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In Russia ... About $100 billion to $150 billion has fled abroad since 1992 ...
In Russia, the Money Doesn't Add Up
By David Hoffman
Washington Post Foreign Service
Sunday, August 29, 1999; Page A1
MOSCOW, Aug. 28 ^Ö The economy of modern Russia is
hemorrhaging cash: every month, $1 billion to $2 billion
slips out in wire transfers, phony import-export
documents and insider price manipulations. About $100
billion to $150 billion has fled abroad since 1992,
according to Russian and Western estimates,
outstripping the international aid coming into the
country.
Capital flight is one of the most debilitating woes of
Russia's eight-year attempt to transform the
centrally-planned economy of the Soviet Union into a
free market. All of the country's other troubles ^Ö
political upheaval, lawlessness, hyperinflation,
oligarchic rule ^Ö have combined to drive wealth that
might otherwise go toward rebuilding and growth into
overseas bank accounts, real estate, luxury resorts and
offshore tax havens.
The breadth of the problem has been highlighted this
month with the disclosure that U.S. law enforcement
officials are investigating transfers of as much as $10
billion in Russian money through the Bank of New York
over the past year and a half. Some of the money
appears to have come from Russian organized crime
bosses, and investigators have described some of it as
part of a money-laundering scheme to conceal the origin
of criminal profits.
But the enormous transfers also appear to be part of a
broader phenomenon of capital flight, money on the run
from Russia from a variety of sources and for a host of
reasons: to hide it from taxes or business partners, to
conceal pillage of natural resources or stripped factory
assets, or to skirt political and economic upheaval at
home.
According to Russian bankers, economists and analysts,
the Bank of New York transactions are typical of
several "clean pipes" carrying Russian capital out of
the
country to the West. These channels are often run by
intermediaries from Switzerland, Cyprus and elsewhere,
who specialize in getting the money to a safe haven. The
"clean pipe" may be carrying the money of dozens of
different people and companies, whether legal, shadowy
or criminal, and to different destinations.
Since the collapse of the ruble a year ago, the
dimensions of Russia's capital flight problem have been
thrown into high relief. The crisis itself was a shock,
propelling billions of dollars abroad, and the aftermath
underscored how widespread the practice had become.
According to many businessmen here, Russia's financial
and political elite, from mid-level bureaucrats to
high-level Kremlin officials, from factory directors in
the provinces to Moscow moguls, have moved capital
and assets abroad with impunity. While there are rules
against exporting capital, they are widely ignored and
almost never enforced.
"You see, it's a very, very easy thing to do this," said
a
Moscow banker. "It's not a problem, technically."
In one of the more striking cases, shares in Russia's
second-largest oil company, Yukos, were moved
offshore late last year and earlier this year after the
parent bank defaulted on Western loans for which it had
pledged the shares. The shares were then traced to a
maze of discreet offshore havens in the Isle of Man, the
Virgin Islands and Cyprus. The offshore companies are
believed by minority shareholders to be in the hands of
Mikhail Khodorkovsky, the mogul at the head of Yukos,
and his close associates, but the company has refused to
say. The case is under investigation by the Russian
securities commission.
In another high-profile example, Russian prosecutors
have been examining how the foreign currency earnings
of the national airline, Aeroflot, were reportedly
channeled into a Swiss company believed by the
investigators to be controlled by tycoon Boris
Berezovsky. And, in another case receiving renewed
attention, the now-suspended Russian general
prosecutor, Yuri Skuratov, has threatened to reveal the
identities of what he described as high-level government
officials with Swiss bank accounts.
Even the Central Bank of Russia, which is supposed to
be a paragon of trust in the country's finances and has
sought to stop capital flight, secretly transferred some
of
Russia's national currency reserves abroad to an
obscure offshore company in recent years, according to
the results of an audit.
Many economists have long argued that in the
increasingly globalized economy, capital flight is not
the
chief cause of Russia's problems, but a symptom of a
more profound failure to create conditions that would
attract and keep capital at work inside the country.
"Money is transnational today," said Valery Solovei, an
analyst at the Gorbachev Foundation here. "Money
moves through borders and seeks the best rate of profit.
Money likes quiet. And money must be working.
Unfortunately, in Russia we have neither quiet nor the
conditions to make a profit. One may lose everything.
One financial clan loses to another, and then it loses
everything. Naturally, they hide the money in the West.
You can slow this process a little bit, but you can't
stop
it altogether. You can stop it only if you create
attractive
conditions in Russia."
But those conditions have not taken hold. Rather,
political instability has roiled Russia, and the rule of
law has not been established. In the last year alone,
President Boris Yeltsin tossed out four prime ministers
amid the worst financial crisis since the collapse of
the
Soviet Union in 1991.
"The root of the evil is the political situation," said
Denis Rodionov, an analyst at Brunswick Warburg, an
investment bank here. "People don't know who is going
to be the next president and whether the Communists are
going to come back to power."
Nor has the financial system inspired confidence. In
many developed Western economies, banks and stock
markets perform a basic function of providing capital to
businesses, but in Russia's recent history banks have
been more often tools of their owners' empires, and
stock markets have rarely raised new capital. The risks
of investing have been increasingly evident as Russian
tycoons trample shareholder rights.
"It is the absence of clear market traditions," said
Yevgeny Yasin, the former economics minister and one
of those who supported the reform efforts of recent
years. "I mean fulfilling contracts, protecting
shareholders' rights ^Ö minority shareholders have no
rights whatsoever, and there is the absence of a
developed financial market infrastructure, such as
mutual funds and investment companies."
Yet another key factor has been Russia's arbitrary and
punishing tax system, which parliament has yet to
reform. It has been the cause of pervasive tax
avoidance, much of it in offshore havens.
But the Russian government has appeared helpless. For
years, successive cabinet ministers have stoutly
promised action, but to no avail. The parliament passed
new legislation against capital flight in June, and the
Central Bank tried to tighten restrictions, but the
leakage
continues.
Capital flight takes many hidden routes out of Russia.
For a long time, two of the most common were through
import and export transactions. A company would sign a
contract to export goods, but the payment would be
deposited in an offshore account abroad rather in
Russia. Or, a company would send money overseas
supposedly as "prepayment" for imports, which would
would never arrive. Another mechanism has been
transfer pricing, in which oil or other natural
resources
are sold cheaply to an offshore firm, which keeps the
profits abroad. Yet another tactic has been to
manipulate
loan payments between a Russian company and an
offshore one so the Russian company's profits are paid
to the offshore firm.
Recently, Alexander Livshits, a former finance minister,
suggested a tax on money that appeared to be leaving the
country. "There is no point in trying to stop a flowing
river," he said. "It would make sense to put a power
station on the river and generate electricity."
But the Moscow banker said too many people have a
stake in capital flight to stop it easily. "There is no
action against capital flight because there is a very
powerful lobby in favor of capital flight," he said. "If
someone will try and establish" a barrier, he added,
"then he will be killed. Because it is too big a process
to stop in this way."
Added Solovei, the analyst at the Gorbachev
Foundation: "The regime itself is involved in capital
flight, its top leaders, or members of their families.
That
is why we can expect changes only with the
establishment of new authorities, whose interests are
going to be in Russia and not the West. I think
repatriation of capital is going to be a very slow and
hard process. It will take years, maybe decades."
© 1999 The Washington Post Company
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