What is kleptocracy and how does it work?

Exploring the definition of kleptocracy, the motivations behind it, why it flourishes in certain societies, and its global impact.

Explainer
4 minute READ

Thomas Mayne

Visiting Fellow, Russia and Eurasia Programme

As Russian bombs rain down on Ukraine, there is a huge focus on the ‘oligarchs‘ and business figures close to Vladimir Putin who have profited from the corrupt underpinnings of Russia’s political economy.

Russia was dubbed a kleptocracy by American political scientist Karen Dawisha in her 2014 book Putin’s Kleptocracy: Who Owns Russia? But what exactly is a kleptocracy and in what ways is the term appropriate for Russia?

Definition of a kleptocracy

Most explanations of kleptocracy – derived from the Greek for ‘thief’ and ‘rule’ – stress the aspect of ‘grand corruption’ whereby high-level political power is abused to enable a network of ruling elites to steal public funds for their own private gain using public institutions.

Kleptocracy is therefore a system based on virtually unlimited grand corruption coupled with, in the words of American academic Andrew Wedeman, ‘near-total impunity for those authorized to loot by the thief-in-chief’ – namely the head of state.

The most successful kleptocracies are those which, rather than strip the house bare, occupy it and allow other members of the household to generate their own income while paying ‘rent’ to the landlord – the godfather-like head of state

Often oligarchs are seen as characteristic of Russia’s kleptocracy, but the Russia of the 1990s was not a kleptocracy as the oligarchs represented a power base outside of the Kremlin, one that Putin had to dismantle by exiling or jailing those who opposed him.

In a true kleptocracy, the oligarchs are the politicians themselves – often referred to as ‘poligarchs’. The former head of the Russian state railways Vladimir Yakunin – whose mansion famously had a whole room dedicated to storing his wife’s fur coats – is a good example, as is Dariga Nazarbayeva from Kazakhstan, the eldest daughter of the country’s first president, who rose to the rank of chair of the Senate while sitting on a $595 million fortune.

The undeniable vast wealth of each of these ‘PEPs’ (politically-exposed person) is explained, they have said, by legitimate personal business earnings and salary. Nazarbayeva successfully resisted a UK court process to explain the source of expensive real estate linked to her.

Some definitions of kleptocracy introduce the concept of illegality – for example a ‘rent-seeking state where favouritism happens illegally’ although this poses problems as kleptocratic regimes do not apply the law evenly.

Illegal activity on behalf of government officials is either ignored, allowing corrupt funds to flow out of the country, or ruled legal by a corrupted legal system – ‘legalized’ illicit financial flows.

Such nations also provide ample opportunities for rent-seeking by awarding lucrative contracts to family members or friends of those in power, which is corrupt but may not be illegal under the laws of that country.

Self-enrichment not the only motivating factor

Clearly self-enrichment is a driving force behind kleptocracies but kleptocratic overreach – stealing too much – may be the death knell for a regime. In a story relayed in Sarah Chayes’ Thieves of State, Tunisian president Ben Ali ‘went berserk’ in his quest to capture the country’s wealth, causing an ‘unimaginable’ development gap and ultimately leading to the overthrow of his government.

Wealth will be lost if the ruling elite cannot remain in power. If they succeed in ousting the incumbents, opposition political factions look to confiscate assets of the previous regime and close opportunities for them to further enrich themselves.

Therefore, a ‘well-functioning’ kleptocracy maintains the system by controlling the money-making enterprises and natural resources, with the head of state attempting to avoid intra-elite conflict by dividing the spoils between various groups or family members.

This is manifested through the country’s top enterprises being controlled by economic ‘frontmen’ who use a network of offshore shell companies to funnel earnings out of the company – and then the country – on behalf of their patrons, the more senior members of the regime.

Some kleptocratic gains are reinvested in political campaigns or in media companies to help frame the kleptocrat’s narrative. Dariga Nazarbayeva’s ownership of Kazakhstan’s largest media company Khabar is a good example of how the domestic narrative can be reframed.

Money is also invested in ‘safe’ assets, such as real estate overseas, or simply hoarded in foreign bank accounts to be used in emergencies – a war chest for a political campaign – or in relocating if the ruling elite is ever removed from power. Hoarding also prevents potential economic and political rivals from getting their hands on capital that could be used to oust the current regime.

For many years the UK has been happy to accept cash from kleptocracies but, following Russia’s attack on Ukraine, the folly of the ‘no questions asked’ approach is starting to be more widely understood

It is not surprising that one of the only serious challenges to the presidency of Nursultan Nazarbayev in Kazakhstan came from former government minister and bank manager Mukhtar Ablyazov who was accused of siphoning $5 billion from a bank he managed. Without any possibility of challenging leadership through democratic means, opponents often try to accrue wealth in the same fashion.

The most successful kleptocracies are those which, rather than strip the house bare, occupy it and allow other members of the household to generate their own income while paying ‘rent’ to the landlord – the godfather-like head of state.

This is why the structure of kleptocracies are is often compared to that of an organized crime groups – unlike in a democracy where capital by and large flows down to the people, money in a kleptocracy is passed up the chain from junior ministers to ministers, then to the head of state and his family.

The relationship between kleptocracies and dictatorships

Kleptocracies may appear stable for decades but are ultimately fragile. In January 2022, peaceful protests in Kazakhstan concerning increased fuel costs descended into violence, leading to the deaths of more than 225 people.

Kazakhstan observers reported the violence may have been provoked by, amongst others, a nephew of former president Nazarbayev, as it was likely their money-making opportunities were being threatened by his successor Kassym-Jomart Tokayev. With no rules-based approach as to who should control what, such seemingly spontaneous conflagrations are to be expected.

A successful kleptocracy provides just enough for the national economy to prevent popular uprisings or be protected by repressive state security services so that uprisings are quashed. It is of course easier to maintain control over a country’s resources if absolute power can be exerted. Turkmenistan, a country ruled for 30 years by dictators of ludicrous proportions, sees 80 per cent of its gas revenues disappear into a black hole.

But not all kleptocracies are dictatorships. Ukraine under President Yanukovych resembled a kleptocracy – Yanukovych’s luxurious private residence made headlines with its golden toilet and bathroom decorated with €350,000 worth of semiprecious stones – yet the election that saw him come to power in 2010 was contested against bitter rival Yulia Tymoshenko. And Nigeria is a country which is politically plural to some extent yet has lost billions over the decades from kleptocratic practices, especially in relation to its oil sector.

And being an autocracy does not necessarily make a country a kleptocracy. Communist dictatorships provide a different model of economic control as there are no private economic actors.

Elites in communist regimes do find ways of garnering private wealth corruptly – in 1980s USSR, high-ranking agents in the KGB generated money by smuggling in embargoed goods from Europe – but the system itself is not built on private control of what should be state assets.

The effects of kleptocracy are felt in other countries

Sometimes debate over whether a particular country is or is not a kleptocracy can detract attention away from whetherhow liberal democracies should support such regimes through providing financial services to them.

Journalist Oliver Bullough says it is ‘pointless’ to ask whether Russia is a kleptocracy, but rather is more appropriate to ‘examine how Russia’s elites are part of a kleptocratic system by which their thefts from the national budget are connected, via Scottish limited partnerships and Moldovan or Latvian banks, to the London property market’.

Kleptocracies need other systems to survive, and recent academic research rightly stresses their ‘transnational’ aspect – UK academic John Heathershaw defines kleptocracy as a state supported by ‘cross-border ties, typically in the form of non-state networks, by which authoritarian elites gain and keep power and wealth’.

Sometimes debate over whether a particular country is or is not a kleptocracy can detract attention away from whetherhow liberal democracies should support such regimes through providing financial services to them

As described in the December 2021 Chatham House paper, kleptocracies rely on professional services provided by the UK and other democracies to legalize, legitimize, and hide dubiously acquired wealth.

Wealth managers and solicitors suggest tax optimization schemes, company formation agents help kleptocrats create complex networks of offshore companies to make their assets hard to trace, real estate agents help them invest in luxury property with few questions asked, and PR agents suggest donations to universities and charities to help launder their reputation.

For many years the UK has been happy to accept cash from kleptocracies but, following Russia’s attack on Ukraine, the folly of the ‘no questions asked’ approach is starting to be more widely understood.

What is kleptocracy and how does it work? 2nd part

The flow of dirty money through the UK is a national security threat, something acknowledged by the Ministry of Defence in 2020, when it said the centrality of the City of London to global finance and the well-being of the UK economy leaves the nation ‘vulnerable to economic warfare’.

Dirty money also causes significant financial damage to the UK, with money laundering alone causing it up to £100 billion of damage according to the National Crime Agency. Questions have been asked recently about the influence of dirty money through political donations and on UK law courts.

The next UK parliamentary session provides an opportunity to turn the tide against the immense flow of money from kleptocracies with a proposed second Economic Crime Bill. But, as ever, new legislation needs to be accompanied by proper enforcement to be effective.