Why aren't the Rich fighting against Autocracy (anymore)?
How Tax Havens Undermine the Rule of Law by Providing the Rule of Law
Historically, economic elites pushed for stronger courts, better property rights, and even elections. There was an underlying logic: elites are fundamentally afraid of the state expropriating them, and domestic political development — the rule of law, democracy — can restrain arbitrary government action.
But recent elites are at best indifferent and at worst complicit in the democratic backsliding of Russia, Hungary, Turkey, and now the United States. Some of that can surely be explained by today’s plutocrats expecting to make wins by aligning themselves with the government. Cash in some short-term gains for potential random punishment down the line.
But I think the main explanation is that elites no longer have the incentive to fight for the rule of law at home. They can buy it abroad.
My previous post examined why firms use tax havens for economic gains other than taxes. This one is about the political gains of going offshore. Sure, these jurisdictions offer secrecy, but also access to commercial law, strong courts, and international treaties. Setting up a shell company in the British Virgin Islands or Luxembourg isn’t just about paying less tax. It’s about choosing your own legal system.
It’s about property protection. And that has major knock-on consequences for political stability.
Running from your government
Let’s start in Ukraine. During the 2004 Orange Revolution, a pro-EU political bloc took power from Kremlin-aligned elites. Using firm-level data on the 300 biggest firms in the country, and linking them to offshore incorporations identified in the Panama Papers, researchers tracked how elites from the “losing” side responded. They restructured ownership, moved assets offshore, and shielded control behind shell companies.
Ukraine isn’t an anomaly. Bayer et al. (2023) show that whenever headlines about asset seizures spike, offshore incorporations increase soon after. That result holds even in stable democracies. Offshore wealth acts as a form of preemptive insurance. It's much harder to seize what you can't trace.
There are a couple of potential mechanisms at play. Let’s say you’re an oligarch and you’ve moved your money offshore. You’ve bought the insurance. But does the government know you’ve done it? Isn’t all this supposed to be murky and hard to trace? Yes, it is. So governments may not know where your money is. They’ll guess it’s abroad and might expect it to be hard to track down — so they might be deterred from expropriating.
But even if that deterrence effect fails – the state still comes to get you – the costs of asset seizing are way higher. The state might manage to figure out which relative’s name your Cayman account is in, but it would then still need to go through the court systems of the Cayman Islands to really get their hands on that wealth.
Tax havens can be accused of a lot of things, but their business model relies on acting like a serious realm of secrecy and protection. They won’t bend over easily.
Dodging Foreign Oversight
Just as an elite can use offshore finance to make it more difficult for their home government to track them, it also makes it harder for international organizations or foreign states to interfere in an oligarch’s affairs. So changes in international politics have also been shown to influence the flows to tax havens.
Kern et al. (2023) illustrate how elites in countries seeking IMF bailouts often move money abroad before the funds arrive. It’s a “crash for cash” strategy: manufacture a fiscal crisis, profit in the short term, shift the gains offshore, and let the IMF clean up the mess. Offshore havens become exit ramps for politically connected wealth.
In ongoing work with Lorenzo Crippa, we find something similar with U.S. corruption investigations. The Department of Justice has absurdly wide latitude to investigate the bribery of government officials abroad through the Foreign Corrupt Practices Act (FCPA). As long as the company paying the bribe has a link to the U.S. (which can be as tenuous as having a U.S. bank account), the U.S. can claim jurisdiction to prosecute.
When America successfully enforces a corruption case in, say, China, offshore incorporations by Chinese elites spike. But the money doesn’t just go abroad. It flows to havens that don't have international legal obligations to cooperate with U.S. authorities on anti-corruption efforts. This is legal shopping to avoid accountability, not just tax.
Weaponizing International Law
Not all tax havens are created equally. Yes, they all promise low tax rates and the rule of law, but they have different international reputations and, with that, are party to different international treaties. The latter lets elites not just use tax havens as a defensive means, but as an offensive weapon against governments.
Bilateral Investment Treaties (BITs) allow foreign companies in a country to sue their host government if their property rights are violated. The idea was that developing countries need capital, but capital doesn’t trust weak institutions, so let’s give them a neutral international venue to protect themselves. So if the Netherlands and South Africa have a BIT, Dutch companies can sue the South African government if the African National Congress (ANC) decides to expropriate them.
Seems smart enough if an emerging market is desperate for the (foreign) money needed for growth.
But what counts as a Dutch company? Should it include American investors that have set up a shell company in the Netherlands for tax purposes? We can argue that normatively, but legally there is a recurring pattern of arbitration bodies accepting de facto Americans as de jure Dutch.
Work by Calvin Thrall shows that 75% of damages awarded in investor-state dispute cases come from claims filed by offshore entities. Often, these suits don’t involve outright expropriation but "indirect" harms — like when Philip Morris famously sued the Australian government over anti-smoking laws.
In other cases, elites even sue their own governments. The infamous $50 billion Yukos arbitration, brought by the exiled partners of Mikhail Khodorkovsky against Russia, is one notorious example. The formerly richest man in Russia sued the Kremlin through the Energy Charter Treaty, with his de facto Russian associates claiming they were foreigners because their assets were structured through foreign holding companies party to the Energy Charter Treaty.
In recent work I’ve co-authored with Calvin Thrall, we show these extraterritorial cases — where nationals use offshore firms to file claims as "foreign" investors — make up 8% of all investment disputes and 41% of total damages claimed.
This is roundtripping as legal warfare. Domestic elites turning international law against their own states through “lawfare.”
The Political Consequence: Liberalism eating itself
The broader point is this: offshore finance allows elites to insulate themselves from the risks of weak governance without having to fix it themselves. Rather than push for judicial reform, more transparent institutions, or limits on executive power, they can arbitrage the rule of law. They don’t need better laws at home if they can choose better ones abroad.
Because not everyone gets to play the offshore shell game, we then have a bifurcated legal system between economic elites and everyone else. And that doesn’t just suck normatively. It’s empirically damaging. Rule of law is one of the strongest correlates with economic growth.
These potentially debilitating political effects of offshore finance are the main reason I decided to spend the last 10 years studying how oligarchs resolve their legal troubles abroad. But I’m certainly not the only one to think this matters. Branko Milanovic mentions this potential de-democratizing effect in his monumental book on global inequality, while Katharina Pistor postulates an analogous logic in her legal scholarship. Sharafutdinova and Dawisha focus on Russian use of the London legal system to draw out these conclusions.
As often happens with emerging ideas, several of us were running down the same track from different academic angles. None of us can be sure we’re right. It is very hard to assess the effects of the rise of tax havens on something as broad as liberal political development. But the clearest test I’ve seen comes from Maxim Ananyev. He shows that more offshore wealth correlates with future weakening of democracy levels.
Tax havens don’t just hollow out state revenues. They hollow out the incentives for elites to do the messy work of political coordination and collective action.
Globalized elites can buy their way into foreign legal protections when politics demands it.
For more details on the research informing this post, check out the full living literature on the Political Value of Tax Havens at the home of Price of Power.
I got here by way of FT’s Alphaville. Good article for the layperson.
Here thanks to link on Anne Applebaum’s Open Letters. Fascinating (and obviously disturbing). Thank you for making this content so accessible and digestible.