Russia’s offshore aristocracy

When Vladimir Surkov talked about Russia’s ‘offshore aristocracy’ he meant that small class of rich Russians who own everything through offshore companies. They don’t pay tax in Russia, they do their IPOs abroad, and they do deals affecting millions of Russians without any regulatory body in Russia knowing what happens. Surkov wants these people to own Russian assets through Russian companies, do their business under Russian jurisdiction, with control from Russian regulators.

More significant than the offshore aristocracy of wealth is the offshore aristocracy of talent. The 17th century French mathematician Blaise Pascal said that France would become a land of idiots if 300 scientists left the country. According to the BBC, World Bank and other sources, more than 500,000 scientists and computer programmers have left Russia since 1991.Most of them have found well paid jobs in the United States, Europe, Asia. In Russia they would be earning between $500 – $1000 a month. In the US they earn $5000 a month on average.

Their influx has greatly benefited the receiving countries -it is estimated that over 30 per cent of Microsoft software is done by Russian immigrants to America. But it has harmed Russia. The cost of the brain drain at its peak was estimated at $20bn-$50bn a year, plus the long term cost of losing comparative advantage.

This is not all. There has also been a huge internal exodus from intellectual life. The World Bank estimates that about one million scientists have moved into non-intellectual occupations since 1991. Everyone has his story of the taxi-driver with a PhD in physics.

Most of the scientists left in the 1990s when the old Soviet institutes ran out of money. Throughout this period Russia was attracting large numbers of immigrants –between 100,000 and one million net migrants a year since 1991. So overall statistics hide the effect of the brain drain. What happened was that highly skilled people left and were replaced by unskilled labour, mostly from other CIS countries.

Today far fewer scientists are leaving. But few are coming back. This is understandable. They have settled down in their new countries. Scientists who do return seem to do so for three reasons. Some are nostalgic for Russia. Some see business opportunities in Russia: programmers who move to the United States are now coming back to set up companies in Russia, taking advantage of low costs to sell to American and European clients. And some top scientists are coming back for prestige reasons to head institutes or become advisers to large Russian companies.

To entice more of them back the Russiam state should start a matching salary programme to enable returning scientists to make as much money in Russian institutes as they make abroad. However, the fundamental answer to the offshore aristocracy problem is to make it more attractive for wealth and talent to stay. Of course,money is an important factor. But Russia also has to become a more attractive place in which to live. This goes beyond money. A country’s power of attraction –its ‘soft power’ –is based on its quality of life, its standing in the world, the hopes and expectations citizens have of its future, and their future in it. In all these respects Russia has some way to go.

Russians have told me that they dream of getting their children into schools abroad, not because they think foreign education is better than Russian education, but because they want to give them an escape route to the west. As long as Russia fails to offer an attractive model of socio-economic and political development the problem of the offshore aristocracy will remain.