The Dirty Truth About Russia's 'Dirty' Money
Published: October 10, 2013 (Issue # 1781)
Recently passed restrictions on ownership of foreign assets for the members of Russian officialdom and the Cyprus saga earlier in the year have brought attention the scale of the supposedly "dirty" cash that flows out of Russia. The reality is far more insidious: most of Russian capital flight over the last several years has been perfectly legal. The data reflect the success of the Kremlin's efforts to embed and legitimize state-run corporations within the global financial system. The trouble with this state of affairs is that it obviates the need to create reliable, independent financial and legal institutions within Russia.
A study by Global Financial Integrity, or GFI, a Washington-based think-tank, reveals that between 1994 and 2011, the Russian economy lost $782.5 billion in capital flight. Of that sum, unrecorded, illicit outflows amounted to $211 billion. Yet a closer look at the data reveals a quite different and extraordinary story. The fact is that there has been a remarkable transformation in the composition of capital flows into and out of Russia. While outflows accounted for by official statistics have remained sizable, the share of unrecorded outflows has plummeted since the middle of the last decade.
According to GFI's data, from 1995 to 2005, illegal outflows averaged 3 percent of gross domestic product on an annual basis, but from 2006 to 2011 that number plummeted to less than one percent of GDP. Consider this: half of all capital flight in 2001 was unaccounted for in official statistics, but only 10 percent of it was unrecorded a decade later. Data from other sources, including the Central Bank and a recent study conducted jointly by the Russian Direct Investment Fund, EY and the Center of National Intelligent Reserve at Moscow State University confirm the trend.
So, what accounts for this surprising legalization of Russian capital flight? Certainly, many factors have played a role, including an indisputable maturation of the corporate sector, the rise of Russia-based multinational corporations and a deepening of financial integration with world markets.
But the most important reason why unofficial capital flight has declined stems from government policy. Liberalization of capital controls that began in President Vladimir Putin's first term culminated in full capital account deregulation by 2006. This made many illicit cross-border transactions simply superfluous. For example, the Central Bank did away with the practice of forcing exporters to sell dollar-denominated proceeds from foreign sales, so those funds could remain abroad. The government stopped controlling the foreign borrowing practices of Russian companies, residents' purchases of securities abroad and the purchases of Russian securities by nonresidents. Of course, the"nonresident investors" in Russia are mostly foreign subsidiaries of "resident" corporations.
Pages:  [2 ]