Oligarchy

Hello, and welcome to Oligarchy. We are tracking how Covid-19 and the world’s response to it is affecting the super-rich — and what that means for power and politics. 

RUSSIAN CAPITAL

Bad news for Russian oligarchs. Back in March, President Vladimir Putin declared that he was fed up with how much money was pouring out of the country into tax havens. He said it was unfair that ordinary Russians had to pay tax at 13%, while the wealthy owners of corporations paid a fraction of that when exporting their wealth offshore.

At the time, I assumed this would go the way of his various other “de-offshorization” initiatives, which never amount to much, but — surprisingly enough — the budget crunch caused by Covid-19 and the oil price slump, on top of the budget crunch that was already happening, seem to have focused minds in Russia’s finance ministry.

Last week, the ministry announced Russia would unilaterally scrap its treaty with Cyprus, since the Mediterranean tax haven was refusing to agree to any alteration. The old deal allowed financial flows to move between the two countries at just two percent tax, to the great advantage of lawyers in Cyprus and the oligarchs that employ them, and the great disadvantage of the Russian budget. 

The foreign ministry’s announcement sent Cypriot Finance Minister Constantinos Petrides scrambling to Moscow, where he quickly signed a new deal, which markedly increases the taxes to be paid on money being moved from Russia to Cyprus. 

• “The Cypriot delegation fully agreed to the terms of the Russian side,” Russia’s deputy prime minister said, in the tone of someone who has just remarked that Cyprus has a nice banking sector, and it would be a shame if anything happened to it.
• “This is very good news for Cyprus. A termination of the agreement would have proven a great challenge for our economy,” said Spyros Ioannou, director and head of Tax at Primus in Limassol, in the tone of someone glad he still has a job.

Hundreds of billions of dollars have fled Russia since the end of Communist rule, ending up in the real estate markets of London, New York, and other major cities. Cyprus has been the most significant conduit for this cash, thanks to its previously generous tax treaty, its convenient time zone, and its relaxed approach to formalities like money laundering regulations.

Russia is not stopping with Cyprus, however. It has already told Luxembourg, the Netherlands and Malta — which are all also major transit locations for Russian capital flight — that it is renegotiating their treaties too. And now it has its eyes on Switzerland and Hong Kong. 

Double taxation treaties are central to globalization, because they prevent taxes being paid twice on earnings that a corporation wants to bring home. However, multinational companies have become skilled at abusing them by routing profits via low-tax jurisdictions like Cyprus or the Netherlands, meaning they end up paying no tax at all.

• “If we fail to find understanding regarding our position, we are reserving the right to terminate those agreements unilaterally,” said Putin.

I’m a bit loathe to agree with Mr. Putin on anything and, let’s face it, the additional taxes this raises are as likely to be stolen by one of his friends as to be spent on anything that benefits ordinary Russians, but I’m going to go out on a limb and say this is a good thing. Russia has been sucked dry by rapacious oligarchs for decades, and anything that throws some sand in the cogs of their sucking machine is for the good.

EVERYONE NEEDS THEIR OWN ISLAND

Also in unexpectedly positive news, Italian authorities are seeing if they can’t stop a Ukrainian tycoon from buying an island near Monaco. You’d think the Italians would be happy about the purchase – yay, foreign investment – but instead they’re not.

Gallinara is shaped like a turtle and rather lovely and the prospect of it being turned into an exclusive resort is proving unpopular. 

Still, it’s not all bad news for oligarchs in the market for an island. There are dozens of them still up for sale, including Rangyai island in Thailand, at a paltry $160 million. It took Jeff Bezos just under 18 minutes to earn that last Monday.

BILLIONAIRES ARE OLD HAT

It must be nerve-racking to be a billionaire, always watching the real-time list to see if you’re still on it, worrying about whether a bad investment decision will demote you back to being an ordinary millionaire like all the other schmucks. And now, as if that wasn’t enough to worry about, a whole new exclusive club has appeared — the centi-billionaire, made up of people who own more than $100 billion.

A couple of years ago, when the club was created, it had just one member – Amazon’s Jeff Bezos. But last year, he got someone to talk to at the bar, when Bill Gates’ wealth also gained an eleventh zero, though not without drama. Now, the clubhouse is threatening to become practically crowded. Last week, Mark Zuckerberg joined, and now he and Bernard Arnault take turns as the third member depending on the relative performance of shares in Facebook and LVMH.

Money is cheap right now, and likely to remain so for the foreseeable future, so shares will continue to climb because of all the people using borrowed money to buy them. That means the centi-billionaire club will swell.

• How much money is 100 billion? If you started counting it, a dollar a second, and didn’t stop until you were done, it would take you more than 3,000 years.
• Put it another way, if someone had started counting at the start of the Iron Age, she’d be getting to 100 billion around now. Though, judging by the fact that all the current and indeed imminent members of the centi-billionaire club are men, she wouldn’t be a woman.
• To put this into still more perspective, Zuckerberg could pay the $600 jobless benefit claimed (until it lapsed at the end of last month) for 25 million of his fellow Americans for an entire month, and still be nearly as rich as Jack Ma.

But he still has a long way to go to be as rich as the man reputed to be the wealthiest individual to have ever lived: Mansa Musa, emperor of Mali, in the fourteenth century. According to a modern calculation, he was worth $400 billion, and carried tons of gold by camel when he travelled abroad.  His extravagant expenditure as he passed through Cairo and Mecca upset the economy of the Middle East in much the same way that oligarchs’ spending skews our own economies today. Not much changes, as it turns out.

WHAT I’M READING

I’ve mostly been looking into the birth of offshore in the last few weeks, which is a knottier story than you’d give it credit for. I was extremely excited to receive an email from Catherine Schenk yesterday, which, if you’re interested in the origin of the Euromarkets, central to how offshore finance came about, is a bit like a Star Wars fan getting an email from George Lucas. So, I’ve been delving into her The Decline of Sterling again, in the hope I’ll be well informed when we chat on the phone.

See you next Wednesday,

Oliver