The author is head of the Center for Financial Crime and Security Studies at the Royal United Services Institute think tank.
When Russian troops massed on the Ukrainian border late last year, Western leaders warned that an invasion would have massive economic consequences for the Kremlin. When these attempts at deterrence failed and the tanks arrived, the US, UK and EU implemented a coordinated sanctions campaign. While many have questioned the execution and effectiveness of this response, it provides a valuable test case for the power of finance as a tool of statecraft.
One of the most obvious examples of how countries use finance in geopolitics is economic colonization (purchase of industries overseas) as deployed by expansionist states for centuries. The British Empire was built on financiers and banks backed by the Royal Navy. More recently, China has used its Belt and Road Initiative to provide loans, investments and infrastructure in strategically important countries, such as the port of Gwadar in Pakistan. In return, Beijing reinforces its reliance on debt and secures trade benefits such as mining rights.
More insidious than the use of financial sanctions and economic colonization is the increasing use of active financial measures by hostile states. The term “active measures” was coined during the Cold War to describe covert and deniable political influence and subversion operations, ranging from disinformation campaigns to organized protests. More recently, finance has been increasingly equipped to achieve this kind of malevolent ambition.
For more than a quarter of a century, Moscow and its proxies have secured their influence in public societies through finance. From simply taking advantage of the security offered by Western asset markets and property ownership to funding galleries, universities and football clubs, Russia has bought the acceptance, influence and proximity to power. Many of these investments are secret, but some are more blatant, such as donations or loans to political parties. The Kremlin has also finance civil unrest in former Soviet republics and engage in anti-democratic activities such as disinformation campaigns. More recently, these have sought to undermine the effectiveness of Covid vaccines made in the US and UK.
Western countries are, on the whole, aware of security threats such as terrorism, and are becoming aware of the threats posed by state-sponsored information warfare campaigns. But their awareness of the role played by finance is much less developed, which makes them vulnerable to active financial measures.
In recent months, the UK has finally begun to close the many loopholes that have allowed ‘dirty’ money to flow through the UK economy. The government has pledged to introduce new legislation that will further strengthen powers to tackle illicit financing and reduce economic crime.
While the fight against criminal activity is clearly welcome, blocking the proceeds of crime is only part of the problem: it is much more difficult to identify apparently “clean” money used for influence. Such investments and donations are usually beyond the realm of law enforcement and not on the radar of a financial industry focused on anti-money laundering.
Whitehall is apparently aware of the threat: last year’s defense and security review highlighted the danger of hostile states[ing] the line between peace and war” via economic policy, cyberattacks, disinformation and proxies. Most of these activities usually involve a financial dimension: identifying and disputing these transactions should be a core function of the MI5 team to fight state threats.
However, some key opportunities are missed. Western democracies account for a significant portion of global finance: London and New York are global financial centers, and the Western alliance includes nine of the world’s 10 largest economies. But as countries like China harness their economic might to expand their influence, the UK – despite its vaunted post-Brexit trade ambition – has backed down. Its financial influence around the world has shrunk as UK banks have reduced their global operations, while the government has failed to articulate a geoeconomic strategy. This runs counter to ministers’ ambitions to ‘replant the British flag on the world stage’.
As Russia’s war in Ukraine nears its sixth month, Western nations are still counting on financial measures as a show of force against the Kremlin. This resolve must now be applied more universally by the UK and its allies for deterrence, just as their adversaries are doing.