Monday, June 24, 2013

Window on Eurasia: Half of Capital Flight from Russia Leaving via Customs Union Countries

Paul Goble

            Staunton, June 24 – Russians have long been upset by the influx of Central Asia and Caucasian gastarbeiters, but now they have an additional reason to be worried about the impact of special relationships between their country and the former Soviet republics: half of the illegal capital flight from Russia is going via its customs union partners, Kazakhstan and Belarus.

            For the first time, the Russian Central Bank has published data on illegal capital flight abroad by means of illegal declarations of imports from the Customs Union countries.  It turns out, Oleg Gladunov writes on the “Svobodnaya pressa” portal, that the new figures are “worse than anyone expected” (   

            According to the bank, 10 billion US dollars of capital is leaving the Russian Federation covered by imaginary imports from Kazakhstan, and another 15 billion is leaving the country by the same means through Belarus, out of the total of 49 billion US dollars of capital flight from Russia in 2012.

            This method also means that Russian data have been overstating the amount of trade the existence of the Customs Union has produced and understated the collapse of that trade over the last several years, Vladislav Zhukovsky, an analyst at Rikom-Trust, told “Svobodnaya pressa,” noting that these declines are overshadowed by the declines in Russian foreign trade overall.

            But “if the worsening of Russia’s trade balance with countries of the far abroad can be explained by the crisis in Europe, the chronic inability of Russian bureaucrats to guarantee competitive advantages … on the post-Soviet space and to extract a profit [from its integration] is openly stupefying,” the analyst added.

            In this regard, Gladunov notes that “the extent of illegal financial operations with Customs Union countries is growing very rapidly.”  And that in turn means that “the noble goal of promoting trade and economic cooperation among the former fraternal republics has been undermined by the growth of criminal operations, as so often happens in Russia.”

            The way in which the Customs Union operates creates “favorable” conditions for this and has allowed those who want to send capital abroad the chance to do so by filing false reports that the money is going to pay for imports from these countries.  As there is no customs control at the borders of the Union, it is very difficult to check which declarations are true and which false.

            But it is quite possible to estimate the size of such flows, Gladunov says, pointing out that the Central Bank can do so by doing an analysis of trade flows.  Last year, when it carried out such a study, the Moscow bank dentified Belarus as a major channel of illegal capital flight; this year, it has added Kazakhstan to the list.

            Such estimates, however, rest on trade statistics and those in this case are highly suspect because they rely on the declarations of individual companies. At present, “only 50 percent” of them provide statistical reports about their operations. And thus, “it is practically impossible” to specify what is moving and in which directions between and among these countries.

            To try to improve the situation, the Russian Central Bank has asked banks that handle such transfers of money to gather more information from the companies involved, but experts say, Gladunov continues, that the companies and banks are likely to be reluctant to do so, even more in the case of Kazakhstan than in that of Belarus.

            The Belarus National Bank at least has a data base on goods and financial transfers; Kazakhstan does not, “and to test the genuineness of documents by which goods are exported will be anything but simple.” Russian banks are likely to point to that and decide not to follow the recommendations of the Russian Central Bank.

            Given all this, many Russians are likely to see cooperation with the former Soviet republics as ever less attractive and to resist efforts by the Kremlin to promote tighter integration. That could mean that the current push in Russia to establish visa requirements for Central Asians may soon be followed by one to restrict economic and financial ties as well.

                And that in turn means that once again the Russian Federation, for all that its leaders talk about promoting the re-integration of the post-Soviet space, may in fact find themselves driven to take steps that not only will block greater integration in the future but walk back some of the moves that Moscow has made in that direction over the last decade.

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