Russia: Capital Flight Surges

Russia: Capital Flight Surges
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Russia: Capital Flight Surges by

Amid a spreading climate of fear in Russia, underscored by the late February assassination of Boris Nemtsov, Russians with something to lose are increasingly trying to find safe havens abroad for their assets.

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The net outflow of capital from Russia reached $151.5 billion in 2014, according to statistics compiled by the nation’s Central Bank, by far the highest annual volume since the bank started keeping track of it in 1994. The 2014 flight total was equivalent to about one-seventh of Russia’s gross domestic product of 70.9758 trillion rubles, or about $1.1 trillion at the rate of exchange as of the end of December 2014. Overall, the Russian economy had its worst year since President Vladimir Putin gained power on the last day of the 20th century.

The surge in capital flight has sharpened the economic challenges for Putin’s government, which has been slow to respond to the decline of Russia’s economic fortunes. In 2013, capital flight stood at $61 billion, a total that the Kremlin deemed “extreme.” Just over a year ago, Minister of Economic Development Alexei Ulyukayev assured that the 2014 figure would not exceed $30 billion. His agency also predicted that the Russian ruble would hold its own against the dollar and the economy would grow at a 2.5 percent clip.

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The capital flight figures expose a glaring dichotomy in public attitudes toward Putin’s leadership. On the one hand, opinion surveys show Putin and his policies, especially Russia’s tough stance toward Ukraine, to be wildly popular. At the same time, the moneyed class’ evident alarm, reflected in the flood of cash streaming out of Russia, offers perhaps a better indicator of Russians’ estimation of Putin’s job performance.

Putin has sought to downplay the capital flight issue. In a late December address in the Russian parliament, he recalled that in 2008 capital flight from Russia reached $133 billion, but “it was not a problem; everyone remained alive and kicking, and that money returned as the situation normalized.” Putin also made a somewhat cryptic assertion that “50 percent of the money” classified as fleeing capital in 2014 actually remained in the country. “It did not go anywhere,” Putin stated.

It is hard to square Putin’s assertion when looking at official data compiled by the Central Bank. In particular, the bank expressed alarm over the fact that Russian companies had to make $115-$130 billion in payments to service their foreign debts. The payments were necessary because private companies “were unable to refinance their loans due to [Western] sanctions,” the bank noted. With the sanctions severely restricting Russian businesses’ access to foreign capital markets, companies are starved of working capital, which jeopardizes their ability to grow, or even survive.

Andrei Belousov, a Putin economic advisor, claimed earlier that a significant portion of capital flight should be seen instead as direct foreign investment, which he described as a positive development. According to an annual government statistics report, Russia invested $201.64 billion in foreign countries in 2013 (2014 numbers have not yet been published).

Belousov’s assertion on foreign investment seems highly questionable. According to the same 2013 government statistics report, $61.6 billion (or 30.5 percent of the $201.64 billion total) went to the British Virgin Islands, a known offshore haven where money goes to hide. Being that the Island’s annual GDP is under $1 billion, either the territory’s economy received a phenomenal windfall, which would be the biggest news of which no one has heard, or, much more likely, the Russian money simply disappeared into offshore bank accounts. Overall, about two-thirds of what Belousov classified as “foreign investments” ended up in the British Virgin Islands, Switzerland, Cyprus and Bermuda, all offshore financial centers known for their banking secrecy.

For now, Russian government officials are predicting that the pace of capital flight will decline in 2015. “We expect the number in 2015 to remain within $90-$100 billion, which is lower than our previous estimate of $120-$130 billion,” the state-run news agency RIA Novosti quoted Minister of Finance Anton Siluanov as saying.

Meanwhile, the Ministry of Economic Development estimates that net capital outflow in 2015 will reach $115 billion, while the Central Bank is slightly more pessimistic, expecting capital flight to reach $118 billion.

Even if the Finance Minister’s optimistic forecast of $90-$100 billion turns out to be accurate, the projected capital flight number in 2015 would still be the third highest since the Central Bank started tracking the trend in 1994.

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  1. During Putin presidency Russia experienced a massive increase in wages as well as social security payments and stuff like that so its unfair to say Putin just stole all the money. He committed massive embezzlement but he also improved standard of living. It’s all the more puzzling he is resigned to throwing it all away just so he could smite the international community.

  2. There was no “Putin Economic Miracle”. There was the global market reality of oil prices rising from $10 per barrel in 1998 to over $100 per barrel as late as mid 2014 and now falling back to $60 per barrel. The problem is that Putin and his cronies were stealing most of the proceeds of the higher oil prices rather than sharing them fairly with the Russian people or investing them in the diversification of the Russian economy so that it could produce something besides oil, gas and vodka that anyone outside of Russia would want to buy. This amounts to the greatest theft in recorded human history and Putin now forces the Russian people to bear the costs of his folly so he and his cronies can keep stealing at the same pace.

    Putin has converted Russia back into a fascist pariah state that is isolated from integration with the western economy. This same strategy and low oil prices brought down the USSR and will bring down Putin in the end. The difference is that Putin will not care because he is a much bigger and better thief than the soviets. At some point Putin will see the end, resign to avoid the consequences and escape to live out his life in luxury on the stolen wealth of the Russian people who will blame his demise on the evil USA.

    In truth, Putin cares nothing about Russia or the nationalistic/imperialistic fantasies that he espouses. All such things are simply lies to divert the focus of the Russian people away from his continuing theft of the wealth of the Russian people. The Russian people are so blindly enamored with Putin’s personality, lies and nationalistic propaganda and so busy groveling for scraps from Putin’s table that they are allowing their national wealth, liberty and future to be stolen.

    Russia is on the fast track to becoming an enslaved nuclear state that is nothing more than a low cost gas station for a dominant China. Only the Russian people can save themselves from that fate.

  3. Not to mention that Putin is poison now for any international cooperation or agreements. He isolated Russia and himself. Soon Russian government will face the choice remain isolated or make Putin resign. There is no way forward with Putin he is done.

  4. If Russia demands to be paid in $ instead of Euro with today’s market that means the cost of energy and natural resources has gone up 30% from last year to EU. Sanctions and their unintended consequences.

  5. A couple quick notes. One, a lot of this “capital exodus” is a feature of Russian tax avoidance. There was a past article that described how this “$151 billion” isn’t as scary as the MSM wants it to be. Secondly, the American dollar is hammering EVERYONE. The Canadian dollar is down in the Russian Rouble territory if you use percentage loss as a metric. The Canadian dollar was down 36% at one point in 2015. One analyst said the American dollar would be the last to go and now wondering if what we are seeing worldwide is the failure of the beggar thy neighbour monetary policy.

  6. Ask Putin and his cronies have there billions stashed away ??? NOT IN RUSSIA !!! I IN Those Euros and Dollars he profess to hate so much

  7. What you see escaping there is 15 years of “Putin’s economic miracle”, escaping like air from a punctured tire. Assuming that Putin gets offended at the West and becomes a client of China (there is no way the powerful Chinese will tolerate him being the leader-he must be a client), it may take Russia 20 years to complete such a strategic shift.

    Even if all sanctions were lifted today and Putin actually received aid and loan guarantees from European Union to try and save his economy, Russia would still have to suffer profound shock therapy, austerity measures and so on.

  8. In the land where ‘lies reign supreme’ who pays any attention, for that matter, gives two flying f*cks what Vova and Siluanov have to say!

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