60 percent of the wealth of Russia’s richest 0.01 percent are held offshore. UC Berkeley economist Gabriel Zucman explains why blanket sanctions, of the kind that collapsed the ruble and Russian markets this week, “hurt ordinary Russians” but are less effective in targeting wealthy individuals who own assets in foreign currencies.

As Russia continues to escalate its invasion of Ukraine, the United States and European governments are stepping up their economic sanctions. In particular, governments around the world have begun zeroing in on Russian oligarchs and political allies of Vladimir Putin. This week, a day after the Department of Justice revealed a new task force aimed at Russian oligarchs—under the colorful monicker “Task Force KleptoCapture”—the Biden administration announced new sanctions against eight Putin-affiliated oligarchs and their families. Around the world, governments have been cutting off Russian oligarchs from the financial system, freezing their assets, and seizing their luxury yachts.

The following chart, based on a 2018 paper by Annette Alstadsæter, Niels Johannesenn, and Gabriel Zucman, shows why such sanctions may be especially promising as a means to pressure Russia: 

According to Alstadsæter, Johannesenn, and Zucman’s estimates, over half of the wealth of Russia’s richest households—the top 0.01 percent—is held offshore. 

To estimate the size of Russia’s offshore wealth, the authors “looked at the difference between the (very large) trade surplus of Russia, and its (smaller) accumulation of foreign assets as officially recorded. The difference likely reflects unrecorded assets accumulation in offshore centers,” Zucman, an associate professor of economics at UC Berkeley, explained in an email to ProMarket. What they found is that when it comes to the size of its offshore wealth, Russia is “an outlier”: whereas the authors find that the equivalent of 10 percent of the world’s GDP is held in offshore tax havens, for Russia, by their estimates, the number is about 60 percent.

A separate 2018 paper by Filip Novokmet, Thomas Piketty, and Zucman estimated that the size of Russian offshore wealth—at about 85 percent of national income—is over three times larger than Russia’s official foreign reserves. What’s more, the authors found that “there is as much financial wealth held by rich Russians abroad… than held by the entire Russian population in Russia itself.” 

Locating the Russian wealth hidden behind scores of opaque shell companies in offshore tax havens like Cyprus and Switzerland (as well as London real estate and cryptocurrencies) may be tricky, but the fact that so much Russian wealth is held outside of the country helps make the Russian elite particularly vulnerable to sanctions, leading many Western policymakers and observers to believe that targeting the offshore wealth of Putin-affiliated businesspeople and political figures may well turn out to be the regime’s “Achilles’ heel.” 

When it comes to the effectiveness of the measures announced so far, however, Zucman is less optimistic. The problem, he says, is that targeting a few wealthy Putin allies is insufficient, and that more systematic efforts—Zucman has long called for the creation of a global wealth register—are needed.

“I’m a bit skeptical that freezing the assets of a few dozen people, the oligarchs, can be highly effective,” he wrote. “Their influence over Putin’s regime is unclear and may be over-estimated. It would probably be more effective to have a more systematic approach, say to freeze all offshore holdings above $10 million—a policy that would affect about 10,000 to 20,000 Russians, those who’ve most benefitted from Putin’s rule.”

Blanket sanctions, of the kind that in the past week caused the ruble to collapse and decimated Russian markets, according to Zucman, “hurt ordinary Russians, many of whom suffer from Putin’s brutal regime. Meanwhile, they have little effect on the key beneficiaries of Putin’s regime, the ultra-wealthy who own assets in foreign currencies. It would be more rational to have sanctions targeted at that group.”

“Historically,” Zucman added, “impoverishing a whole nation has been a recipe for disaster.”

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