How the other half per cent live: the Rolls Royce Wraith is unveiled in the windows of Harrods, Knightsbridge. Photo: Getty
Show Hide image

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.

Macroeconomist, bond trader and author of Money

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

Show Hide image

It's time for Jeremy Corbyn's supporters to take on the unions

The union support for expanding Heathrow reflects a certain conservatism. 

The government’s announcement that it will go ahead with a third runway at Heathrow seems to have unlocked an array of demons. It has also created some unlikely alliances. Zac Goldsmith, the pro-Brexit mayoral candidate whose campaign was widely condemned as racist, is seeking to re-invent himself as an environmental champion, campaigning alongside fellow Heathrow MP John McDonnell. And the Richmond byelection which he is triggering could yet become a test case for Labour’s progressive alliance enthusiasts.

But perhaps the most significant position is that of the major unions. To the shock of many less seasoned activists on the left, Unite, the largest trade union in the UK and a consistent supporter of Corbyn’s leadership, has loudly called on the government to “be bold and build” the new runway, even now urging it to accelerate the process. Far from being a revelation, Unite’s position on Heathrow is longstanding – and it points to the lasting power and influence of an establishment trade unionism.

In August, the TUC co-ordinated a joint statement from five unions, urging the government to go ahead with the third runway. Like the rest of the unions’ lobbying efforts, it was coordinated with other pro-expansion stakeholders like the CBI, and it could just as easily have been authored by the business lobby. Heathrow expansion will, it says, “deliver at least £147bn to UK GDP and 70,000 new jobs”. “Trade unions and their members”, said Frances O’Grady, “stand ready to work to help the government successfully deliver this next major national infrastructure project”.

The logic that drives unions to support projects like Heathrow expansion – and which drives the GMB union to support fracking and Trident renewal – is grounded in a model of trade unionism which focuses not on transforming the workplace, but on the narrowly-defined interests of workers – job creation, economic growth and a larger share of the pie. It views the trade union movement not as merely antagonistic to employers, but as a responsible lobbying partner for business and industry, and as a means of mediating workers’ demands in a way that is steady and acceptable to the state and the economic system. This model, and the politics that accompanied it, is why, historically, trade unions were a conservative influence on Labour’s internal politics.

Nothing could be more at odds with the political, environmental and economic realities of the 21st century. It is not in the interests of workers or ordinary people to live on a planet which is slowly becoming uninhabitable. To avoid catastrophic global warming, we need to leave the vast majority of fossil fuels in the ground – that probably means shrinking the aviation industry, not expanding Heathrow’s passenger capacity by 70 per cent. All of this is implicitly recognised by Jeremy Corbyn’s environmental and industrial strategy, which aims to create a million new jobs and build a million new homes while switching to renewables and democratising the energy industry.

The gap between Corbyn’s policies and the policies of many major trade unions tells us something deeper about the challenges facing the left. If Corbynism is an unfinished revolution in the Labour Party machine, it is one which has barely started in the wider labour movement.

The gradual leftward shift in many unions’ political allegiances has broadened the alliance around Corbyn and given him strength in numbers and resources, but it is often as much about internal union politics as it is a deep conviction for what Corbyn represents. Unison general secretary Dave Prentis did back Corbyn’s re-election following a ballot of members, but is hardly a left-winger, and the union’s votes on Labour’s NEC are not safely aligned to the left.

The political radicalisation of the unions has been matched, if anything, by a decline in coordinated industrial action. The national strategy that fuelled the anti-austerity movement in 2011 and 2012 is only a memory. The democratic and organising culture in many unions, too, remains bureaucratic and opaque. Trade unions have played a key role in Corbyn’s coalition, but without a significant shift in their internal culture and a shift away from their role as respectable partners of industry, they could easily scupper the project as well. 

The expansion of Heathrow airport is a step backwards for the future of the planet and the interests of ordinary people – and yet, if it happens at all, it will have been made possible by the concerted efforts of key trade unions. This is not an aberration but a reminder that, despite their rhetorical flourishes in support of Corbyn, Britain’s trade unions are also in need of change. Any project that aims to transform the Labour party and wider society must also aim to transform the whole of the labour movement – from the shop floor to the corridors of power.