$150bn capital flight ravages Russia
A new crisis, a new premier but firms enriched by the end of communism go on salting cash away abroad, says Simon Pirani
Russian prime ministers come and go - Sergei Stepashin is the fourth in 14 months - but the flight of capital is constant. It flows through semi-legal and illegal channels into assets denominated in foreign currencies, and is reckoned to total more than $150 billion during the Yeltsin era so far. This is far greater than the flow of loans into Russia, about which much more is heard.
Economist Leonid Abalkin, who advised Prime Minister Yevgeny Primakov until the latter was sacked last Wednesday, blames the excesses of 'shock therapy' in 1992-93, and says the problem can be dealt with 'only by a radical shift in both foreign economic policy and domestic policy'.
Since 1994, the flight has totalled $17bn a year, according to a joint study by the Institute of Economics of the Russian Academy of Sciences (of which Abalkin is director) and the University of Western Ontario in Canada. It also found that Russian residents accumulated about $68bn abroad between January 1994 and September 1997.
But the greatest capital flight happened as the reforms began in 1992-93. Abalkin's researchers believe between $56bn and $70bn left in those years.
Separate research by Moscow-based financial services company Troika Dialog puts capital flight at between $15bn and $20bn a year since 1994. Its estimate for 1999 is 'around $15bn - only a few million less than Russia's trade balance'.
It says capital flight amounts to $200 per year for each economically active Russian - or nearly four times the average annual pay of $58 (a state statistics office figure that excludes second and unofficial incomes - essential for survival).
By averaging out their own estimates with those of other economists, Abalkin's researchers give a grand total for 1992-97 of $133bn - more than twice as much as post-Soviet Russia's sovereign debt to international banks and institutions (about $60bn).
Russia is very high in the all-time capital flight league, overshadowing the figures for Latin America in the Eighties. The $133bn total is more than double the flight from Mexico in 1979-87 and surpasses the amounts for Brazil, Venezuela, Mexico and Peru put together.
Abalkin's researchers define capital flight as the transfer of ruble-denominated assets into those denominated in a foreign currency, whether they are at home or abroad. It is, as a rule, 'accompanied by a collapse of industry and investment', he says.
The term capital flight has previously been used to describe the immediate consequences of financial collapse. But in Russia, the team says, the continuous crises since 1991 have turned it into an 'ongoing process'.
Capital flight on such a scale has been possible largely because capitalism mushroomed far quicker than legal and regulatory systems. 'I liked to quote the example of Britain,' Abalkin says. 'It took 11 years, and much effort, for your country to privatise a few major corporations. And in our great country, with its huge geographical expanse and weight of tradition, these people wanted to privatise everything in 500 days.'
Disappearing capital often takes the form of export revenues that fail to return to Russia. Abalkin gives the example of sales of seafood to Japan. In 1994, Japan registered $510.9 million of seafood imports, but only $90.4m worth show up in Russian statistics, leaving more than $400m on the ocean waves - or, more probably - in Swiss banks.
Other gaping holes in the regulatory fabric through which capital flies include payments for 'imports' never received, and the difference between offered and raised sums for export trade credits and import advances. Troika agrees that most capital flees in the form of non-repatriated export proceeds and prepayment on fake import contracts, 'rather than men in black smuggling large suitcases stuffed with dollars'.
It pinpoints four main routes:
*Manipulation of insurance and transport costs incurred on the export of oil and other high-earning commodities;
*The violation of capital controls by banks that are a) frequently controlled by the big exporters and b) in the process of being bankrupted;
*The creation of trading partners in other CIS countries and the export to them of ruble-denominated Russian goods that are subsequently re-exported for dollars;
*Bad debt, which Troika says is 'the easiest mechanism for hiding both export and import revenues'.
Abalkin argues that ordinary Russians' preference for keeping savings in cash - preferably dollars - rather than banks, is another form of capital flight: 'If money is lying under somebody's mattress in dollars, it's not capital. It is not able to serve any useful purpose.
'We have made a provisional estimate that a minimum of $30bn went out of the Russian economy in this way last year. Particularly during and after the August banking crisis, people changed what money they had into dollars. It is shameful, but people have lost confidence in their country, the banking system and the ruble.'
Another $10bn was circulating among the chelnoki, Russians who live by travelling, often to Turkey, to buy cheap consumer goods and returning home to sell them. But this trade, too, has fallen off drastically since the banking meltdown, and these dollars are also reckoned to be stored in cash.
Abalkin sees this 'capital flight within the borders' as related to another key economic malaise: demonetarisation or 'dollarisation' - a shortage of rubles in the economy. Deals without rubles are not limited to street trade. Medium and even large companies often do most domestic trade by promissory notes and other money surrogates.
A development plan drawn up by Abalkin and others at Primakov's request posited a state-led investment strategy as the way to reverse the catastrophic decline in production (by half) and industrial investment (by 16 times) since 1992 - and to tackle capital flight and demonetisation.
'The first step is to accumulate resources for economic growth,' says Abalkin. In his view profits must be ploughed back into modernisation, credit made available for the construction industry, leasing and consumer credit schemes launched, and a system of local banks and credit unions created. He says the financial market must be restructured to encourage foreign direct investment, as opposed to speculative capital flows. His proposals for reviving Russian banking include a key role for foreign banks: only they can help bring people's savings into the financial system.
'We need to turn to the most solid and authoritative western banks and allow them to restore confidence.'
Abalkin had Primakov's ear for these proposals, but will not have Stepashin's. A moderate reformer who rose to prominence under former Soviet president Mikhail Gorbachev, Abalkin bitterly opposed monetarist dogma in the early Yeltsin years. Abalkin is the same age as Primakov, 69, and is seen as out of date by the young reformers.
He served as deputy prime minister for the economy for 18 months in 1989-91, but lost influence as Moscow politics polarised between the most conservative wing of the Soviet establishment and Yeltsin's free-market radicals.
Political analyst Denis Rodionov at Brunswick Warburg in Moscow, says: 'Stepashin may not bring the radical reformers into government, but they are the ones he will listen to. The question is whether Yeltsin will be strong enough to back them up.'
For the time being, the establishment will be paralysed by the battle between Yeltsin and parliament. Banking reform and financial regulation are unlikely to get a look in. Foreign money will stay away and Russian money will feel no incentive to hang around - even more fertile territory for capital flight.