The problem with the Russian economy is that it is designed to favour its crony capitalists. Similarly, the assets of the Chinese elite are derived from government connections

The West is attempting to force Russia into giving up the Crimea and invading eastern Ukrainian. Their weapons of choice are sanctions. The US and European Union (EU) have imposed sanctions on some of the leading political and business leaders close to Russian President Vladimir Putin. Russia has retaliated with its own set of sanctions. Although it is doubtful that either set of sanctions will have any real effect on Russia’s foreign policy, what is interesting to us are the effects they will have.

So far the Russians have restricted travel for several US legislators, the leader of the House and Senate as well as a few others. I doubt if they even noticed. It is possible that they have never even been to Russia. They certainly do not go there on a regular basis. Most likely all of their assets are in the US. If they do have foreign assets they are definitely not anywhere near Russia.

In contrast, the US has placed sanctions on 20 Russians and one Russian lender, Bank Rossiya. Bank Rossiya was referred to as “the personal bank for senior officials of the Russian Federation”. Putin’s stance hasn’t changed, but both the equity and the currency, the rouble, have been punished. The equity markets are off 21% this year and the Russian rouble has declined over 13%. Meanwhile, the US equity markets are flirting with new highs.

The wealthy Russian oligarchs were the worst hit. In March alone, Russia’s top 10 billionaires, led by Alisher Usmanov, had lost a combined $6.6 billion of their net worth. This is perhaps fitting. The problem with the Russian economy is that it is designed to favour these crony capitalists. But apparently Russia isn’t even safe enough for them.

Crony capitalism allows certain individuals to profit from special connections to the state. Often their gains are allowed by contravening weak laws. The paradox is that at some point these people need laws to protect their property regardless of its origin. So they leave and invest elsewhere. The money leaving Russia is estimated to be $65 billion last year alone.

One favourite destination is London. One important guage of crony capitalism is the price of London real estate and the origin of the buyers. Property prices in London rose 12% last year. Much of this was from Russia and the rest of the former Soviet Union. When surveyed by London real estate agents about change of domicile, 37% of this group said they were considering a move. The global average is around 15%.

Russians and Ukrainians are hardly the largest nationality vying for London property. This distinction belongs to the Chinese, although usually the money comes through Hong Kong or Singapore. They prefer new buildings where up to 90% of the buyers are from “Hong Kong”.

The number of Chinese, who want to leave, is also similar to their Russian counterparts. As of 2013, Chinese emigrants to overseas had reached 9.34 million, an increase of 128.6 % in 23 years. Those that stay in China, still want to invest outside of one of the fastest growing economies in the world. One third of wealthy Chinese have overseas assets and 30% of those who don’t intend to in the next three years.

Of course like the Russians, the assets of the Chinese elite are derived from government connections. These wealthy individuals exploit these connections to become what is known in economics as rent seekers. They get exclusive access to public goods like licenses, building contracts, and low interest loans. This type of crony capitalism is a disaster for the economy because it results in misallocation of capital and poor infrastructure.

The Economist recently even came up with a chart. The problem with their chart and many others is that they used the wrong metrics. They arbitrarily used billionaires and limited their financial interests to certain sectors. This led to a ranking that put China below Britain and just above France.

Perhaps, a better way to rank crony capitalist countries would be to compare countries the rich want to leave with places where they want to live and invest once they attain their illicit booty. The mistake that The Economist makes is to limit the sectors. The real problem is not the sectors or necessarily the institutions although these are certainly part of the problem. The real problem is government itself.

All government policies distort markets whether they intend to or not. The distortions lead to misallocations and inefficiencies that slow growth. In the US, the massive program of quantitative easing was intended to help the unemployed. Instead it just made the rich richer.

This is not to say that all of these policies should be eliminated. Simply that they should be limited. Limiting the scope policies to the least number of areas is the best way to eliminate the advantages of the elite and avoid unintended consequences. Regulations necessary to protect the general public should be designed to be self-executing when ever possible. In other words, harness the power of self interest to help make a decent place to live rather than allowing government enabled greed to create a place people want to leave.

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)