Piketty Says Russia Robbed of Bigger Reserves by Capital Flight

  • Inequality, lack of transparency sap reserves, economist says
  • Russia struggling to rebuild holdings after currency crisis

Thomas Piketty.

Photographer: Fred Dufour/AFP/Getty Images

Count Russian reserves as another casualty of income inequality that Thomas Piketty believes is reshaping the world’s biggest economies.

Russia, which is struggling to rebuild holdings depleted during last year’s currency crisis, has missed out on building a bigger stockpile in the past 15 years by failing to create a more transparent financial system to ease inequality and distribute the spoils of a boom in commodities prices, said Piketty, the author of the bestselling “Capital in the 21st Century.” Jailing “a couple of billionaires from time to time” is no way to address the challenge, the French economist said in an interview in Moscow on Thursday.

“In the long term, Russia should have much more reserves, given the level of its trade surplus,” he said. “It’s important to realize that Russia is being stolen money from, by capital flight and by the fact that billionaires and millionaires outside Russia and sometimes inside Russia are able to benefit from natural resources of Russia much more than they should.”

Piketty, 44, who gave a lecture at the Higher School of Economics in Moscow, may already be preaching to the converted. The government is looking to wring greater revenue from the energy industry with a tax increase, while the Bank of Russia has set a target of about $500 billion for reserves after burning through a fifth of its holdings to prop up the ruble last year.

Taxation, De-Offshorization

Vladimir Putin, in power for 16 years as premier or president, has backed efforts to repatriate as much as $1 trillion in capital held by companies and high-ranking officials abroad as part of what he’s called the “de-offshorization” of the economy. Putin, who introduced a 13 percent flat income tax rate in 2001, has also seen top ministers broach the subject of re-instituting a progressive tax system.

The current income levy is “relatively small” in a country with “a lot of inequality” and “far too little transparency,” Piketty said.

Inequality, Transparency

“Russia would be in a much better situation today if this reform for more transparency, progressive taxation would have been conducted before,” Piketty said. “It’s time, especially in the current crisis, to change course and to deal with inequality and transparency in a much more front-faced way.”

The debate is gaining urgency after the government allowed household finances to bear the brunt of the country’s first recession in six years, putting Russia on track for the biggest drop in consumption during Putin’s rule. This year, 21.7 million people, or about 15 percent of the population, are living beneath the subsistence level, according to the Federal Statistics Service. The crisis marks the “first significant” increase in Russia’s poverty since the crisis in 1998-1999, according to the World Bank.

While a period of high oil prices contributed to an unprecedented increase in living standards, and the World Bank estimates the middle class doubled in 2000-2013 to more than 60 percent of the population, inequality has grown since Putin took power, as measured by the Gini coefficient.

The top decile of the richest Russians controls 87 percent of all household wealth in the country, a share that’s “significantly higher” than in any other major economic power, Credit Suisse Group AG said in this year’s Global Wealth Report.

Cui Bono?

“We don’t even know how many tax payers with high incomes are paying the tax year after a year,” Piketty said. More detailed data will show “who’s benefiting from growth in Russia as compared to the poor, as compared to the middle class.”

That will enable authorities to “adapt the tax system to whatever we see,” he said.

In his book, Piketty has argued that wealth inequality in Europe and the U.S. has risen in recent decades, and that the gap in the U.S. has widened more than in Europe. Piketty, who joined the London School of Economics this year at its new International Inequalities Institute, has given presentations on its findings to the White House Council of Economic Advisers, the International Monetary Fund and the United Nations. In September, the U.K. Labour Party said he’ll serve on its panel of advisers.

For Russia, the right policy mix can reverse years of capital outflows, according to Piketty.

“Russia needs to put an end to capital leakage and capital flight and needs to
invest the surplus coming from natural resources and export revenue,” he said. “There could have been lot more domestic investment using this manner.”