An Economic Analysis of the Asset Recovery Law

The asset recovery law has now been in force for more than six months. There has been little public debate about it, even though it is a very important law and requires very careful enforcement. I have read it only cursorily.

Society demands the return of assets, which is, in principle, normal. In law, "lawful" and "just" are not always the same thing. Justice is often subjective, whereas lawfulness is not always just, but as lawyers say, dura lex, sed lex.

I am not a lawyer, and it is hard for me to assess the law itself: how harsh or how fair it is.

I would like to address its economic aspect.

First, defining the economic boundaries of what was illegally withdrawn or acquired is a highly subjective and difficult exercise. For example, suppose a person illegally obtained assets worth USD 10 million, then sold them and invested the proceeds in a project that generated USD 100 million. How much should be recovered from that person?

Another example: using administrative leverage, a person from the old Kazakhstan brings in a foreign partner, and together they build a business and earn income from a monopoly position, say USD 1 billion, split equally. Will the authorities demand the entire billion from that person or only half? And what happens with the foreign party?

Second, what if a person who obtained assets illegally later lost them through poor management? Will that person still be obliged to compensate for their value?

Third, if the scale of challenges becomes large enough to touch the privatization of the 1990s, then in theory the process would bear the hallmarks of nationalization, leading to an even larger share of the state in the economy.

Fourth, the very process of determining who falls under the law is highly subjective, which is logical in principle. But it means that some will be able to strike a deal, while others simply will not be caught.

Next comes the sale and privatization of whatever is recovered, and however hard the state tries, we will again see inefficiency, bureaucracy and a long delay before these assets return to economic circulation. A simple example: when assets are being recovered, they will be overvalued, because the state needs to show how much it has recovered, while the owner benefits from handing over fewer assets to satisfy the claims. But later, when the assets are put up for sale, there will not be many willing to pay a high price, and after a number of years under state management their quality may fall sharply. We would then again be left with problem assets stuck on the state's books.

In this respect, hardly anyone is likely to manage them more efficiently than the current owners, so it is better to use fiscal methods of recovery.

In this situation it is hard to define the best formula for asset recovery. I would focus more on returning the withdrawn funds to economic circulation and on the fiscal function. For example, one could stipulate that current owners pay a certain tax on all disputed assets, while funds withdrawn abroad are likewise taxed and come with an obligation to invest in the country.

In short, this is a complex law and a complex process: we must neither worsen the investment climate nor fail to restore justice, and we must do so by lawful means. In my view, what was acquired lawfully should never be challenged, because private property must be inviolable and untouchable; otherwise it will be very difficult to secure an inflow of foreign investment.