«Comparison with Western and other ex-communist countries»
We now come to the evolution of the composition of aggregate national wealth (both public and private) in Russia over the 1990-2015 period. So far we focused on market-value national wealth. That is, corporate assets were valued at prevailing stock market prices.
This explains a large part of the fluctuations in the ratio between market-value national wealth and national income reported on Figure 6a: the value of other domestic capital (which includes the value of corporate capital and other non-housing non-agricultural-land domestic capital) is very small in the late 1990s-early 2000s because of the low stock market valuation of Russian companies. In contrast, market-value national wealth reaches much higher levels in 2008-2009 due to high corporate and housing valuations.
It is worth pointing out that there are very different ways to interpret the fact that Tobin’s Q is systematically below one. There are many countries with well-functioning legal systems where Q ratios are systematically below one, such as Germany, Nordic countries or Japan. The standard explanation is the stakeholder model: various actors other than shareholders, including worker representatives and sometime regional government, share corporate decisionmarking power, which may reduce the market value of equity shares, but not necessarily the social value of companies. Of course, one can also think of less optimistic interpretation of low Q ratios, which may better fit the Russian case, such as ill-defined property rights and low protection of shareholder stakes in companies (not the benefit of other well-defined and potentially efficiency-enhancing stakeholders, but simply because the legal system is not working well).
An additional reason for less than one Tobin’s Q in Russia could be due to the low market valuation of the capital inherited from the Soviet era. The story of the overextended and uncompetitive Soviet industry is quite well known. But inherited capital still accounts for the important part of the Russian capital stock and many industries have been artificially kept alive as a part of the government social policy. To some extent, this explanation is complementary to the above mentioned, since government can reduce shareholders’ control in most profitable sectors, such as natural resources, as a part of the wider rent-sharing system (Gaddy and Ickes 2002; Gustafson 2012).
Finally, it could also be that this low level of market valuation reflects the importance of offshore assets and legal outsourcing in the management and control of Russian corporations. That is, one additional reason why the market value of equity shares traded on the Russian stock market is relatively low might be that Russian corporations are embedded into a complex nexus of contracts and offshore legal entities, of which the system of official shares ruled by the Russian legal system and traded on Moscow stock market is only the visible part. Some of the case-based evidence reported by legal scholars such as Nougayrede (2014, 2015, 2017) seems consistent with this interpretation. More research is needed to analyze these issues.
We now compare our findings regarding the evolution of aggregate wealth in Russia to the evolution observed in other countries. Consider first the evolution of private wealth-national income ratios. It is by now well-known that there has been a general rise of private wealth relative to national income in all developed countries since the 1970s-1980s. This evolution can be attributed to a mixture of factors, including a combination of growth slowdown and relatively high saving rates (leading to high wealth-income ratios, partly in relation to ageing), as well as a general rise of the relative price of housing and financial assets relative to the consumer price index, reflecting a complex set of institutional and possibly technological changes (including financial deregulation, the end of rent control, rising agglomeration effects, and relatively slow technical progress in construction and transportation as compared to other sectors).
The case of Russia – together with that of China and other ex-communist countries – can be viewed as an extreme case of this general evolution, reflecting another critical explanatory factor, namely the privatization of public assets. In Russia as in China, private wealth was very limited back in 1980: slightly more than 100% of national income in both countries according to our estimates. By 2015, private wealth has reached 500% of national income in China, i.e. approximatively the same level as in the U.S., and rapidly approaching the levels observed in countries like France or Britain (550-600%). In Russia, private wealth has also increased enormously relative 26 to national income, but the ratio is “only” of the order of 350-400% in 2015, i.e. at a markedly lower level than in China and in Western countries. We should stress that the gap would be even larger if we did not include our estimates of offshore wealth in Russia’s private wealth. (For other countries, offshore wealth is estimated to be much smaller than in Russia (typically less than 10% of national income) and is not included in the estimates reported here. Note however that offshore wealth held by Chinese has been increasing fast in recent years and might become more significant over time. We plan to further investigate this issue in future research).
Next, Chinese savings were used for the most part to finance domestic investment and hence domestic capital accumulation in China. In contrast, a very large fraction – typically about half – Russia’s national saving were in effect used to finance foreign investment (via very large trade surpluses and current account surpluses) rather than domestic investment. This is not necessarily bad in itself, except that as we have seen earlier these large flows of foreign savings did not result into much wealth accumulation, due to general mismanagement of the surpluses (bad portfolio investment, capital flight and offshore leakages). Again, the gap between Russia and China would be even larger if we did not include offshore wealth in Russian national wealth (as we do throughout this paper and on Figure 7b, which is obviously debatable, given that offshore wealth is largely out of reach of Russia’s national government). In contrast, if we were to include the full value of cumulated trade surpluses in Russia’s national wealth, then Russia’s national wealth-income ratio would be at the same level as China by 2015 (around 700% of national income). This illustrates the macroeconomic significance of this issue.
Finally, another reason why China’s national wealth income ratios are higher than in Russia is because relative asset prices have increased more. In particular, Tobin’s Q ratios are much closer to one in China. The interpretation of this finding might reflect different factors (including more organized stake-holders in Russia, and/or less well protected property rights, and/or more legal outsourcing; see the discussion in previous subsection).
It is also interesting to compare the evolution of the overall share of public property in Russia and other countries. In developed countries, the share of net public wealth in net national wealth was significantly positive in the post-WW2 decades up until about 1980, around 15-25% of national wealth, reflecting low public debt and significant public assets (including corporate assets in manufacturing and finance in several Western countries). Net public wealth declined significantly since the 1980s, due both to the rise of public debt and the privatization of public assets. By 2015 net public wealth has turned negative in Britain, Japan and the U.S. (and is barely positive in Germany and France). In effect this means that private wealth holders own the equivalent of total public assets (via financial intermediation and the ownership of public debt), and also a fraction of future tax payments (in countries with negative net public wealth).
There are also strong differences between these countries. In particular, the privatization process was much more gradual in China than in Russia: it started earlier, and is still going on (although Chinese authorities might also choose to stabilize the public-private divide at the current level). The gradual privatization pattern observed in the Czech Republic is intermediate between the two, and is in some ways closer to China (see Figure 7c). From that viewpoint, the “big bang”, “shock therapy” approach followed for privatizing Russia appears to be markedly different from that followed in other ex-communist countries (something that we will later relate to the different inequality trajectories). It would be very interesting to compare these patterns to other Eastern European countries, but unfortunately comprehensive balance sheets are yet to be collected for most of these countries.
Finally, it is interesting to compare ex-communist countries with respect to the importance of foreign assets. It is particularly striking to contrast the case of Russia and China, which both have positive net foreign assets (i.e. these two countries own more assets in the rest of the world than what foreigners own in Russia and China), and Eastern European countries, which all have hugely negative net foreign assets (i.e. these are largely foreign-owned countries). These differences are partly due to differences in economic and natural endowments. In particular, it makes sense for countries with large (but not permanent) natural resources such as Russia to accumulate trade surpluses and foreign reserves for the future. This is what one observes in most oil-rich countries in the Middle East and elsewhere.
It is also worth noting that these patterns of foreign ownership also have consequences for the study of domestic inequality. In particular, as demonstrated by Novokmet (2017), the fact the holders of top capital incomes tend to be foreigners rather than domestic residents contributes to lower top income shares in countries like the Czech Republic or Poland or Hungary (as compared to countries like Russia or Germany). I.e. foreign owned countries tend to have less domestic inequality (other things equal). We will return to this when we compare inequality trends across countries.
Finally, note that a significant subset of Eastern European countries (in particular Poland, Hungary and Bulgaria) already had large negative net foreign asset positions back in 1990.
Co-authored with Gabriel Zucman.
To be continued...