The Russian Military’s People Problem
It’s Hard for Moscow to Win While Mistreating Its Soldiers
The Panama Papers—the massive collection of leaked documents from Mossack Fonseca, a Panamanian law firm that helps set up offshore shell corporations—have already had political consequences. Iceland’s prime minister, Sigmundur David Gunnlaugsson, resigned after the leak revealed that he had partly owned an offshore firm. David Cameron, the British prime minister, is facing criticism over an offshore company that his father set up. In Brazil, many of the people connected to the country’s unfolding corruption scandal appear to have held offshore shell companies set up by Mossack Fonseca. And in Russia, Sergei Roldugin, a cellist who is a close friend of Vladimir Putin, appears to control assets of over $100 million. Roldugin has claimed that this fortune is the result of donations from Russian businessmen to help buy expensive musical instruments for poor students. Clearly, classical music has some very generous friends among the Russian business elite.
At first glance, the Panama Papers leak looks a lot like other big leaks, such as the classified documents that U.S. Army soldier Chelsea Manning provided to WikiLeaks or the former NSA contractor Edward Snowden’s trove of information on international surveillance. Like those leaks, the Panama Papers highlight the hypocrisy of prominent politicians and officials. The leak also recalls a series of less glamorous data leaks on the customers of secretive Swiss and Liechtenstein-based banks, which put pressure on governments to crack down on tax havens and allowed some authorities to pursue cases against tax evaders. Although few may remember, WikiLeaks began with a similar leak from the Swiss bank Julius Baer.
Yet the best comparison—and the best guide to what may happen next—is not to Snowden or Julian Assange but to Thomas Piketty, the famous French economist. Piketty’s book, Capital in the 21st Century, has been interpreted as an economic history, as a grand economic theory and a gloomy political prognosis. Yet few have paid attention to its closing pages, where Piketty lays out the political bet that underlies his research program: that people simply do not know the full extent of economic inequality, and that politics would be transformed if they ever found out.
Piketty’s research and his political program are motivated by a belief that the true extent of economic inequality is invisible. Everyday statistics simply cannot capture the extent to which the rich are different from ordinary people. They are not designed to. Common techniques of measuring inequality, by comparing the income or wealth of the top ten percent of the population to the rest, do not capture how much richer the top one percent is than the top 10 percent, or how much richer the top 0.1 percent is than the mere one-percenters. As the American political commentator Chris Hayes observed in Twilight of the Elites: America After Meritocracy, inequality is like a fractal in that it gets deeper and stranger the further one investigates it. One reason why Piketty’s research has influenced other economists is that it figures out clever ways, such as using university endowment funds as a proxy for hidden fortunes, to measure the consequences of inequality despite imperfect data.
Piketty’s aspirations may yet be fulfilled, but only if the Panama Papers create a new, self-sustaining politics that demands ever more information on the ways in which wealth is being hidden.
But the problem goes beyond deficient datasets. The truly rich have the means and the incentives to hide their staggering wealth. Piketty’s collaborator, the Berkeley economist Gabriel Zucman, estimates that $7.6 trillion is hidden in offshore arrangements. The London real estate market has been reshaped by oligarchs from Russia and elsewhere who use shell corporations to park their capital in a safe and predictable economic system. Activists run Hollywood-style bus tours of the houses of the new kleptocracy.
As the economist Branko Milanovic argues in his new book, Global Inequality, these trends are reshaping economic and political development. It used to be that economic elites had an interest in building up the rule of law in their own country, if only to protect their own property. Now they can just transfer the loot to London or New York, where “nobody will ask where the money came from,” Milanovic writes. Financial globalization is building a world similar to the one depicted in William Gibson’s grimly satirical science fiction novel, The Peripheral, in which the truly rich are unaccountable to anyone but themselves.
Piketty wants to map this hidden world and destabilize it. He believes that ordinary people simply don’t understand the extent of wealth because they aren’t able to comprehend it. There is thus an urgent need to generate new information that will help people understand how important wealth is, and who has it. This explains, for example, why Piketty wants a utopian global tax on economic capital. It’s not because such a tax would be a complete solution to inequality but because the tax would generate reporting requirements, and hence information on who holds which assets, allowing democracies to hold a “rational debate about the great challenges facing the world today” and who should pay for them.
Piketty’s perspective provides a different—and more fundamental—way of thinking about the long-term consequences of the Panama Papers. The Panama leaks, measured in gigabytes of information, are far larger than the Snowden and Manning ones. Yet compared with the true size of the offshore sector, they are less a leak than a trickle. Mossack Fonseca is not the only law firm setting up shell corporations to help people avoid taxes and scrutiny. And shell corporations are just one small part of a much larger system designed to hide people’s wealth. The document release—although significant—is no substitute for the kind of detailed and comprehensive information that a global tax arrangement might provide.
The truly rich have the means and the incentives to hide their staggering wealth.
Still, the leak brings the world one step closer toward better information on global wealth. The United Kingdom, for example, has come under pressure to stop protecting its tax haven dependencies. France and Germany are calling for a blacklist of tax havens, which might be cut off from the SWIFT financial messaging network, a global network that financial institutions use to transmit information securely, if they do not make their ownership structures completely transparent.
Perhaps more important, in some countries the revelations are creating a new popular politics around tax avoidance and fraud. The Panama Papers have spurred massive public protests in Iceland and political furor in the United Kingdom. They are connecting technical questions of tax evasion and tax avoidance to everyday politics by identifying well-known politicians, officials, and celebrities who benefit from complex arrangements. Some of Piketty’s hopes for popular debate are being realized.
Even so, the effects have been sporadic. The revelations have had little popular impact in the United States, where no public figures have been identified as taking advantage of Mossack Fonseca. They have also yet to lead to substantial public outcry in countries such as Russia or China, where there are limited channels for public dissent. If this is indeed a first step toward identifying the true extent of global wealth inequality, it is only that.
Piketty’s aspirations may yet be fulfilled, but only if this release of information creates a new, self-sustaining politics that demands ever more information on the ways in which wealth is being hidden. This is a tall order given the complexities of international politics and the incentives for individual states to cheat, but the world is significantly closer to it now than anyone would have predicted three weeks ago.