The writer is head of the centre for financial crime and security studies at the Royal United Services Institute think-tank
When Russian troops massed on Ukraine’s border late last year, western leaders warned that an invasion would bring massive economic consequences for the Kremlin. When these attempts at deterrence failed and the tanks rolled in, the US, UK and EU implemented a campaign of co-ordinated sanctions. 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 colonisation (buying up 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, investment and infrastructure in strategically important countries — such as the Gwadar port in Pakistan. In return, Beijing is building debt dependency and securing commercial advantages such as mining rights.
More insidious than the use of financial sanctions and economic colonisation 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 staged protests. More recently, finance has been increasingly weaponised to achieve this sort of malign ambition.
Over a quarter of a century, Moscow and its proxies have been securing influence in open societies through finance. From simply enjoying the safety offered by western asset markets and property ownership, to funding galleries, universities and football clubs, Russia has bought acceptance, influence and proximity to power. Many of these investments are covert, but some are more blatant, such as donations or loans to political parties. The Kremlin has also funded civil disruption in former Soviet Republics and engaged in anti-democratic activity such as disinformation campaigns. Most recently, these have sought to undermine the effectiveness of US and UK-made Covid vaccines.
Western countries are, on the whole, alive to hard security threats such as terrorism, and are waking up to the threats posed by state-backed information warfare campaigns. But their awareness of the role played by finance is much less developed, making them vulnerable to active financial measures.
In recent months, the UK has finally started to plug the manifold loopholes that have allowed “dirty” money to circulate in the British economy. The government has committed to bring forward new legislation that will further strengthen powers to tackle illicit finance and reduce economic crime.
While addressing criminal activity is clearly welcome, blocking the proceeds of crime is only part of the problem: much harder is identifying the seemingly “clean” money being used for influence purposes. Such investments and donations typically lie beyond the realm of law enforcement and are not on the radar of a financial sector focused on combating money laundering.
Whitehall is apparently aware of the threat: last year’s defence and security review emphasised the danger of hostile states “test[ing] the line between peace and war” via economic statecraft, cyber attacks, disinformation and proxies. Most of these activities typically involve a financial dimension: identifying and challenging these transactions should be a core function of MI5’s team to combat state threats.
However, some key opportunities are being missed. Western democracies represent a significant portion of global finance: London and New York are global financial centres, and the western alliance comprises nine of the 10 largest global economies. But whereas countries such as China harness their economic power to expand their influence, the UK — despite its vaunted post-Brexit trade ambition — has been in retreat. Its financial influence around the world has shrunk as British banks have reduced their global business, while the government has failed to articulate a geoeconomic strategy. This goes against ministers’ ambitions of “planting the British flag on the world stage once again”.
As Russia’s war in Ukraine grinds towards its sixth month, western nations are still relying 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 purposes — just as their adversaries are doing.