Putin vs. Marcos: Who is the Bigger Kleptocrat?

Bill Browder, the former CEO of the hedge fund Hermitage Capital Management and who was once Russia's largest foreign investor, told Fareed Zakaria of CNN that he believes that President Vladimir Putin of Russia is the world's richest man, with an estimated net worth of US$ 200 billion.  This would make Putin more than twice as rich as Bill Gates, the world's richest man, with an estimated net worth of US$79 billion.  Bill Browder would be in a strong position to know.  He once conducted a "stealing analysis" of Gazprom, Russia's largest oil company, and concluded that "only 10%" of Gazprom's assets were being stolen, instead of 99% as indicated by Gazprom's market price, hence Gazprom's gross undervaluation.

Given that many of Russia's billionaires have strong ties to Putin, particularly in the oil and gas industries, Russia's main export and one of its largest natural resources, it is unsurprising that Putin, the one with the actual power to distribute Russia's biggest exported commodity, would have the biggest share of the Russian economic pie.

This is not hard to believe at all.  One just has to look at the cost overruns of 2014 Winter Olympics in Sochi, Russia. With a revised budget of US$ 51 billion, the 2014 Winter Olympics in Sochi costs more than three times the 2012 Summer Olympics in London, roughly $14 billion. But the Sochi Winter Olympics was a much smaller event, with only 2,873 athletes representing 88 countries.  In contrast, the London Summer Olympics was a much more massive affair, with around 10,700 athletes from over 205 countries.  This is just one event in the course of Putin's 14 year reign.  Multiply this by all the transactions that go through in Russia's US$ 2.1 trillion economy and US$ 200 billion in plunder sounds pretty darn realistic.

Bill Browder went on to claim that during "the first eight or 10 years of Putin's reign over Russia, it was about stealing as much money as he could."  Sound familiar?

In absolute numbers, the size of Putin's loot would dwarf the US$ 35 billion that President Suharto was reported to have amassed in his 31 years in power.  But Putin's rapaciousness ranks only 5th in the world, behind Mobutu Sese Seko of Zaire, Sani Abacha of Nigeria, our very own President Marcos of the Philippines, and President Suharto of Indonesia.  Why?  A robber's ability to rob is determined by the size of the vault he is robbing.  It just so happens that Putin's vault, namely the Russian economy, was so much bigger than the others. With a cumulative GDP of US$ 15.88 trillion from 1999 to 2014, Putin's vault is almost 6 times President's Suharto's cumulative GDP of $2.66 trillion from 1967 to 1998.  But in terms of amount stolen as a share of the economic vault, Putin's loot amounts to only 1.26% of the cumulative Russian GDP in the 14 years that Putin has been in power.

So who was the bigger kleptocrat: Putin or Marcos?  In this case, Macoy still comes out on top!

Just How Rich Are The Marcoses Today?

Marcos is widely believed to have plundered US$ 5 billion to US$ 10 billion from the Philippines during his regime from late 1965 to early 1986.  Although some studies have estimated the plunder to be as high as US$ 17 billion, these are not widely cited.  The Presidential Commission on Good Government (PCGG), the government agency tasked with the recovery of the Marcos Wealth, has recovered around US$ 4 billion in the past 28 years.

Does this mean the Marcoses only have US$1 billion to US$ 6 billion left?

Definitely not!

First of all, the US$ 4 billion that the PCGG has recovered was recovered over a stretch of 28 years, giving the Marcoses enough time to squirrel away and hide most of those assets beyond the reach of the PCGG.  Moreover, the Marcoses have had more than enough time to grow those assets to even more unimaginable sums.

People of Great Wealth tend to have one primary investment strategy: Capital Preservation.  This capital preservation investment strategy generally has two goals:

• Preserve the Absolute Amount of the Wealth:

In other words, if the Marcoses had US$ 5 to US$ 10 billion in assets, they would like to have at least the same amount (US$ 5 to 10 billion) so many years later. In this case, at least 28 years later.

• Preserve the Amount of Wealth Relative to Inflation:

Most people intuitively understand inflation: that the buying power of one peso today is much less than the buying power of one peso ten years ago.  Similarly, having US$ 5 billion today is not the same as having US$ 5 billion in 1986.  You could buy more stuff with US$ 5 billion back in 1986.  Therefore, the Marcoses would have liked to preserve their wealth on an inflation-adjusted basis.

Just how much would the Marcos Plunder be on an inflation adjusted basis?  What was US$ 5 billion to US$ 10 billion in 1986 dollars would be worth US$ 10.7 billion to US$ 21.3 billion in 2014 dollars.

People of Great Wealth and Ambition also have another, often overriding goal: to grow their capital even further over and above what it would be on an inflation adjusted basis.  In other words, the Marcoses would most certainly want to grow their wealth beyond US$ 10.7 billion to US$ 21.3 billion.

There are many, many ways to do this.  The possibilities are infinite.  There are a multitude of ways for a wealthy but law-abiding citizen to grow his wealth in a most tax-efficient manner.  Just ask Mitt Romney. Given the magnitude of the Marcos wealth, its stateless status, its illegal origin, and the Marcoses' determination to evade the law, there are even more ways to hide and grow this wealth way beyond what they have lost to PCGG's recovery efforts.

This blog post will merely explore the investment possibilities that are available to anyone with much much more modest financial assets: the affluent but ordinary investor.

Given the size of the Marcos wealth, it would be inconceivable for the Marcoses not to have a significant portion of it invested in what the world deems the biggest, the safest, and most liquid investment market: US financial securities. Also, given the size of the Marcos wealth, it is entirely possible for them to invest in these securities and reinvest 90% of the interest payments received.  The income from the remaining 10% of interest payments would be more than sufficient to provide the Marcoses with a decent amount of cash flow to pay living expenses and whatever taxes they cannot avoid.  The calculations below assume that the investment instruments were held to maturity.  They account only for returns due to the stated interest rate and not total return (yield plus gain/loss in price of security)

Risk Free Investments

The safest US financial instruments are US Government Securities such as US Treasury Bills and US Treasury Bonds.

3-Month US Treasury Bills

If the Marcoses had invested all their assets in 3-Month US Treasury Bills from 1986 to 2013 and reinvested 90% of the interest payments they received, they would still have an estimated net worth of US$ 12.71 billion to US$ 25.42 billion as of year-end 2013. Moreover, they would have received a cumulative income distribution of US$ 0.86 billion to US$ 1.71 billion during this time.

10-Year US Treasury Bonds

If the Marcoses had invested all their assets in 10-Year US Treasury Bonds from 1986 to 2013 and reinvested 90% of the coupon payments they received, they would still have an estimated net worth of US$ 18.46 billion to US$ 36.92 billion as of year-end 2013.  Moreover, they would have received a cumulative income distribution of US$ 1.50 billion to US$ 2.99 billion over that time period.

Safe But Not Risk Free Investments

1-Month Eurodollar Deposits

If the Marcoses had invested all their assets in 1-Month Eurodollar Deposits from 1986 to 2013 and reinvested 90% of the interest payments they received, they would still have an estimated net worth of US$ 13.81 billion to US$ 27.61 billion as of year-end 2013.  Moreover, they would have received a cumulative income distribution of US$ 0.98 billion to US$ 1.96 billion over that time period.

AAA Rated US Corporate Bonds

Triple A Rated US Corporate Bonds are safe and have higher yields than US government securities.  They are not entirely without risk because even blue chip corporations can and do default from time to time but the risk is minimal.  If the Marcoses had invested all their assets in AAA Rated US Corporate Bonds from 1986 to 2013 and reinvested 90% of the interest payments they received, they would still have an estimated net worth of US$ 26.64 billion to US$ 53.28 billion as of year-end 2013.  Moreover, they would have received a cumulative income distribution of US$ 2.40 billion to US$ 4.81 billion over that time period.

Tax-Free Investment

20-Bond Municipal Bond Index

The Marcoses could also have invested in tax-free US Municipal Bonds.  If the Marcoses had invested all their assets in 20-Bond Municipal Bond Index from 1986 to 2013 and reinvested 90% of the interest payments they received, they would still have an estimated net worth of US$ 19.53 billion to US$ 39.05 billion as of year-end 2013.  Moreover, they would have received a cumulative income distribution of US$ 1.61 billion to US$ 3.23 billion over that time period.

US Equities

US Equities, by definition, have higher risks than debt instruments such as AAA Rated Corporate Bonds, Municipal Bonds, Eurodollar Deposits, and US Government Securities.  The easiest way to invest in US Equities is by buying into an Index Fund, preferably one that tracks the S&P 500 Index, which is often cited as a measure of the broad equity market.  Such a strategy would have certainly been available to the Marcoses in 1986 because Vanguard, which pioneered this investment strategy, has been offering this since the 1970s.

Why invest in an index fund? Because most fund managers cannot beat the broader market on a consistently long-term basis and at a lower cost

S&P 500 Index Fund

If the Marcoses had invested all their assets in the S&P 500 Index from 1986 to 2013 and withdrawn all the dividends they received, they would still have an estimated net worth of US$ 45.18 billion to US$ 90.35 billion as of year-end 2013.  Moreover, they would have received a cumulative dividend income distribution of US$ 11.75 billion to US$ 23.50 billion over that time period.

If the Marcoses had invested all their assets in an S&P 500 Index Fund from 1986 to 2013 and reinvested 90% of the dividend payments they received, their net worth would be significantly higher: US$ 77.61 billion to US$ 155.22 billion as of year-end 2013.  Moreover, they would have received a cumulative dividend distribution of US$ 1.67 billion to US$ 3.33 billion over that time period.

If the Marcoses had invested all their assets in an S&P 500 Index Fund from 1986 to 2013 and reinvested all dividend payments they received, their net worth would be significantly higher: US$ 82.35 billion to US$ 164.71 billion as of year-end 2013. 

Conclusion

Most likely the Marcoses would have employed a mix of all these investment instruments (stocks, bonds, deposits, government securities) plus many many more investment vehicles only available to the extremely wealthy.  In 1986, their wealth was already diversified with investments in art, jewelry, real estate, etc.  to reduce the risk of loss of capital.

How much are the Marcoses really worth? No one really knows.  Not even the PCGG.  Some of it turns up here and there.  But when Imelda Marcos says that she can pay off the Philippines foreign debt, she wasn't kidding.

Data Sources: New York University Stern School of Business.  St. Louis Federal Reserve.  Worldbank.org

On the Collective Amnesia of the Philippine Electorate Regarding the Marcos Dictatorship

Filipinos of a certain age have been lamenting about the collective amnesia of the Filipino Voter regarding the Marcos years, particularly now that the Marcoses aim to recapture the Presidency in 2016.  This is one such lamentation.

Why is this so?

Some have attributed it to the lack of education. For instance, there are reports that the current textbooks on Philippine History that are in use throughout the nation's public schools are hopelessly outdated, containing almost zero information on Martial Law and the Marcos Dictatorship.

Others have attributed it to the social media onslaught of the Marcos family, wherein they have scrubbed popular online repositories of information of any meaningful information regarding the Marcos Dictatorship.

All this maybe true.

But another factor is age.

For instance, many baby boomers may have heard what it was like during World War II or even World War I from countless books, movies, newspaper articles, and personal stories from parents and grandparents.  But all this imparted knowledge just resides in their brains, somewhat cold, distant, and abstract.  In other words, baby boomers have no living memory of those events.  They have not lived in those times at all.  And that could make all the difference.

So the same could be true of the Filipino voter.

Population Distribution

As of 2013, the Philippine population was estimated to number around 98.4 million people.  So far, population growth has averaged 1.7% a year.  By 2016, the total population could number 103.5 million people.

The Philippine population skews very young.  The Philippine Statistics Authority placed the median age at just 23.4 years as of 2010.  That means half the population is younger than 23.4 years old.  This, believe it or not, represents an increase over the year 2000, when the median age was only 21.3 years.  Despite this increase in median age, we still have one of the lowest median ages in the ASEAN region. Only Lao PDR has a lower median age - 22.0 years old.

Another way to look at it is through the Philippine Population Pyramid, again courtesy of the Philippine Statistics Authority.

Projected Philippine Population Distribution

Based on projected population distributions from the 2012 World Population Prospects, a publication of the Population Division, Department of Economic and Social Affairs, United Nations, the total population will number 101.8 million people by 2015.

Around 43.60% of the population, or 44.4 million people will be younger than 20 years old.  Around 57.4 million people or 56.40% will be 20 years or older.

Philippine Voting Age Population By 2016

Conservatively, this means that 57.4 million people will be eligible to vote by 2016.  This is a conservative estimate is because the actual minimum voting age requirement is 18 years old and not 20.  Moreovoer, the projections are for the year 2015 and not 2016, when the total population is expected to grow by another 1.7%

Again, the voting age population will skew to the young side:

Based on this data, by 2016, at least 16.67% of the voters will have no living memory of the Cory Administration, 31.74% will have no living memory of EDSA I, 44.68% will have no living memory of Martial Law.  Moreover, 65.78% of the voters will have no living memory of the declaration of Martial Law, and a stunning 74.47% of the voting population will have no living memory of what life was like before Marcos assumed the Presidency in 1965!