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‘We just watch a country being destroyed on TV’

Why do sanctions not work and is ‘Western hypocrisy’ to blame for the war in Ukraine? Thomas Piketty, leading inequality expert, explains

Photo: David Dee Delgado / Getty Images

A few years ago, French economist Thomas Piketty with co-authors published a study which suggested that Russian elites could have “privatised” and withdrawn up to €2 trillion of oil and gas revenues from the country since the year 2000. This money, as a rule, passed through a chain of offshore companies and settled in Western jurisdictions — London, Paris, and other European capitals willingly accepted the flow of oil money, while politicians often turned a blind eye to their origin.

After the start of the Russian invasion of Ukraine, the situation seemingly changed — a record number of sanctions were imposed against Russia, some assets of Russian oligarchs were frozen. But it's still a drop in the ocean, and the reason is not the Russian kleptocracy, says Piketty. Rather it is the Western elites who have been benefiting from an unjust financial and legal system that protects the super-rich. 

Novaya Gazeta Europe spoke to the economist about what the West can still do to stop Putin and what instruments there are to reduce extreme inequality in the world.

Thomas Piketty

French economist, leading inequality expert

In March, you wrote that the Western response to Russia’s war in Ukraine has been insufficient and that it targets regular people, not the ones who made the decision to invade. Could you explain what kind of sanctions would be more effective?

The reaction and the attitude of the Western countries to the Ukraine crisis has been insufficient, both in military and economic terms.

I think what I wrote in March is still very much valid today. If you look at the quantity of assets owned by Russian oligarchs and Russian large wealth-owners more generally, you can see that the number of the assets that have been frozen in Western countries is very small compared to the extent of the capital flight from Russia.

Putin’s regime is really a kleptocratic one, we’ve never seen something like that in the modern economy. We’re talking about a country [Russia] that over the past 20 years has been exporting the equivalent of about 5 to 10% of GDP per year of trade surplus, mostly in oil and gas exports. So this is a country which should have very large foreign reserves in the rest of the world. If you have a trade surplus of 5 to 10% of GDP each year during 20 years you should have somewhere between 100% and 200% percent of GDP in foreign reserves.

But if you look at the case of Russia, the foreign reserves are ten times smaller, maybe 10 or 20% of Russian GDP.

My colleagues Gabriel Zucman, Filip Novokmet and I have done estimates of total financial assets held by wealthy Russians in the West. We cannot be sure but it’s somewhere between 1-2 trillion euros. 

So where has all the money gone? The obvious explanation is that you’ve had enormous capital flight by wealthy Russians and mostly people who are sufficiently close to the regime that [capital] they can appropriate for themselves.

Some of these wealthy Russians can be based in Western countries. Many of them can be based in Russia. Some of them are using the Western legal system, through legal entities that are based in Western financial centres, or in offshore financial centres, which also could not exist without the West. And the assets that have been frozen since the beginning of the previous year are somewhere between 10-30 billion euros which is 100 times smaller than what they should be.

The bottom line is that Western countries play a major role in making this possible. This would not be possible if Russia was an autarky. It is possible only because Western countries have made it possible. Putin’s kleptocratic regime is a product of Russia and the West and describing it as a sort of rational evil simply doesn’t work.

So then comes the war, and what do you do? When you have a country of 45 million people being destroyed in front of you, the civilian population being bombed, people don’t have access to heating and electricity in the middle of the winter. I think when Western countries look at this 10-20 years from now, they will feel very ashamed of how little has been done.

So very little has been done partly because [Putin’s regime] is so embedded into the Western legal and financial system. It doesn’t mean it’s impossible to do it, but if you want to, you have to question not only the Russian elite but these Western systems that have benefited not only Russian oligarchs, but also Western oligarchs, billionaires, multimillionaires who might lose from a radical increase in transparency.

And this is what makes people in the West afraid that [this fact] might be used against them. And I think this is part of the explanation as to why so little has been done.

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Do you believe that sanctions could expedite the collapse of Putin’s regime?

Whether it’s sufficient to bring down Putin’s regime now or whether it is too late, I think it [toughening the sanctions] should be done. It would be very important to show that the West is able to be very tough against the wealthy Russians.

The Western governments are viewed as very hypocritical by many people, not only in Russia, but throughout the world in the sense that Western governments like to give lessons about democracy and about human rights to the entire planet.

But in practice, when they can get more money into their financial system, whether it comes from Russian, Chinese or Dubai oligarchs or anybody who wants to put money in Paris or London or Cote d’Azur or Courchevel, it is most welcome. 

I think the rest of the world is quite realistic about that. And that’s part of the reason why Western countries have difficulties being heard and being credible in other parts of the world.

I don’t know whether at this time tougher economic sanctions would be sufficient. There’s also the issue of military action, having a no fly zone over parts of Ukrainian territories, in particular the larger cities.

I think it’s clear that there has to be some limits on what the Russian military can do. If they start bombing and killing half of the population in Kyiv I guess at some point NATO will have to do something. When you make people freeze and have no access to electricity or energy in the middle of winter, where is the limit exactly? If you don’t put any limits and if you don’t say anything about the possibility of a no fly zone and more direct military protection of Ukraine, when are things going to stop? Both economic sanctions and military assistance are weak so far.

I think that by targeting the wealthy elite, the West could put down that regime. I cannot be sure that it would work, but I think there’s a serious possibility. So we should give it a chance.

Do you support harsher restrictions on Russia’s oil and gas in the EU?

Yes, sure I think we should’ve stopped importing these [oil and gas] right away. It’s a very strange situation like with China a few years ago when the Chinese government cracked down on the Hong Kong elections and basically destroyed the democratic electoral system in front of everyone. The reaction of the European Union, that was at the end of 2019, just before the COVID, was to propose to China a new investment treaty. That was the reaction of the European Union — let’s have a new free capital-flow treaty between China and the EU, and the official excuse for this kind of attitude was that we need to trade with China because otherwise we would be so poor we cannot afford that.

But this is completely crazy. European countries have never been as rich as they are today. They have multiplied their average income by 10-15 [times] over the past 100 years. So they are much wealthier today in terms of income, wage, wealth, every economic indicator there is. And this is not due to China or due to Russia. This is due to an incredible increase in productivity.

So the idea that we cannot afford taking sanctions upon China or Russia because otherwise we would be poor is a symptom of a political system where we have sort of stopped thinking about changing the economy in the direction of a more equitable distribution of resources and income. We take the fact that we cannot make billionaires pay and we cannot have a more equal distribution of wealth as a given.

If you accept this assumption, then indeed you end up in a situation where there’s very little you can do. I think when people look at these political choices in 10 or 20 years from now, they will look at institutions and look at Western countries that are so rich but still do not do anything. We just watch a country being destroyed on TV. This is really quite sad and quite unusual by historical standards.

And if you do not want to change the level of inequality, it leads to this conservative political attitude toward Russia and China. Because then you say, ‘Oh, but, if we do something then the minimum wage workers in France or Germany are going to suffer and they would not accept it so we cannot do anything.’

If minimum wage workers pay the cost of sanctions, indeed you have a problem. But the only solution, given how wealthy Western countries are, is to redistribute the wealth so that the cost of the adjustment is paid by the people at the top, and not by the people at the bottom and in the middle class. 

I’m not saying this is simple to do, but it’s technically doable. It’s a question of political willingness.

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You said it was doable for the European countries to redistribute their wealth . What would be the way to do it? What tools are there in place for that?

You can have more redistribution of income and wealth through progressive taxation of very high-income groups so as to pay compensation for the middle class and lower income groups. This is what was done during a very long period of time during the 20th century. If you take a country like the United States between 1930 and 1980 during Roosevelt’s terms and post WW2-period the top income tax rate was as high as 91% and was 82% on average.

This did not destroy US capitalism. Otherwise we would have noticed it because it was applied for 50 years. And in fact, this was a period of maximum prosperity and maximum economic growth in the US. Why is this so? Well, because historically the true source of prosperity is high productivity through high education. And the US is a country that had a huge educational advance in the middle of the 20th century.

You don’t need extreme equality to grow and to reach prosperity. I think income gaps of 1 to 5 [ratio] or 1 to 10 is well enough from the historical evidence I have put together. But in any case, not 1 to 100 or 1 to 1000, which is what we have today.

I think the conclusion is that extreme inequality is simply not useful. So how can we reach a more equal system? We have to look at what was done in the past — like very high progressive taxation under Roosevelt. We have to push this further to the future by having progressive taxation, notably of income, and, even more importantly, of high wealth. We need to invest in education, in hospitals, in green technology. That’s a real source of prosperity.

You wrote that WW2 actually decreased inequality but when it comes to the war in Ukraine, it does not seem to be the case and it’s the poorer countries that are suffering even more, and Putin uses this situation as an argument for ‘fighting neocolonialism’. Is that really so, is this war, as opposed to WW2, creating a larger wealth gap?

We should not expect wars to bring good things and we should certainly not expect wars to solve the inequality problem. What has brought us more equality historically is not so much WW1 or WW2 but more of the positive political mobilisation and democratic transformation with the rise of social security systems, the rise of progressive taxation, the rise of education. But both world wars in some ways have contributed to the change in political attitudes towards a free market system and towards a capitalist system in general.

I think one of the limits of the Western countries and the global reaction to events such as the 2008 financial crisis, COVID, the Ukraine war, and so on is to rely too much on monetary creation to pay for everything. It’s good to print money to solve the problem in the middle of an emergency. But then that’s not going to be enough because at some point the inflation will hit. This is what we have today, which is partly due to the energy prices for Russia, but also partly due to the fact that Western countries have created a lot of money to solve any problem, but without having the kind of tax reforms that will make richer people pay.

Inflation can actually increase inequality because it’s going to be like a tax on the poor. Let’s say you have a little savings account in Germany, Britain, France or in the US, and you’re going to pay a 10% inflation tax on your savings. And the same is true for someone in Russia with little money in their savings account. But if you are very wealthy, in the West or in Russia, you can put your money into the world financial markets or use some sophisticated financial assets. And who knows, you might even get richer.

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What other major events, such as COVID lockdown and the war now, may be affecting inequality within countries and outside nowadays?

One of the new challenges in terms of equality and inequality today is obviously the consequences of global warming for people in the south. Countries in the southern part of the world that are going to have to pay for the consequences of the cumulative carbon emissions produced by the West, Russia, China, Japan, North America.

If you take all these countries in the north, including Russia and China, they have contributed to make the future look pretty bad for the countries in the global south and for the people in the north. We don’t have the income to face increasing energy prices and all sorts of consequences. This is a new factor affecting inequality.

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Russia’s usually one of the world leaders when it comes to inequality in assets’ distribution. Do you believe that what’s going on in Russia — the authoritarianism and the war — could be a consequence of that?

I think high inequality of wealth can come together with many different political regimes. Democracies and autocracies today have a lot more in common than they admit. There are very important differences, of course, but one crucial common point is that we live in an era of extreme inequality and very high protection of wealth owners and very little protection of people who do not have that wealth.

If you try to freeze the assets of wealthy oligarchs, they have all the legal protection to go to court in order to protest [this decision] and to be protected against that. But if, let’s say you are in Russia, you lose almost half of your wage or half of your pension because of inflation, you cannot go to a Western court in London or Paris to protest and ask for compensation.

We are so accustomed to this very asymmetrical legal system that we find it perfectly fine, but in fact, it’s a very biased view of the rule of law. 

What I mean is Western democracies like to say that they are completely different Russian and Chinese autocracies, and to some extent they are different, of course. But they have things in common, including this high tolerance for wealth, which could very well continue even in a democratic Russia.

I very much believe in electoral democracy and think it’s very important, but it is not enough. We also need to build a more egalitarian and a more equitable world, both in Russia in the future and in the West.

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