Capital Flight for Your Right to Party

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Petersburgers queue at a money exchange point in the downtown as the euro again rises in value against the ruble, August 22, 2017. Photo by the Russian Reader

Half the Kingdom for an Offshore
Since the early 1990s, Russians have exported as much money as is left in the country 
Arnold Khachaturov
Novaya Gazeta
August 24, 2017

Research into the scale of the transfer of money from Russia to preferential tax jurisdictions has confirmed the darkest fears of economists and politicians. The offshore capital of Russian companies amounts to 62 trillion rubles [approx. 888 billion euros], which is comparable to 72% of Russia’s annual GDP and three times larger than the country’s gold and foreign exchange reserves. A handful of hyper-wealthy Russians and major companies have deposited in accounts in Panama (read our special investigation “Offshores: An Autopsy”), Cyprus, and other offshore zones about the same amount of money as the rest of Russia’s populace has left at home. Or, to invoke another comparison, the elites have exported the monetary equivalent of the entire Russian economy during the mid-2000s.

You won’t find this information in the official statistics, of course. These are the calculations reached by three of the world’s leading specialists on inequality—Thomas Piketty, Gabriel Zucman, and Filip Novokmet. (Piketty and Novokmet work at the Paris School of Economics, while Zucman works at UC Berkeley and the National Bureau of Economic Research.) The economists have authored a report entitled From Soviets to Oligarchs: Inequality and Property in Russia, 1905–2016. The report has been published by the NBER, a private research organization based in Cambridge, Massachusetts.

Piketty and his colleagues most often assemble and analyze globe-spanning data sets, but this time they have written a detailed article on a single country. It deals with a particular trajectory in Russia’s progress after the Soviet Union’s collapse: the economy has been sent offshore, and the income gap between the wealthy and the poor has reached critical levels not typical either of the developed countries nor of other post-communist regimes. The report’s authors see this as an example of an extreme form of oligarchic capitalism, which confirms their central hypothesis that a high level of inequality is incompatible a country’s sustainable development.

Although Piketty’s methodology has been constantly criticized due to the insufficient reliability of his data (the use of official Soviet statistics provokes the biggest questions in this instance), the conclusions reached by the world’s biggest star in academic economics and author of the international bestseller Capital in the Twenty-First Century cannot be ignored.

In any country in the world, the major capitalists are engaged in devising different ways to minimize tax payments: economic incentives function the same everywhere. In his previous works, Zucman calculated there is $7.6 trillion tucked away in the world’s offshore zones. In 2014, according to Oxfam, the fifty biggest US companies kept $1.4 trillion in tax havens.

In relative terms, however, this is only 8% of the US economy. The European elites keep approximately the same percentage of their wealth abroad. Returning these assets to their original jurisdictions and adding them to the tax base would certainly be a powerful impetus in the fight against inequality, but the quality of life of the average American or European would probably not change too drastically.

Can the same be said of Russia? Offshores have played a fundamentally different role here.

Due to corruption and the lack of legal protections for business, the Russian economy has been deprived not just of a small part of corporate super-profits, but of almost half of its potential assets. The failure of the deoffshorization campaign has shown the problem in Russia lies much deeper than in western countries. Russian businessmen are trying not so much to evade the practically preferential income tax rate of 13%; on the contrary, in other jurisdictions they are willing to pay twice as much so as not face the Russian tax inspectorate and the Russian courts.

Even if we ignore the origins of the offshore fortunes of the Russian rich, the possible public gain from returning these funds to Russia appears extremely significant. The most conservative estimates predict 400 to 500 billion rubles in additional tax revenues for the budget annually. This was the same amount the federal government spent on healthcare in 2016.

If at least part of this money were invested in the Russian economy, the effect could be much stronger. For example, the Stolypin Club’s strategy argues that, in order to grow, the Russian economy lacks 1.5 trillion rubles annually in the form of business loans. Economist Mikhail Dmitriev proposes allocating the same amount to finance infrastructure projects.

These are conversations in a vacuum, however. Having made their fortunes both in the private sector and government service, wealthy Russians imagine Russia’s “national interests” quite differently.

Translated by the Russian Reader

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This paper combines national accounts, survey, wealth and fiscal data (including recently released tax data on high-income taxpayers) in order to provide consistent series on the accumulation and distribution of income and wealth in Russia from the Soviet period until the present day. We find that official survey-based measures vastly underestimate the rise of inequality since 1990. According to our benchmark estimates, top income shares are now similar to (or higher than) the levels observed in the United States. We also find that inequality has increased substantially more in Russia than in China and other ex-communist countries in Eastern Europe. We relate this finding to the specific transition strategy followed in Russia. According to our benchmark estimates, the wealth held offshore by rich Russians is about three times larger than official net foreign reserves, and is comparable in magnitude to total household financial assets held in Russia.
Abstract to Filip Novokmet, Thomas Piketty & Gabriel Zucman, From Soviets to Oligarchs: Inequality and Property in Russia, 1905-2016, NBER Working Paper No. 23712, August 2017

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Fruits and Vegetables

“Fruits Vegetables”

Anyone who blames the US Foreign Service and its 755 staffers, most of them Russian nationals, who even as I write this are either being removed from their posts and sent back to the States, or (the vast majority) summarily fired without cause from their jobs at the US embassy in Moscow and the US consulates in Petersburg, Yekaterinburg, and Vladivostok, for the earth-crushing “visa crisis” now “unfairly affecting ordinary Russians,” should actually try and figure out what is going on and who is to blame for the so-called crisis before writing yet another wildly misinformed Facebook or Telegram post about how it’s all the fault of Donald Trump, the State Department, and the obtuse staffers in the visa departments at the US embassy and consulates in Russia.

Vladimir Putin, President of the Russian Federation, is to blame for the “crisis,” because it was he who ordered the summary dismissal or removal of 755 embassy and consulate personnel by September 1, 2017.

He knew quite well his order would, among other things, make it difficult for the US embassies and consulates to process visa requests at the pace required by all those “ordinary Russians” and to do this in the big cities where they either live or live near.

But I have seen hardly any mention of Putin’s role in the affair, especially in the tumultuous fountain of collective wisdom known as Facebook, where yet another festival of free-floating anti-Americanism has erupted.

President Putin, if he actually read Facebook, would be pleased to see what some of his countrymen have been writing, because he would be witnessing the wild flowering of the anti-Americanism he has been carefully planting in place of communism as the country’s ruling ideology over the last eighteen years.

I admit he has been going about it in a way that sometimes suggested he was, instead, “fostering better relations” with the US, but nobody who has actually been following the vicissitudes of his regime and his actual moves and key policy statements would have been fooled by that transparent ruse.

But enough of Putin. He’s a super villain and can thus be excused for doing mean, hurtful things to hundreds of people he has never met. That’s his job.

What about his virtual countrymen, who for the last several days have been writing lots of mean, hurtful, and stupid things about hundreds of people, most of whom they have never met, most of them on the verge of losing jobs some of them have held for one or two decades (the Russians) or being uprooted again and sent to another posting after getting settled in Russia (the actual US diplomats)?

What have they done to deserve your wrath?

Nothing.

Which means, at least, that the minimum of solidarity you could have shown them as they go through something that will cause many of them and their family members a great deal of anguish, to put it mildly, was to think harder for a few minutes, find out what was really going on, and figure out who was really to blame for the problem, instead of once again taking an absolutely useless but “emotionally satisfying” punch at the Great Satan, as if you were taking your cues from Putin himself or the late Ayatollah Khomeini, Allah bless his soul.

I realize what I’ve written will be nearly inscrutable to people who have reacted this way. They just want their visas—and they want them now.

So I’ll leave it at this. Now matter how many times you may have been to the US and how much time you’ve spent there, you’ve demonstrated to me you’re not exactly friends of my country.

At the same time, you’ve shown you feel no solidarity for your own real countrymen, who are losing their jobs because a whimsical tyrant and his clique of friends have decided to rule Russia for as long as they can or until they drain it dry, whichever comes first.

Is the US State Department and its Russian national employees to blame for that state of affairs, too?

No.

So, at very least, you also have a very odd, contemptuous attitude toward your own countrymen and your own country.

Hence your signal inability to blame the man who actually caused the “crisis” for causing it.

Not to mention he scares you to death, so it’s always wiser to blame someone else for his regime’s excesses. It’s a lot safer to verbally roast the State Department, Kirill Serebrennikov, Kirill Serebrennikov’s accountant, and so on, for the “stupid mistakes” they made.

Anyone smarter than they are wouldn’t have done the stupid things they did, and we know you’re all much smarter than the State Department, Kirill Serebrennikov, his accountant, and all the other, now nearly countless victims of the eighteen-year-old Putinist tyranny. TRR

Photo by the Russian Reader