Friday, February 22, 2013

Window on Eurasia: West Vastly Underestimating Size of Illegal Capital Flight from Russia, Moscow Expert Says

Paul Goble

            Staunton, February 22 – A report by the Washington Center for International Policy’s Global Financial Integrity program suggests that illegal capital flight from the Russian Federation over the last 17 years has been “stupifyingly” large, but in fact, a Russian economic analyst says, the report’s figures understate the size and implications of the problem.

            In a lengthy essay on yesterday, Vladislav Zhukovsky says that the GFI report is correct at a general level because it documents the ways in which the Russian economy is suffering from “a black hole” which is “incompatible with the normal existence of the state and even more with the modernization of the economy” (

            According to GFI, Zhukovsky says, the illegal import and export of capital by the private sector in Russia totaled 782.5 billion US dollars between 1994 and 2011 for an average of about 43.5 billion US dollars a year. Illegal capital flight within this figure totaled 211.5 billion US dollars for the period or about 11.8 billion US dollars annually.

            The GFI report adds that money laundering of criminally obtained funds by sending it abroad amounted to about 135 billion US dollars over this period, an amount equivalent to 40 percent of the annual state budget of the Russian Federation and one that far exceeds government spending on education, health, environmental protection, sports, and other programs.

            Further, it continues, Russian firms through the manipulation of prices and the illegal import of goods produced by them abroad were able to pull out of the Russian Federation “no less than 397.1 billion US dollars over this 17 year period, an amount equal to 23.3 billion US dollars annually and one that cost the government and ordinary Russian citizens enormous sums.

              Independent economists, Zhukovsky says, including those at the National Anti-Corruption Center, suggest that fictional operations in foreign trade amount to “no less than 1.5-2 trillion rubles” (50 to 70 billion US dollars) every year, again an amount that far exceeds federal spending on most projects.

             Put in simplest terms, the commentator continues, “colossal financial resources which over the course of ‘market transformations’ and the theft of state property … have been carried away by major oligarchic capitalists, criminal structures, corrupt bureaucrats and ordinary entrepreneurs iin offshore accounts and then returned back to the economy under the guise of foreign investment.”

            “Even the GFI experts were forced to admit,” Zhuravlyev says, “that given its current size, the offshorization of the [Russian] economy represents a serious threat to the macro-economic stability” and could easily drain dry the financial system of the country, triggering an economic crisis.

            Offshore arrangements, he continues, “are a constituent part of the Russian de-iindustrialized ‘pipeline economy,’ which help the ruling class to extract the maximum profit from the sale of minerals and the misuse of their monopoly position” as well as pulling into the country oil dollars and foreign credits.

            A “no less interesting” part of the GFI report concerns the size and role of Russia’s shadow economy.  Its estimates in this area, however, are much too low.  Rosstat says that the shadow economy makes up 16 percent of GDP; the IMF suggests it is approximately 35 percent, but the reality is that “at a minimum 47-50 percent of Russia’s GDP is in the shadows.

            Indeed, Zhuravlyev continues, “it is very likely” that the real figure approaches 70 to 80 percent if one includes tax avoidance schemes and other illegal activities.  He acknowledges that the situation now is better than it was in the mid-1990s, but he points out that it is worse now than it was in 2009, a trend that must be changed.

             GFI’s estimates in this area “on the whole” correspond with Russian ones, but the American economists underestimate “the creative potential of Russia’s corrupt bureaucrats and thus the size of the shadow sector of the economy.”  If one compensates for that, then the illegal outflow of capital over the last 17 years was “a minimum of 2.5 times” larger than GFI reports.

            Zhuravlyev then provides a close analysis of Russian figures and concludes that “over the last 17 to 18 years, “the real losses just from the illegal export of capital to offshore havens and fashionable countries may exceed the annual GDP of Russia [today] and reach 2.5 to three trillion US dollars.

            As long as this continues, he says, “Russia will remain ‘a cash cow’ and a raw materials colony of trans-national capital.”  Even the Russian leadership is “beginning to understand that such a de-industrialized Russian ‘oil and gas Titanic’ is step by step heading toward the bottom.” The question is, does the current regime have the will and resources to change course.

            Zhuravlyev’s economic analysis may well be beyond the patience of many ordinary Russians, but today, an article in “Rossiiskaya gazeta” put the issue in terms everyone can understand.  The paper said that if Russia ended capital flight, the country would have enough to build 25,000 miles of roads every year (

            That would be enough, the paper suggested, to “support the entire transportation network of Russia for 15 years.” And it noted that money now flowing into the offshore accounts of wealthy Russians “could at least theoretically be working for the good of Russia” if the government could stop this outward flow.

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