Sep 6, 2017

Thomas Piketty on the Russian kleptocracy

Alexander Zemlianichenko/AP

Russia is widely thought of as an oligarchy run by President Vladimir Putin and a handful of billionaire cronies whose main accomplishment is looking out for their own financial interests. In a new paper, three economists say forensic evidence bears that out.

Economists Thomas Piketty, Filip Novokmet, and Gabriel Zucman found that income inequality is as great in Russia as the United States, with the top 1% of earners garnering upwards of 25% of national income, well above China and other former communist countries like the Czech Republic.

An offshore treasure trove: Piketty and Zucman have studied rising income and wealth inequality all over the world, and what makes Russia unique is how much cash is held offshore. They estimate that nearly $1 trillion in Russian assets is held outside the country, likely by a handful of oligarchs, most of which doesn't show up in official statistics.

The exploited masses: The Russian experience is in stark contrast to economic development in China, where income inequality has also exploded, but where the typical citizen's wealth and income has risen significantly as well. This research shows that the average private citizen's share of the national wealth has not increased whatsoever since the fall of the Soviet Union, despite the huge transfer of assets from the public sector to the private. The authors write:

What is particularly striking is the very low level of recorded financial assets owned by Russian households. ... In effect, it is as if the privatization of Russian companies did not lead to any significant long-run rise in the value of household financial assets, in spite of the fact that it is now possible to own financial shares in Russian firms, which seems especially paradoxical. In our view, the main explanation for this paradox is the fact that a small subset of Russian households own very substantial [sum of] unrecorded financial assets in offshore centers.

In other words, the uber wealthy in Russia have as much or more assets stashed overseas than the rest of the population combined holds in the country itself.

Why it matters: The Russian system rests on the extraction of natural resources, primarily oil and natural gas, which is sold abroad by oligarchs. They use the proceeds to invest in foreign real estate and other assets, rather than in productive ventures at home that would create jobs and allow the median Russian to share in that prosperity.

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