The City and Russia’s billions

Why is London so popular with oligarchs?

Because, as Boris Berezovsky's lawyer once happily explained to The Sunday Times, no other city affords them the same combination of "accessibility, services, security and lifestyle". In the chaotic years after the fall of communism, a combination of these four factors turned London into the home-away-from-home of choice for the powerful and now fantastically wealthy figures who had seized control of Russia's economy particularly the energy and metals sectors.

Just a few hours flying time from Moscow, there's an army of international bankers, lawyers and accountants on hand to help manage, expand, legitimise and protect their business empires. And then of course there are all the restaurants, football clubs, art auctions, high-quality schools.

How has this affected London?

It's been a boon for London's financial advisers, estate agents, restaurateurs, security guards, jewellers, private schools,and many more besides. No Londoners, however, have welcomed the oligarchs with as much enthusiasm as its lawyers. An estimated 60% of the commercial litigation cases involve parties from the former Soviet Union racking up hundreds of millions of pounds in fees.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

At the same time, the influx of Russian wealth has contributed to surging house prices in central London, as foreigners fearful of political and economic instability at home (be it Russia, Ukraine, southern Europe, the Middle East or south Asia) buy into what they see as the "safe haven" of London bricks and mortar. Russians make up only about 4% of buyers in prime central London, and according to Savills they spend an average of £6.3m on their homes.

However, the Ukraine crisis has put Russian and Ukrainian investment in London in the spotlight due to accusations that Britain is more interested in protecting London's attractiveness to wealthy Russians than in standing up to Russia over Ukraine.

Who's doing the accusing?

US politicians were disturbed last week by leaked briefing notes for David Cameron which proposed that the UK should not "close London's financial centre to Russians".

The issue was then blown up by an intemperate op-ed piece in The New York Times which rapidly went viral in the political and financial worlds accusing London of "betraying the US to protect the City of London's hold on dirty Russian money".

The piece's author, Ben Judah, says London has become a city of amoral cynics "where oligarchs are celebrated and migrants are exploited but that pretends to be a multicultural utopia". London's core business is now "laundering oligarchs' dirty billions, laundering their dirty reputations".

Is he right?

As MoneyWeek readers will be well aware, it is unarguably true that financial services are crucial to the UK economy, bringing in £80bn to London alone each year. And no doubt there is a strong case for London to become less of an international outlier in terms of taxing foreign property buyers (see below).

However, Judah does himself no favours by embroidering his piece with some bizarre inaccuracies. For example, he writes that the gleaming Shard at London Bridge "encapsulates the new hierarchy of the city. On the top floors, ultra high net worth individuals' entertain escorts in luxury apartments. By day, on floors below, investment bankers trade incomprehensible derivatives." In fact, of course, the place remains all but empty.

Judah also repeats the claim that London is being hollowed out; that "the townhouses in the capital's poshest districts are empty: they have been sold to Russian oligarchs and Qatari princes".

So what's the truth?

As Janan Ganesh put it in the FT: "Against this kind of hysteria, only numbers will do." London does have more ultra-rich individuals (with assets of more than $30m in addition to their main home) than any other city, but there are only 4,224 of them. Oligarchs are not to blame for soaring house prices, but decades of illiberal planning laws and outdated, regressive property taxes.

Nor is London being hollowed out: its population rose from 7.3m to 8.2m in the decade to 2011. It fell a fraction in Kensington and Chelsea, but everywhere else saw a rise, including an astonishing 21% in Westminster. Right now, London is a city of endless construction, of falling crime and improving schools, and is a magnet to the young of Europe and beyond.

Yes, of course, there is a debate to be had about inequality and the impact of the super-rich, but right now London is a great success story and that is thanks to globalisation, notin spite of it.

What could be done?

Globalisation has been good for London overall, but owners of expensive property should be making a much bigger contribution to its coffers in terms of property taxes, argued Ben Rogers recently in the FT.

Yes, London has a housing problem, but the solution will come from freeing up planning, incentivising new development, and building more densely in the suburbs not from "worrying too much about the declining proportion of affordable homes within walking distance of Harrods".

In terms of concrete changes, argues The Observer, London needs a mansion tax, increased council tax for empty properties, restrictions of the proportion of foreign buyers per development, compulsory purchase orders, plus rent controls and the licensing of landlords.