Russia = Putin = Corruption = Disaster

and how to “PEP” up sanctions

 

Ben Judah has a great article on the Russian problem in today’s (July 27, 2014) Sunday Times which can be summarized as a set of simple equalities:

 

Russia = Putin = Corruption = Disaster

 

In Stalin’s time, the USSR (especially in the period after the Second World War to his death in 1953) was equated with one man – Stalin – and he ruled through intense fear. When Gorbachev succeeded in the destabilization of the Soviet Union, the West believed that the tumbling Berlin Wall symbolized the breakdown of Soviet norms, the ending of Communism and the establishment of democracy.

 

What was misunderstood (and remains misunderstood) was that the intrusion of market economics into an historically centralized set of nations that made up the USSR had massive risks. The risks were not considered by the libertarian economists that ruled in the 1980’s and for some time after that. In mature economies, the rivalry between Keynes and Hayek could be maintained with pendulum swings from one to the other as decades passed. Indeed, as we now know (or some of us know) the drive towards economic equilibrium is a fantasy but mature economies can adjust regularly and maintain decent GDP growth (even if the measure if substantively flawed).

 

In the newly emerging states that had formed the Soviet Union, the drive for libertarian economies in states that were predominantly centralized in terms of power and decision-making led (without any real checks and balances) to an elite ownership of resources (mainly natural resources) through which wealth in such under-developed economies was generated. Thus, the oligarchs were formed – and they have dominated those states ever since.

 

The oligarchic state is driven by elites and supported by fear, corruption and domination of those not in power. To many in those countries, this is just another chapter in their history of such elite domination. The incipient middle class (as Ben Judah points out), which had been promised a new world order, is now dispossessed. The working class sees no change and as long as jobs are there for them cannot force themselves to complain.

 

Into this oligarchic domain, Vladimir Putin has risen to the top. He is no more than the prime oligarch – the most elite in a country of corrupt elites. His ability to clean up the chaos after Yeltsin and to show who’s boss in a country that always seemed to prefer strong, central leadership (an ingrained characteristic made part of the Russian DNA for centuries) meant that he could dominate political and economic levers. Those who he considered risks were quickly destroyed (sent to prison or even killed). He is not Stalin and he does not control the masses because of a communist-type brainwashing. There is no-one in Russia who believes he has a moral suasion. It is the immoral suasion of power through corruption that keeps him in power and he is tolerated by many and venerated by many others for just that.

 

This power through corruption showed itself in a country like Ukraine. Yanukovych was simply Putin’s oligarch in situ – his corrupted vassal in Russia’s little sister. The danger to Putin that began with Yanukovych’s downfall was stark and a risk to his strategy of power through corruption. When people (some who may well be of the extreme right and no better for that) rise up and force out one strand of corruption in a vassal state, it is a danger for Russia and Putin in particular. This could not be tolerated.

 

It has led directly to the deaths of 298 passengers on Malaysian Airways flight MH-17, most likely hit by missiles from a Russian Buk anti-air missile system stationed in Eatern Ukraine and manned by Ukrainian dissidents. This disaster is a natural outcrop from the corruption at the heart of Russia and Ukraine. In my earlier paper on this I showed the Triangle of Misrule at the heart of such societies:

 

 Slide1

 

This triangle which engulfed Russia and several of its ex-Soviet Union states, now impinges on the West. The deaths of 298 people from across the world as a direct result of Russian corruption provides a shocking example of the risks. Putin has put himself above the law in Russia in a similar way to the Chinese politburo in China and the dos Santos family in Angola (and many others around the world).

 

The UK has played its part in that London has acted as the money-launderer for many oligarchs that have bought properties here and used the banking system to wash money corruptly (although not illegally under Russian law – until Putin changes the implementation of those laws) gained.

Sanctions

As the West considers its next move, it should be ensuring that each and every wealthy Russian seeking to move money outside of Russia is seen as a PEP (politically exposed person). Banks have to treat individuals that are politically entrenched in their own countries and have to seek assurances that their money is not the result of illicit political activities.

 

In Russia, every oligarch has been involved politically – that is how most obtained the “rights” to natural resources or phone systems or whatever in order to make their money. Why not do the obvious and require each bank world-wide that is asked to deal with such individuals to treat them all as PEP’s unless they can prove otherwise? FATF (Financial Action Task Force) produces guidelines on PEPs which describe them as people who have had or have a prominent position that can be abused. In endemically corrupt nations, all senior corporate positions are such – you don’t have to be a government minister or civil servant to have a prominent position that can be abused (or where the prominent position was the result of such abuse).

 

Make all such oligarchs and their staff and their lawyers and accountants PEP’s. It won’t stop them doing business but it could reduce their ability to flow their corrupt money around the world – and money is the basis for their power. It is also the basis for Putin’s – a PEP if ever there was one who has used the banking system and hidden behind the opacity of trusts and companies seemingly owned by others to stash billions outside Russia. Now is the time for Governments to deliver on better transparency in international cash flows and identities of companies and trusts.

 

Opacity = corruption = elites = Putin = Disaster

 

 

See-through Society – transparency

Cleaning Up

Chuka Umuna, the Shadow Business Secretary, recently called for companies in the UK to declare their tax payments to Her Majesty’s Revenue and Customs (HMRC). This followed the widely reported, bad publicity surrounding the minimal tax payments made in the UK by Amazon, Google, Starbucks and many others. Whilst not wishing to name and shame, he believes that all companies should glory in the tax they pay. Justin King, head of Sainsbury’s, one of the big four food retailers in the UK, made a similar statement, suggesting that consumers could make change happen through their custom. International Corporations have been cleaning up by transferring their tax liabilities to low tax regimes and tax havens – they can virtually choose where to pay tax.

Nick Clegg, the leader of the Liberal Democrats and Deputy Prime Minister, states in his most recent letter to LibDem members: “The idea of combining a strong economy with a fair and transparent society is something that will also be seen in an international context this year when we host the G8 in Northern Ireland.”

Transparency is becoming the mantra of the well-meaning in society and many would say “about time, too”. While not the answer to all of societies’ ills, it is a precursor to re-directing society towards solving some of the greatest problems we have – because transparency of key information allows people (civil society) to make informed decisions – either on their own (through the marketplace) or through their government.

Sweeping away the leaves

For years, organisations like Transparency International have campaigned for dramatic improvements in the way governments, publicly owned organisations and companies provide important information. The danger with secrecy (and the UK remains a very secretive country) is that beneath the opacity of information lie secrets that those with vested interests wish to keep hidden. Whilst secrecy is always claimed by Governments to benefit all of us where they wish to enforce it, the evidence is usually to the contrary. The benefits of secrecy accrue to vested interests and results in economic mismanagement at best – at worst, in countries which are, for example, resource-rich and economically poor, it leads to mass corruption, impoverishment of the mass of people, illness and suffering.

Economics and economies thrive on the open availability of good information and only monopolies thrive on secrecy. It is only when information is made available that proper judgments can be made by the mass of participants in the marketplace.  In a world population of billions, markets can only work where information is not controlled from the top down. Stockmarkets and financial markets depend on the freest possible flow of information to the widest audience and there has been a progressive move towards freer access to information along with the spread of technology that enables it to be used. The driving force is the same human one that drives freedom and democracy. There is an inherent motor behind individual freedom and the right to self-govern and the same motor drives transparency because it is with transparency that the potential can be seen and with transparency that informed decisions can be made.

Transparency is not closing your eyes when the wind blows

In the UK, a nation that always appears to be governed by a conservative mindset where change is difficult, where the Official Secrets Act dominates, where GCHQ and CCTV appear ubiquitous, where the challenge to maintain a fairness between an open society and a society that bears down on terrorism often seems so far weighed in the latter’s direction, the motor for transparency often seems to be running in neutral. Conservatism (especially in England) means keeping things the same and with direction from the centre. This often means that vested interests operating from the centre or with the centre will disallow the move towards more openness. The Labour government provided a Freedom of Information Act, for example, to the chagrin of its then leader, Tony Blair., who was and remains a centrist. In a sense the provision of the Act was odd, because Labour remains as much a centrist party as the Conservatives. Nevertheless, the human motor for more transparency was stronger than the urge to opacity in this case – even if the Act is not itself allowing the freedoms desired.

Yet, it was a step towards a more open society and towards transparency that many countries would relish. A free press (the subject of so much discussion following and before Leveson) has helped to unearth the secrecy in banking, for example, that has plagued the UK for centuries. Manipulation of LIBOR, money laundering, sub-prime casino banking and support for tax havens may have helped to make London a key banking centre but it did not insulate the UK from the collapse in 2007 – it made it far worse – and “only when the tide goes out do you discover who was swimming naked” (Warren Buffet commenting on naked transparency). Sometimes, opening our eyes hurts.

Nothing to Hide?

One example of eye strain concerns the opacity of the banks and their cozy relationship with Government (not just in the UK). The secrecy allied to the special relationship has hindered the UK to an intolerable degree. Under Nigel Lawson (one of Margaret Thatcher’s Chancellors) the post-manufacturing society was hailed as the future as banks gained more freedoms and we all kept our eyes closed. Yet, we now see Germany as Europe’s economic motor because of its manufacturing prowess and the revitalization of the British motor industry (although hardly any it owned by Brits) is now lauded much louder than our “success” in financial services. The illusion of banking remains, though – as a key driver of the economy rather than what it really is – a provider of services that should assist the real economy. And the illusion has been propped up by a lack of real transparency which enables banking to remain a secret society.

Transparency is the ability to be strong enough to reveal information because there is nothing to hide. The true strength of transparency is the confidence that it portrays. So, the opportunity for companies and Governments to be open, to be transparent, only exists where there is not much to hide. Clearly, international companies that are paying virtually no corporation tax on sizeable UK earnings have something to hide; clearly, those (companies and individuals) who put money into offshore tax havens or to secrecy jurisdictions may have something to hide.

If banks and individuals had nothing to hide, Wegelin, the oldest Swiss bank, which is closing as a result of its plan to take on all the clients of Swiss banks that had decided to be more transparent with the US authorities over tax evasion would still be open for business. Their clients, who wished anonymity, made their way to Wegelin – which had been founded in 1741. They knew they were doing wrong and Wegelin knew the same – and the bank is closing after a hefty fine from US regulators and after 271 years. Secrecy was in the bank’s DNA – it could not evolve to the realities just beginning to dawn in the 21st Century. It became extinct.

So, lack of transparency in a world with eyes opening can be also hurt and be expensive and the US executive is now proving to be vigilant on  behalf of transparency on a world-wide basis – as is the US Congress which passed legislation in 2010 called Dodd-Frank. Part of this related to section 1504 which requires extractive industry companies registered with the SEC (Security and Exchange Commission) to disclose their revenues and taxes paid on a country by country basis worldwide. This includes all companies registered on the NYSE no matter where they are based. The EU looks to be following this example so that the people of resource-rich, economically poor countries will know how much money their precious natural resources raise in annual income and then can follow through what their Governments do with that money.

However, the American Petroleum Institute and the US Chambers of Commerce (vested interests if ever there were) are trying to fight back and have initiated a law suit in the US to nullify section 1504

How curious that libertarians fight on behalf of secrecy – the proponents of a free market arguing against a main tenet of economics – free information.

Battle lines are being drawn – the light and the dark.

21st Century Schizoid Man, King Crimson’s take on Spiro Agnew, was written in 1969 but the 21st Century does even now witness such schizoid tendencies characterized by corporate and governmental secretiveness, emotional coldness and apathy that typifies the illness. The lack of openness is world-wide and exhibited by the Chinese authorities’ suppression of its Southern Weekly newspaper when an editorial criticizing Chinese leadership was thrown out and one supporting the leadership was superimposed. Anyone reading Martin Jacques book “When China Rules the World” would not be surprised at the suppression. It characterizes the central leadership of this “civilization state” but Jacques argues that we see it too much with western eyes. But, what if we in the West are right and democratic freedom and openness are the motors that drive our human endeavours? What if the Chinese have, for 2,000 years, actually got it wrong. As China grows stronger, the move away from freedom for information will intensify and Chambers of Commerce will battle against laws for transparency that they will argue provides Chinese firms with advantages. This is a battle that has to be fought world-wide.

Our pursuit of progressively greater freedom (whether press freedom, open markets, democracies, freedom of speech) and equality (of race, religion (or non-religion, sex, sexual orientation and more) appears to be the real motor rather than the schizoid tendencies of the centrist control of monopolies, dictators, and vested interests. Transparency is a hugely important base upon which this basic human drive can persist. In a post-2007 world where the risk is that wealth is being driven to the top 1%, the drive for transparency is fundamental.