COLUMN-When capital flies, but corruption stays behind-Chrystia Freeland

Thu Mar 28, 2013 2:02pm EDT

By Chrystia Freeland

NEW YORK, March 28 (Reuters) - One of the most important political and economic facts of this young century is that capital has been slipping the traces of the nation-state. Business is global; government is national. That mismatch is one of the big sources of tension in the world today: Whether it comes to taxes, bank regulation or immigration, the fact that money and politics no longer live in the same neighborhood makes consensus harder to achieve.

For Exhibit A, you could point to the flood of Russian rubles into Cypriot banks - and the dramatic consequences.

Global businesses have profited handsomely. Multinationals have legally lowered their tax bills by shifting their profits to low-tax countries: As a scandalized British public recently learned, for example, Starbucks paid 8.6 million pounds, or $13 million, in corporate taxes in Britain over the past 14 years.

For individual plutocrats, taking advantage of globalization is even easier: Move your legal residence - and your money - as the actor Gerard Depardieu or the Facebook co-founder Eduardo Saverin did.

But these lower tax bills come at a cost. As I was told by Kemal Dervis, former minister of economic affairs in Turkey and now vice president of the Brookings Institution, "Capital is seeking to avoid the burden-sharing which makes modern society possible."

"If every country tries to race towards the lowest rate, then in the end nobody gains," Dervis said. "If you believe there should be no government at all, then fine. But if you believe some government is good, then you cannot have a system that erodes the tax base in all major countries."

The big losers, in Dervis's view, are those who do not have the option of exiting the nation-state: the middle-class citizen and the medium-size business.

The Cypriot economy was an extreme product of the age of global business and a weakening nation-state. Cyprus used to live off a banking sector whose coffers were bloated chiefly by Russian money.

Part of the country's appeal was the seduction of low taxes and light regulation. But for the Russians, whose home tax rates are low enough to attract Depardieu, that was not Cyprus's only advantage.

Equally important was the fact that Cyprus allowed affluent Russians to escape the corruption of their home country and to trade it for the rule of law of the European Union. That was a shift with important political consequences.

One of the mysteries of modern Russia is why a country that is relatively rich and well educated is so tolerant of its authoritarian rulers and weak legal system. The political quiescence of the Russian middle class flies in the face of the theory that as the bourgeoisie gains economic power, it will demand a corresponding increase in political rights - a view that implicitly underpinned much of the West's policy toward post-Soviet Russia.

But, partly thanks to globalization and the mass offshorizatsiya, as the Russians call it, that it has facilitated, that is not how things have turned out. In contrast to the rising middle classes of North America or Western Europe in earlier eras, rich Russians have not needed to fight for the rule of law at home to protect their capital. They have chosen the much simpler option of exporting their money and taking advantage of the rule of law in the West.

As Ivan Krastev, a Bulgarian political scientist, has argued, part of Vladimir V. Putin's political genius is that he has not blocked the flight of his richest and smartest citizens. Unlike both the czars and the commissars, Putin has realized that letting these people and their rubles go actually makes his regime more stable, by exporting a potentially powerful source of dissent.

But the Cyprus crisis has shown that the Russian elite's strategy of offshoring the rule of law, rather than building it at home, has its risks, too. When the wolf was at the door, Cypriot citizens had the political muscle in Nicosia and Brussels to defend their interests; Russian bank depositors did not.

The rule of law and a stable financial system are both part of the expensive infrastructure of modern society that Dervis worries is underfinanced. Russian elites found it easier and cheaper to buy these collective goods abroad. But even in this global age, citizenship has its perks, and one of them is that in a moment of crisis, your government might put you first in line.

Plutocrats worldwide have readily understood the advantages of evading the burdens of the nation-state. Cyprus is a reminder that government has benefits as well as costs and that if you opt out of paying the bill, you may find that you get what you pay for.

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