanctioning efforts. This is just one example of how key Russian actors conceal their wealth by using offshore financial services that hinder the West’s ability to effectively levy sanctions. In a working paper, we systematically explore how offshore financial centers may limit the West’s ability to effectively sanction “bad behavior.”
Offshore finance is the provision of financial services by banks and other agents to non-residents. While many countries offer such services to non-residents, places such as the Bahamas, the British Virgin Islands, and Aruba have the highest volume of offshore financial transactions. To remain competitive, these providers deregulate, minimize barriers to entry, and reduce monitoring, taxation, and fees. Consumers, meanwhile, seek offshore financial services for a variety of reasons. Their motivation may be purely financial—avoiding high taxes or transaction costs—or they may be hiding the spoils of illicit activity from prying eyes. Regardless of intent, offshore financial centers provide an additional veil of secrecy, allowing individuals or firms to evade international attention while safeguarding their assets.
Data from a series of document leaks culminating with the Pandora papers in October 2021, allow unprecedented access to this offshore world. Crucially, these data contain information about investing entities’ registered addresses and the date of new offshore financial transactions. We paired data on targeted sanctions (the US Treasury’s Specially Designated Nationals and Blocked Persons, or SDN list) with these offshore transactions. Our analysis suggests a catch-22 for countries using targeted sanctions as a policy tool. The addition of new entities to the SDN list can drive those actors to move their assets offshore preemptively. In addition, new offshore transactions involving entities that resemble recent additions to the SDN list involve more middlemen, a trend that suggests a desire to obscure the location of assets with a longer, more complicated paper trail.
Adding individuals—for example, Russian oligarchs—or firms to the sanctions list is necessary for the US and its allies to monitor behavior and enforce sanctions by extracting penalties. However, doing so may drive not-yet-sanctioned but similar entities and individuals into offshore investment, making future asset seizure more difficult. Offshore financial services are an escape route for threatened investors. Their services limit the US’s ability to exact significant financial costs and effect rapid, and vital, policy change.
Menevis Cilizoglu is an Assistant Professor of Political Science at St. Olaf College.
Chelsea Estancona is an Assistant Professor in Political Science at the University of South Carolina.