One of the most vexing questions troubling the Russian economy is that of capital flight. How is it that a country whose previous year exports exceeded imports by $30 billion must go cap in hand for loans to the IMF? A recent article in "Trud" tried to identify the size and routes of capital export from Russia, but came up with wildly differing estimates of the scale of the problem. (Trud, January 20)
In 1996, according to a report by Deutsche Morgan Grenfell, Russian exports exceeded imports by $28.5 billion, while foreign debt grew by $4.1 billion and currency reserves fell by $3.2 billion. Allowing for increases in dollar holdings within Russia, the report estimated the total outflow in 1996 at $22.5 billion.
The report from the Russian Central Bank cites a significantly lower figure: $8 billion, including allowance for unreported imports (less than $4 billion) and the repatriation of earnings. One of the most disturbing features of capital flight is the elusiveness of reliable figures on the extent of the problem. How much of the export revenue is really leaving Russia? How much is flowing out then back, through hidden channels, simply to avoid tax payments?
According to Central Bank Deputy Chairman Andrei Kozlov, capital flight peaked in 1992-93, when controls were slack and more than one-third of export income stayed abroad ($25-30 billion per year). As controls were tightened, the "river became shallower" — falling to $10 billion in 1994 and less than $7 billion in 1995 — but then rose to $9 billion in 1997 as entrepreneurs became more sophisticated. Overall, about $60-70 billion has left Russia since 1991–more than double the total capital inflow in the form of foreign aid and investment
One of the most common techniques for illegally exporting capital is "transfer pricing"–that is, understating the price of exports (or overstating the price of imports) and banking the difference in an unreported offshore account. Transfer pricing has become more difficult over the last two years since the introduction of "passports" listing the prices in each trade transaction. Customs officials compare these figures with world commodity price lists and investigate cases where prices deviate from world standards.
Other troublesome methods include the creation of phony trade firms that open and close in a single day and move money around in obscure offshore accounts, and the billing by offshore firms for fictitious services. Some sectors cause specific problems. Fishing fleets are notorious for selling fish direct to foreign processors on the high seas and not reporting the transactions to Russian authorities. Such "black" fish sales were estimated at $644 million in the Far East fishing fleet last year.
Capital flight is a problem primarily because it represents money the Russian government is unable to tax. It is also worrying because, one assumes, most of the money is not invested back into the Russian economy. However, it is important to keep the phenomenon in perspective. Russia is not alone in experiencing capital flight, a common occurrence to most developing countries. More important, the Russian economic transition has been underway for only six years. Ownership rights and legal structures are still in formative stages. It would be unrealistic to expect a flood of long-term investment under such conditions. There are still grounds for hoping that Russia’s footloose capital will return home when conditions are right.
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