Sanction the oligarchs, not the people!

Putin's power base, the super rich, should pay for the war costs. Registering and freezing their foreign assets would be possible. But because that could also hurt the rich in the West, it is not happening. A Feb. 16 commentary by Thomas Piketty.

By Thomas Piketty

[This article published in March 2022 is translated from the German on the Internet, https://zeitschrift-luxemburg.de/artikel/sanktioniert-die-oligarchen/.]

The conflict in Ukraine has revived an old debate around how to effectively sanction a state like Russia. To put it bluntly, it is time to develop a new kind of sanctions. They must be targeted specifically at the oligarchs who have become wealthy as a result of the regime. This would require the establishment of an international financial registry, a measure that will not please the Western wealthy. After all, their interests are much more closely linked to those of the Russian and Chinese oligarchs than is often claimed. Without starting here, the political and moral battle against the autocracies cannot be won. This is the only way to show the world public that the loud speeches about democracy and justice are not empty words.

Let us not forget that freezing the assets of Putin and his relatives has been part of the arsenal of tried and tested sanctions for several years now. The problem is that so far this freeze remains largely symbolic. It affects only a few dozen individuals and can be circumvented through the use of trustees. This is all the more true because there has been no attempt to systematically track and match individuals' real estate and financial portfolios.

The U.S. and its European allies are now considering disconnecting Russia from the Swift financial network (The exclusion occurred on Feb. 27, ed.). This would deny Russian banks access to the international system for financial transactions and money transfers. The problem is that such a measure is very poorly targeted. Just as traditional trade sanctions were instrumentalized primarily to strengthen government influence after the 2014 crisis, this measure also risks imposing significant costs on ordinary Russian and Western companies, with negative consequences for their employees. The measure would also affect a large number of dual nationals and binational couples. Meanwhile, the richest would be spared because they use alternative financial intermediaries.

To put the Russian government in its place, sanctions urgently need to focus on the narrow social stratum of multimillionaires on whom the regime relies-a group much larger than a few dozen individuals but much smaller than the total Russian population. For example, one could target those who own more than 10 million euros in real estate and financial assets, which, according to the latest available data, is about 20,000 people. This is equivalent to 0.02% of the current adult Russian population of 110 million. A threshold of 5 million would affect 50,000 people, and a reduction to 2 million would affect 100,000, or 0.1% of the population.

It is likely that a significant impact could be achieved by targeting only those with more than 10 million. These 20,000 people are the ones who have benefited the most from the regime since Putin came to power in 1999. All indications are that a significant portion of their real estate and financial assets-between half and three-quarters-are in Western countries. Therefore, it would be relatively easy for Western countries to impose a heavy tax of, say, 10 or 20 percent on these assets and freeze the rest as a precaution. The threat of financial ruin and a ban on entry would almost certainly persuade this group to make its voice heard by the Kremlin.

The same mechanism could have been used after China's political blow in Hong Kong. It could also be applied in the future to the 200,000 or so Chinese who own more than 10 million euros. Although their assets are less internationalized than those of Russian oligarchs, they too would be hit hard and could destabilize the regime.

To implement such a measure, it would be enough for Western countries to finally establish an international financial registry (also known as a "Global Financial Registry" or GFR). It keeps track of who owns what in different countries. As the World Inequality Report 2018 has already shown, such a project is technically possible and requires that government authorities take control of the so-called private CSDs (such as Clearstream, Eurostream, Depository Trust Corporation, etc.). It is they who currently register securities and their owners. Such a public registry would also be an essential step in the fight against illicit financial flows, drug trafficking and international corruption.

Why, then, has there still been no progress in this direction? For one simple reason: the rich in the West fear that such transparency would ultimately harm them. This is one of the central contradictions of our time. The confrontation between "democracies" and "autocracies" is overstated, forgetting that Western countries share with Russia and China not only an unbridled hypercapitalist ideology, but also a legal, fiscal, and political system that increasingly favors large fortunes. In Europe and the United States, every effort is made to distinguish useful and deserving Western "entrepreneurs" from harmful and parasitic Russian, Chinese, Indian or African "oligarchs." In truth, they have much in common. The immense wealth accumulated by multimillionaires on all continents since 1980-1990 can be explained in large part by the same perks and privileges. Free movement of capital without fiscal and collective compensation is an unsustainable system in the long run. Only by challenging these general dogmas can we effectively sanction autocracies and promote a different model of development.

This text appeared on Thomas Piketty's blog at Le Monde back on February 16, 2022, before the attack on Ukraine.

Thomas Piketty is an economist and professor at the Paris School of Economics and the École des Hautes Études en Sciences Sociales. In 2014, his publication Das Kapital im 21. Jahrhundert (French 2013: Le Capital au XXIe siècle) generated a lot of attention worldwide.

Sanctions many want - but which are the right ones? Demonstration in front of the Russian Embassy in Vienna on Feb. 26. (Photo: Hans Punz/APA/ AFPA)