Money-laundering involves a broad range of activities and financial instruments which are not directly observable. Hence, comprehensive and ...
Money-laundering involves a broad range of activities and financial instruments which are not directly observable. Hence, comprehensive and meaningful estimates of its size are difficult to compile. As everywhere, no precise official or unofficial estimates exist in the Russian Federation with regard to the quantity of assets laundered. In the Russian Federation, the estimates of capital flight frequently serve as a basis for moneylaundering estimates because a significant part of the capital flight is presumed to be laundered illicit proceeds. The magnitude of capital flight itself causes suspicions about money-laundering. In the 1990s, the magnitude of capital flight from the Russian Federation was significant. This was acknowledged by many sources,
although there is no consensus about its nature and size. A joint project on capital flight undertaken by the Institute of Economics based in Moscow and the Centre for Study of International Relations of the University of Western Ontario in Canada has reviewed alternative assessments of capital flight from the Russian Federal Departments, the Central Bank of the Russian Federation and international financial institutions. The project team, headed by Leonid Abalkin,6 concluded that the average of different agencies’ estimates equals a total of $133 billion for the period 1992-1997. No credible balance of payments data was compiled during the early years of transition (1992-1994) when the size of capital flight was presumably much higher than later. The project team, therefore, excluded this period and argued that from 1994 until September 1997 capital flight in the Russian Federation ran at an annual $17 billion (the study includes 100 per cent of “errors and omissions” items of the balance of payments and export trade credits and import advances).7 In 1999 the Central Bank of the Russian Federation estimated the size of capital flight to be $54.2 billion for the period 1994-1998, which suggests an annual flow of about $11 billion.8 The Central Bank used the sum of non-receipt of export earnings, unredeemed import advances, non-equivalent barter and 50 per cent of errors and omissions. In order to estimate the amount of money-laundering, the Centre for Strategic and Global Studies, a research institute of the Russian Federation Academy of Sciences, assessed and measured indirect indicators, such as the estimated share of the shadow economy in gross domestic product (GDP), similar indicators for the national income and the share of cash and barter transaction in the economy, the official data for capital outflows from the Russian Federation, the amounts of banknote trade by Russian commercial banks, dynamics of visible cash dollar imports as well as shuttle trade9 by Russians. Facing a lack of reliable data, the Centre, forced to discontinue its efforts in 1997,
suggested anything between $7 billion to $100 billion as the amount of money laundered.10 Such a huge range is explained largely by the lack of reliable data and by a variation in the definition of money-laundering, which could be defined in a narrow or broad sense.11 The team headed by Leonid Abalkin (capital flight project) concluded that from around $68 billion accumulated by Russian residents abroad between 1 January 1994 and 30 September 1997, 33 per cent was comprised of illegal capital flight (item 1), 37 per cent constituted semi-legal transactions (item 2), and the rest consisted of various financial operations with capital assets (see table below). This classification can be easily challenged and variations offered depending on what assumptions are chosen for the relevant terms (illegal, semi-illegal etc.) as well as for the statistical errors. The existence of a negative entry for “errors and omissions”, presumed to be illegal export of assets ($22.7 billion), could be in fact an underrecording of current account outflows, in particular imports. It is reasonable to assume that the capital leaving the Russian Federation illegally might be returning to the country disguised as legitimate foreign investment.
The relationship between capital flight (even when estimates with the lowest levels of capital flight are used) and foreign direct investment (FDI) appears to be direct (see figure I). This relationship is particularly identifiable for 3 Russian capitalism and money-laundering Table Estimated capital flight from the Russian Federation, 1994-1997 (Billions of dollars) Item 1994 1995 1996 1997a Total for 1994- 1997a 1. Non-registered capital outflow (item “Errors and omissions”) 0.4 7.9 8.1 7.3 22.7 2. Export arrears and uncovered import advances 3.9 4.9 9.8 6.5 25.1 3. Export trade credits and import advances: a difference between offered and raised sums 4.7 0.0 10.3 5.1 20.1 Capital flight: (1)+(2)+(3) 9.0 12.8 28.2 18.9 67.9 Source: Abalkin (1999), p. 426, reproduced with some omissions. a Data for 1997 is for the first nine months. Figure I Foreign direct investment and capital flight in the Russian Federation, 1994-1998 (Billions of dollars) Source: Central Bank of the Russian Federation (2000) for FDI and Central Bank of the Russian Federation, quoted in International Monetary Fund (IMF ) (1999), for capital flight. 0 2 4 6 8 10 12 14 16 1994 1995 1996 1997 1998 FDI Capital flight 4 Russian capitalism and money-laundering 1997 and 1998, when both indicators show simultaneously a significant increase in 1997 and decrease in 1998. However, both of these trends could be explained by the overall economic performance of the Russian Federation: its gross national product (GNP) peaked in 1997, reaching $479.5 billion, and fell in 1998 to $456 billion. The increase in capital flight in 1997 could be the result of the fast reaction of capital movements to the deteriorating economic and financial environment towards the end of 1997. Besides, the inflows of FDI into the Russian Federation have been minimal compared to capital flight estimates. In comparison, China with about the same level of capital flight as the Russian Federation (in the 1990s) experienced growth in the inflow of FDI, which reached $44.2 billion in 1997.12 In the Russian Federation, the inflow of FDI was at $6.5 billion in 1997. The authors of the capital flight estimates, as in the case of the money-laundering “guesstimates”, caution each time that the numbers should be taken as a very tentative approximation because there are great uncertainties as a result of statistical errors and poor quality of data in general. Thus, the numbers should be taken as an indication of problems rather than as a precise measure. Nevertheless, it is far easier to estimate capital flight than the magnitude of money-laundering because of the high level of secrecy integral to the process of moneylaundering. Capital flight estimates are a measurement more meaningful for economists, politicians and ordinary citizens. They are an important part of the Government’s financial stabilization programme and a popular topic for politicians eager to demonstrate themselves as patriots fighting against the loss of the national assets. Few in the Russian Federation worry about moneylaundering per se, but many are concerned about the enormous illicit proceeds from the theft and embezzlement of public and private assets. This concern echoes an international perception of the Russian Federation as a source of illicit proceeds, rather than their safekeeping haven. These operations are closely related to the “broad” definition of money-laundering, which includes the legalization of assets from a variety of sources, including various speculations and certain privatization methods, the criminality of which it is impossible to demonstrate since they did not violate any criminal acts at the time they occurred. In an effort to circumvent the legalization of illegal profits, the Russian authorities have been tightening controls,
which have included measures halting financial liberalization and installing foreign exchange controls. More recently, the Government increased the surrender requirements on export earnings from 50 to 75 per cent and increased to 100 per cent deposit requirements on imports. But the authorities have also tightened tax administration and financial sector supervision. More detailed reporting is required on trade transactions: a system of information exchange and action coordination has been established between the Central Bank of the Russian Federation and the Federal Foreign Exchange Control Board. The Central Bank has determined the criteria for suspicious transactions and instructed commercial banks to report all suspicious transactions. Exchange control mechanisms, including suspension of operations through non-residents, so-called “S-special” accounts, have also been introduced and prompted innovations circumventing these restrictions.
The schemes involved foreign holders of roubles and Russian companies interested in doing business with them. Under the scheme, the shares of the Russian companies sold for roubles to foreign companies were purchased back by the same Russian companies for hard currencies. To purchase the shares, the Russian companies use their foreign currency holdings abroad. It was reported that using this mechanism, the Lukoil company sold its 4.8 million (1 per cent of total stock) shares for 1 billion roubles to Citibank and that the Sibneft company sold shares for 1.5 billion roubles (3.5 per cent of its total stock) to CS First Boston bank. The Russian authorities described these operations as of a limited scale and immoral, but not of a criminal nature.13 Nevertheless, they raise questions about why and how Russian companies have been able to accumulate and keep abroad assets of such size. As a result of measures to contain it, capital flight fell by 40 per cent in 1999 to $15 billion from $25 billion in 1998. A major contributor to this trend is capital flight to offshore centres, which fell during 1998-1999 by 60 per cent from an average of $1 billion per quarter of a year to $400 million per quarter. Reductions are expected in the capital flight resulting from the nonreceipt of export earnings, unredeemed import advances and payments of fictitious fines related to foreign trade operations.14 In June 2000, the Central Bank reported that the outflow to offshore zones had further fallen, reaching the level of $300 million for the first quarter of 2000.15 Those concerned with money-laundering hope that this decline implies also the containment of money-laundering, which in the Russian Federation seems to be inseparable from capital flight.
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