How the other half per cent live: the Rolls Royce Wraith is unveiled in the windows of Harrods, Knightsbridge. Photo: Getty
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The last thing we need is oligarchs’ money flooding into Britain

Felix Martin explores the question of Russian capital flight to London.

The international response to the crisis in Ukraine has been depressing to watch. It is hard to avoid the conclusion that the west has so far been comprehensively outmanoeuvred by Russia, whose old-school, facts-on-the-ground tactics have been met by a series of feeble and poorly co-ordinated half-measures.

The diplomats dismiss such pessimism. In today’s financially globalised world, they say, there is more to the projection of power than conferences and UN resolutions. As the real measure of their strategy’s success, they point to the revival of modern Russia’s most chronic economic ailment – capital flight.

In the first three months of 2014, $51bn exited Russia, compared to half that a year earlier. In other words the financial markets are doing the diplomats’ job better than they ever could. Investors are voting with their feet. Every dollar of capital fleeing the country is another nail in the coffin of Putin’s policy in the “near abroad”.

The idea that internationally mobile capital has the power to discipline governments – and that this power is benign – is an old one. In the west, it usually crops up in the context of economic policy. The idea is that governments are prone to spend beyond their means and to dole out contracts to their backers and that they generally fail to take the “tough decisions” necessary for long-term economic success. Voters get to punish them for such misdemeanours only every four or five years. The financial markets, by contrast, do it in real time. Their X Factor panel sits in judgement 24 hours a day, with the price of a government’s bonds keeping track of the score.

The diplomats’ excitement is not be-cause they think that Russian capital flight shows up the shortcomings of the Kremlin’s latest budget plans, however. For them, it signifies something much bigger: a major counterweight to Vladimir Putin’s political power. In short, a powerful force for democratisation.

This, too, is an idea with a distinguished pedigree. In the 18th century, Montesquieu observed that since the invention of the bill of exchange – the prototype of the bonds, stocks and currencies traded on today’s international financial markets – Europe’s monarchs had become “compelled to govern with greater wisdom than they themselves might have intended”.

His contemporary the Scottish economist James Steuart put it even more bluntly. The ever-present threat that capital might flee the country, he wrote, was nothing less than “the most effective bridle [that] ever was invented against the folly of despotism”.

The diplomats in Washington and Brussels agree. Yet they should pause before engraving Steuart’s maxim over the gates of the US state department and Berlaymont, the home of the European Commission. Neither the economic nor the political benefits of the international free movement of capital are quite as simple as they look. Both rest on questionable assumptions.

The economic argument relies on the premise that markets accurately assess where capital can most profitably be deployed. The theory suggests, for example, that capital will tend to flow from rich countries – where it is plentiful and therefore earns a low return – to poor ones, where it is scarce and therefore highly productive. What could be more logical than that?

The reality is exactly the opposite. Over the past two decades, capital has tended to flow from poor countries to rich ones and, as the years leading up to the 2008 crisis showed, often into investments that are egregiously wasteful, too. There is, in other words, no economic law of gravity that ensures that capital flows to wherever it would be most productive. In the real world, other factors trump pure financial rationality and so capital often flows uphill.

The political dividend from international capital mobility is more ambiguous still. The unspoken assumption here is that the markets are in essence democratic, while the governments they undermine are corrupt – that’s the reason to applaud the fixing of the bridle to the despot.

What if it is the other way round? What if it is the government that is representative and the forces of capital that are not? Everything hangs on the distribution of wealth. In countries where the ownership of capital is widely dispersed, it may be a fair assumption that investors are a democratic force. But where wealth is concentrated among a tiny elite, it may not hold true at all. Russia is a good example: it is the capital of the country’s oligarchs that is fleeing abroad. The budget option open to the average Russian without a banker in Zurich or an estate agent in London involves a much less exotic itinerary: she buys dollar bills and sticks them under her mattress.

Two hundred and fifty years ago, international capital mobility may indeed have been an innovative force for the eradication of bad government. Today, it is just as often the means for multinational companies to dodge sales taxes or developing-world kleptocrats to siphon off their unearned wealth.

There is also another consideration – particularly for us here in the UK. For every country that capital is fleeing from, there has to be somewhere it is fleeing to.

This month, it was announced that penthouse D in the One Hyde Park development in London has been sold for £140m – unsurprisingly, newspapers reported that the buyer was “thought to be from Ukraine or Russia”. Just a few days earlier, the deputy governor of the Bank of England had warned that the UK’s booming housing market is “dangerous” and “the brightest light” flashing on its dashboard of risks.

An increase in Russian capital flight, I imagine the Bank would agree, is the last thing the UK economy needs.

Felix Martin is a macroeconomist, bond trader and the author of Money: the Unauthorised Biography

This article first appeared in the 21 May 2014 issue of the New Statesman, Peak Ukip

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Our union backed Brexit, but that doesn't mean scrapping freedom of movement

We can only improve the lives of our members, like those planning stike action at McDonalds, through solidarity.

The campaign to defend and extend free movement – highlighted by the launch of the Labour Campaign for Free Movement this month – is being seen in some circles as a back door strategy to re-run the EU referendum. If that was truly the case, then I don't think Unions like mine (the BFAWU) would be involved, especially as we campaigned to leave the EU ourselves.

In stark contrast to the rhetoric used by many sections of the Leave campaign, our argument wasn’t driven by fear and paranoia about migrant workers. A good number of the BFAWU’s membership is made up of workers not just from the EU, but from all corners of the world. They make a positive contribution to the industry that we represent. These people make a far larger and important contribution to our society and our communities than the wealthy Brexiteers, who sought to do nothing other than de-humanise them, cheered along by a rabid, right-wing press. 

Those who are calling for end to freedom of movement fail to realise that it’s people, rather than land and borders that makes the world we live in. Division works only in the interest of those that want to hold power, control, influence and wealth. Unfortunately, despite a rich history in terms of where division leads us, a good chunk of the UK population still falls for it. We believe that those who live and work here or in other countries should have their skills recognised and enjoy the same rights as those born in that country, including the democratic right to vote. 

Workers born outside of the UK contribute more than £328 million to the UK economy every day. Our NHS depends on their labour in order to keep it running; the leisure and hospitality industries depend on them in order to function; the food industry (including farming to a degree) is often propped up by their work.

The real architects of our misery and hardship reside in Westminster. It is they who introduced legislation designed to allow bosses to act with impunity and pay poverty wages. The only way we can really improve our lives is not as some would have you believe, by blaming other poor workers from other countries, it is through standing together in solidarity. By organising and combining that we become stronger as our fabulous members are showing through their decision to ballot for strike action in McDonalds.

Our members in McDonalds are both born in the UK and outside the UK, and where the bosses have separated groups of workers by pitting certain nationalities against each other, the workers organised have stood together and fought to win change for all, even organising themed social events to welcome each other in the face of the bosses ‘attempts to create divisions in the workplace.

Our union has held the long term view that we should have a planned economy with an ability to own and control the means of production. Our members saw the EU as a gravy train, working in the interests of wealthy elites and industrial scale tax avoidance. They felt that leaving the EU would give the UK the best opportunity to renationalise our key industries and begin a programme of manufacturing on a scale that would allow us to be self-sufficient and independent while enjoying solid trading relationships with other countries. Obviously, a key component in terms of facilitating this is continued freedom of movement.

Many of our members come from communities that voted to leave the EU. They are a reflection of real life that the movers and shakers in both the Leave and Remain campaigns took for granted. We weren’t surprised by the outcome of the EU referendum; after decades of politicians heaping blame on the EU for everything from the shape of fruit to personal hardship, what else could we possibly expect? However, we cannot allow migrant labour to remain as a political football to give succour to the prejudices of the uninformed. Given the same rights and freedoms as UK citizens, foreign workers have the ability to ensure that the UK actually makes a success of Brexit, one that benefits the many, rather than the few.

Ian Hodon is President of the Bakers and Allied Food Workers Union and founding signatory of the Labour Campaign for Free Movement.