East-Central Europe – the Visegrad nations and the Balts – are commonly considered to have had far better post-Communist transitions than Russia. They started earlier, and from a more privileged position; in contrast, the Soviet economy was more distorted in the first place, and there were no living memories of prewar capitalism. They got more economic and institutional support from the West. There was no haphazard rush to privatize state assets, preempting the development of a powerful oligarch class that in Russia’s case has become a byword for sleaze and boorishness.

One positive result of this was a generally much lower degree of income inequality than in Russia.

This conventional view is mostly true.

However, as Leonid Bershidsky has just pointed out, citing a recent research paper by Thomas Piketty et al., there is a small catch.

Finally, the large negative foreign asset positions of Eastern European countries should obviously be put in relation to the fact that these countries have adopted a development strategy based upon economic and political integration within the European Union. Eastern European countries are largely foreign-owned, but the owners tend to come from EU countries (in particular from Germany). So in some sense it is not entirely different from the situation of peripheral regions that are being owned by more prosperous central regions in a large federal country. It is also worth noting that these patterns of foreign ownership also have consequences for the study of domestic inequality. In particular, as demonstrated by Novokmet (2017), the fact the holders of top capital incomes tend to be foreigners rather than domestic residents contributes to lower top income shares in countries like the Czech Republic or Poland or Hungary (as compared to countries like Russia or Germany). I.e. foreign owned countries tend to have less domestic inequality (other things equal).

In other words, a lower net international investment position – all other things equal – should result a country having lower inequality by dint of their 1% being foreigners.

The two major exceptions in the ex-Communist world are Russia and China.

Finally, it is interesting to compare ex-communist countries with respect to the importance of foreign assets (see Figure 7d). It is particularly striking to contrast the case of Russia and China, which both have positive net foreign assets (i.e. these two countries own more assets in the rest of the world than what foreigners own in Russia and China), and Eastern European countries, which all have hugely negative net foreign assets (i.e. these are largely foreign-owned countries). These differences are partly due to differences in economic and natural endowments. In particular, it makes sense for countries with large (but not permanent) natural resources such as Russia to accumulate trade surpluses and foreign reserves for the future.

Certainly Russia’s resource endowments helped and perhaps made it possible, but there was also a political element to it. Even under Yeltsin, the Kremlin had always been loathe to privatize state corporations to foreigners, even though they managed them better than either the state or domestic oligarchs.

One explanation is that privatization was unpopular enough, and selling off assets to foreigners would have made it even more politically untenable. A more cynical interpretation is that foreigners were harder to influence or to provide the kickbacks and favors their benefactors in the state expected for their largesse.

Be that as it may, Russia (and China) developed national oligarchies, whereas Visegrad and the Baltics ceded theirs to the established oligarchies of Mitteleuropa.

Finally, the large negative foreign asset positions of Eastern European countries should obviously be put in relation to the fact that these countries have adopted a development strategy based upon economic and political integration within the European Union. Eastern European countries are largely foreign-owned, but the owners tend to come from EU countries (in particular from Germany). So in some sense it is not entirely different from the situation of peripheral regions that are being owned by more prosperous central regions in a large federal country.

Ergo for Belarus and the Ukraine (!) with respect to Russia. (Despite everything that’s happened since 2014, Russia remains the biggest foreign investor in Ukraine).

Now as Bershisky goes on to point out, while foreign ownership has its benefits – institutional integration, better management, etc. – there is also a price to pay: A loss of sovereignty.

It’s not really a choice; Eastern Europe will eventually need to champion integration, just as it once championed membership. My own view is that eventually, it will no longer matter where a European company is headquartered because a united Europe will have a common budget, and economic cohesion will become inevitable. Nationalism may be having a moment, but it’s too late: The Eastern European countries have been open to investors for too long, and they’ve lost too much control over their economic future to hold on to political control.

Of course opinions on the desirability of this will differ.

As an immigration optimist who had a hysteric fit on Twitter over Brexit, we can be pretty sure that Bershidsky will see this as a good thing.

That said, Bershidsky might be jumping the shark here. As the Ukraine has shown, if there is sufficient political will, an economic “colony” can well defy its foreign owners, despite the economic cost of it (a 15% collapse in GDP). On the other hand, could Muslim immigration really be the hill on which Eastern Europe’s populists and Brussels skeptics make their last stand? After all, multicultural enrichment is a process that takes years if not decades to get noticed and to start having a marked effect on natives’ lives, whereas the loss of Crimea and the Donbass – and the ensuing threat to Ukraine’s continued statehood – was a much more sudden jolt.

In the lack of any such highly visible state of emergency, it is easy to imagine the East Europeans taking their hush money and piping down.