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.