(Bangkok Post) - Russia's war in Ukraine may not be going as it had planned, but the worst is still to come. And while Western financial sanctions against Russian institutions and oligarchs have exceeded what some were expecting, they have not targeted the Western-based roots of Russian President Vladimir Putin's regime.
As in many other kleptocratic regimes, Mr Putin's power is based on a deal between an autocrat and oligarchs.
But there is a catch: As the oligarchs' coffers grow, they become more concerned about the autocrat's power to seize their assets or harm their families. They are left with two options. The first is to develop formal and de facto institutions to constrain the autocrat. The second option is to move their assets and their families abroad.
Many Russian oligarchs have availed themselves of the second option, which requires two essential forms of Western assistance. First, the Western banking system needs to provide easy opportunities for them to launder their wealth. London, Switzerland, Luxembourg, Cyprus, Jersey, the Bahamas and many smaller jurisdictions have been meeting this demand for years. European banks also have been enthusiastic participants in the process, and the US financial system has provided all of them with the critical infrastructure.
Second, Western financial capitals need to welcome the oligarchs' families, allowing them to buy property and enrol their children in premier educational institutions. Cities like London and New York have welcomed oligarchs and their kin.
These arrangements have not only helped to sustain autocratic regimes in Russia and elsewhere. They have also engulfed Western financial institutions and economies. Oligarchs' money has transformed financial markets by injecting huge amounts of liquidity, contributing to growing global imbalances. Since 1990, the United States, the United Kingdom, and several other Western countries have run large current-account deficits financed by capital flows from the rest of the world.
Gabriel Zucman of the University of California, Berkeley estimates that at least 8% of global financial wealth (more than US$7.5 trillion) is now held in tax havens -- a figure that does not include the other forms of dark money residing at the heart of the Western financial system. Mr Zucman finds that some 52% of all household wealth in Russia -- and even greater shares in the Gulf states -- is held offshore.
These illicit flows have exacerbated social and political problems around the world. The demand for luxury housing has fuelled disruptive real-estate booms. The resulting housing-price inflation has exacerbated inequality.
The West's accommodation of dark money has accelerated the trend toward more opaque ownership structures and complex trusts aimed at evading taxes, supported by a massive infrastructure of bankers, accountants, and lawyers. When Mr Zucman and his colleagues analysed data to determine the scale of tax evasion in the US, they concluded that the richest 1% of American households hide more than 20% of their income using the tools provided by this nefarious industry.
Similarly, through the Panama Papers and then the Pandora Papers, the International Consortium of Investigative Journalists has demonstrated that offshore tax evasion is much more systemic and widespread than was commonly believed.
These schemes have left a stain on Western democracies and financial institutions. While the world's kleptocrats have amassed vast, illegitimate fortunes -- and while Western elites have gotten in on the action -- Western governments have been unable to generate tax revenues from the rich. As a result, welfare-state institutions and services have been cut back, and inequalities have deepened.
Shocked by Mr Putin's unprovoked war, Western politicians have rushed to support severe trade sanctions, kicking most (but not all) Russian banks out of the Swift financial messaging system and freezing the bulk of the Russian central bank's foreign-exchange holdings. But it will take more courage to clamp down on tax evasion and dark money.
Still, if there was ever a moment to change course, this is it. Western policymakers can rein in a tax-evasion scheme that has been unfairly benefiting the world's most powerful corporations and tycoons for years. In doing so, they can also raise sorely needed tax revenues to support new infrastructure and social programmes at home. If the West wants to see itself on the right side of history, targeting Russia is not enough. It must clean out its own Augean stables. ©2022 Project Syndicate
By Daron Acemoglu
March 11, 2022
Daron Acemoglu, Professor of Economics at MIT, is co-author (with James A Robinson) of 'Why Nations Fail: The Origins of Power, Prosperity and Poverty (Profile, 2019)' and 'The Narrow Corridor: States, Societies, and the Fate of Liberty (Penguin, 2020).'
