Russian capital flight

Doug Henwood dhenwood at
Fri Sep 11 09:32:25 PDT 1998

[from Johnson's Russia List]

From: fweir at Date: Thu, 10 Sep 1998 Subject: Capital Flight

By Fred Weir

MOSCOW (CP) -- Capital has hemorrhaged out of post-Soviet Russia on a scale unseen anywhere else in the world, leaving the country without needed resources to rebuild its economy, a joint Canadian-Russian report says.

The 18-month study, sponsored by Russia's official Institute of Economics and the University of Western Ontario's Centre for the Study of International Economic Relations, concluded that as much as $140-billion (US) -- almost $2-billion per month -- fled Russia during the first six years of market reforms.

``There has been a very large net outflow of capital from Russia, and this certainly has aggravated the present crisis,'' says John Whalley, one of the report's main authors.

``It means Russia has lost crucial development capital, money that could otherwise have been invested in Russia and used to generate economic growth.''

Five Canadian and five Russian economists worked on the study, which is the first to put a reliable figure on the headlong flight of wealth out of Russia after the onset of market reforms in 1992.

The amount of money escaping Russia was greater than the combined capital flight from Brazil, Venezuela, Mexico and Peru during the turbulent 1980's, the study said.

``While capital movements are very common the world over, Russia has experienced an abnormal, even cataclysmic, loss of vital resources,'' said Leonid Abalkin, head of the Russian team.

``Now Russia's economy is like a locomotive headed downhill.''

The report was completed before Russia's current financial collapse, but at a public presentation Thursday the authors said many of the warning signs of incipient crisis were detailed in it.

Russia's economy has imploded in recent months. The Moscow stock exchange has lost 80 per cent of its value since January, the buying power of the rouble has halved in barely a month, and most private banks are teetering on the brink of insolvency.

Although Thursday's appointment of the popular foreign minister, Yevgeny Primakov, as acting prime minister may take the steam out of a tense political standoff between President Boris Yeltsin and the opposition-led parliament, Russia still faces rising social unrest and a growing wave of labour protests.

``We have emphasized that the numbers for capital flight are so large, this issue is clearly central to Russia's political disaster,'' said Whalley.

Political instability, a lack of legal property rights, haphazard privatization of state-owned assets and widespread official corruption are underlying reasons that Russia's new rich have exported their wealth in such prodigous amounts, the report says.

When the study began last year the Russian economists favoured cracking down on capital flight while the Canadians argued it was just a symptom that could only be cured by tackling the basic causes.

But on Thursday their positions appeared slightly reversed.

``I have gone from a supporter of strong capital controls to a believer in the senselessness of trying to fight the problem head on,'' said Abalkin. ``That would only lead to criminalization of the process.''

Capital flight will only cease when Russia's legal environment and business climate become attractive enough to keep money at home and attract foreign investors, he said.

Whalley said all that is true, but the global financial meltdown beginning in Asia last year and now tearing through Russia has given many Western economists pause to rethink a few beliefs.

``A lot of voices are now arguing that some degree of insulation from international markets may be necessary,'' he said.

``The Russians did everything Western agencies told them to do, and when you look at the outcome now, it's pretty catastrophic. You can't just come here and tell people it's the magic of the marketplace.''

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