Offshore Your Rubles in Swiss Accounts

1999 > Russia

Why not put your IMF loot in the safest banks in the world?

Every wealthy Russian has at least one, if not a few, a Swiss bank account
to hide all the cash they ship out of Russia on a daily basis. I didn’t
know how widespread this was until I read these articles.

Johnson’s Russia List, 11 September 1998

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

“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.’

Rossiyskaya Gazeta October 6, 1998

“The Flight of Capital”

Article by Igor Tsukanov

The other day, RF Prime Minister Yevgeniy Primakov met with major Russian
exporters. The subject of the conversation was the huge amount of money which
has, for many years now, been a deep river flowing out of Russia and settling
in foreign banks. Up to now, it has been primarily the scholars in our country
who have been working on the problem of the “flight” of capital from Russia.

In particular, scholars from the Institute of Economics at the Russian Academy
of Sciences, in conjunction with the Canadian University of Western Ontario,
who have been dedicated to studying the problem for about one-and-a-half
years. The state has also been working on this, but in the person of so many
bodies (the TsB [Central Bank] Special Administration, the State Customs
Committee (GTK), the Federal Currency and Export Control Service (VEK), the
Department of Tax Policy, the Ministry of Finance, the Ministry of Economics
and even the State Investment Corporation), that there was no occasion to
talk about specific, especially unified measures.

The scholars of the Institute of Economics were the first to count up: a
total of about $140 billion has left Russia since 1992. This is more than
the sum of money which “vanished” from Brazil, Venezuela, Mexico and Peru
taken together during 1979-1987 (the period of the financial crisis in these
states). By 1997, the amount of former Russian capital which has now settled
abroad reached one-fourth of the domestic GDP, and practically equaled the
value of the country”s foreign debt!

The reason for such an active outflow of money is obvious — it is, first
of all, the lack of confidence of our countrymen (incidentally, not of them
alone) in the ruble and the entire financial policy followed by the state.
It is quite natural that the most noticeable “splashes” of the economy”s
dollarization and transfer of currency abroad fell in October 1994 (the “black
Tuesday” on the MMVB [Moscow Inter-Bank Currency Exchange], during the period
of elections for the RF President, and hisillness.

Researchers calculated that Russia has lost up to $17 billion yearly since
1994. We can only guess how much money “migrated” beyond the borders of our
native land during the last one-and-a-half months….

Like these guys wanna give up the dough?At the meeting with the exporters (the directors
of Gazprom, LUKOIL, YUKOS and the banks servicing them, Sberbank, ONEKSIM
Bank, MENATEP, Rossiyskiy Kredit and Avtobank, took part in it), the Russian
prime minister stated: by the beginning of September, the country had failed
to receive, in the established time limit, export currency earnings amounting
to $3.4 billion dollars. Moreover, according to the data of Ye. Primakov,
“in approximately 80 percent of the cases there had been instructions from
the exporters to their foreign contractors not to transfer funds to Russia.”

LukOil’s “modest” headquarters

For this reason, the Government feels that control over return of the earnings
to Russia is necessary. The TsB, the VEK and the GTK have been instructed
to think about how to do this.

The basic direction has already been proclaimed, however: oblige the exporters
to sell 75 percent (and not 50 percent, as before) of their currency earnings
on the domestic market, as well as to reduce the time-limits for their return
(up until now, a gap of 180 days was permitted between the supply of the
goods and the payment for them).

Ye. Primakov reminded them: a delay in payments and an understatement of
the total currency earnings will cost the violators 200-300 percent of the
earnings themselves. The measures of which we are speaking are not merely
timely actions by the state, but part of the government program for a way
out of the crisis.

There is so far no talk about returning the “fugitive” capital to Russia.
But it would be worthwhile to keep the money which is still here (the so-called
“flying” capital). Strict administrative regulation, in the opinion of Leonik
Abalkin, director of the RAN [Russian Academy of Sciences] Institute of
Economics, will not help in this matter. “Gaps” can always be found in any
law, even the strictest one: despite any obstacles, there are still more
than enough ways to take money abroad — including fully legal ones, such
as, for example, offshore business.

In addition, capital can flee the country without every crossing its borders:
this is precisely what happens in the dollarization of the economy, when
the population begins actively ridding itself of ruble cash, using it to
buy up foreign currency. According to the data of the RAN Institute of Economics,
the amount of cash dollars (the population has $30 billion “in stockings,”
plus about another one-and-a-half dozen billion in turnover in “shuttle”
trade) in September considerably exceeded the amount of the ruble money supply
(approximately 180 billion rubles or, at the exchange rate at that time,
$10-18 billion).

According to the estimates of economists, over 40 percent of the country”s
monetary flow right now is in foreign currency and, therefore, not under
the control of the Central Bank. The procedure for the obligatory sale of
currency by exporters is stiffening very little. This must be done, but it
is hardly the first thing to do. First, we must think about stabilizing the
economy and about how — at least partially — to restore the investor”s
confidence in the ruble. The first step here, obviously, should be a clear
and precise government program. Which we are anxiously awaiting.

Business Week, September 13, 1999

Commentary: The Tidal Wave of Cash Gushing Out of Russia

By Patricia Kranz and Margaret Coker

The Russian money-laundering scandal is grabbing headlines around the world.
That’s no surprise, since it has all the elements of a juicy story: money,
drugs, and sex.

Investigators in Britain and the U.S. believe the Russian mafia has used the
Bank of New York to smuggle as much as $10 billion out of Russia. Some of the
laundered money comes from proceeds of activities such as contract murders,
narcotics trafficking, and possibly prostitution, investigators say.

It’s horrible publicity for the Bank of New York. But $10 billion is only a
tiny drop in the tidal wave of capital that has gushed out of Russia in recent
years. Fitch IBCA, a London-based credit-ratings agency, estimates that $136
billion was taken out of Russia from 1993 through 1998. Moscow-based Troika
Dialog investment bank calculates that the total could be as high as $500
billion in those six years. So even a thorough and successful investigation of
the Bank of New York–or any other bank that has actively courted Russian
business–is unlikely to make much difference. The powerful money flows will
continue until there are drastic changes in Russia.


There’s little hope of that anytime soon. Russian politicians are gearing up
for parliamentary elections this December and presidential elections next July.
They don’t want to rock the boat by making any major changes. That poses a big
challenge for policymakers in the West. They’ve known about Russian capital
flight for years. They even abetted it by looking the other way when billions of
dollars of aid money disappeared into the pockets of corrupt bureaucrats and
businessmen. But they thought they were doing the right thing by supporting
Yeltsin as he fought off Communist challenges. And they wanted to prevent chaos
in a nuclear power.

Now, the money-laundering scandal is shining a harsh spotlight on their
Faustian bargain. The fact is that Russian-style capitalism and capital flight
go hand in hand. Members of the resource-rich country’s business and political
elite are stripping Russia of its assets, from oil to aluminum to furs. Over the
years, they’ve perfected a myriad of ways to get cash out of the country, from
carrying it out in suitcases to setting up elaborate networks of shell companies
and bank accounts. Even ordinary Russians find ways to set up bank accounts when
they vacation abroad.

Why does everyone from government officials to street cleaners want to get
their money out? The reasons are political and financial and entirely logical.
Russians have a legitimate basis for not trusting their politicians. They lost
their savings in 1992 when Boris N. Yeltsin’s economic reforms sparked soaring
inflation. Last year, the central bank promised to reimburse depositors for
money they lost when banks collapsed in August. Most are still waiting.

Businesspeople turn to offshore banking as a way to contain the risk in an
economy where the banks are unsound and corruption is fierce. But it’s also
often a way to limit payments to the Russian tax man. That’s why experts believe
that the majority of the capital that flows out of Russia comes from companies
or individuals engaged in normal economic activity, from selling oil to
hamburgers. But the machinations they go through to get the money out are
certainly questionable–and bend if not break Russian or overseas laws.

Examples abound. For years, foreign investors have accused managers of
Russia’s oil and metals companies of cheating shareholders by selling
commodities on world markets and parking the proceeds offshore. In another
scheme, Russian managers set up an offshore shell company, using it to bill
Russian customers for goods to be imported. The customers prepay with a wire
transfer to the offshore company. But the goods are never shipped, and the money
is left outside Russia.

What could stop the cascade of capital? Probably only decades of thorough
economic, political, and legal reforms. The Clinton Administration and the
International Monetary Fund should admit this. It’s time to tell the Russians:
“No reforms, no money.” Or at least the Administration should be perfectly up
front about policy goals in Russia. If the West is willing to pour money into
Russia because it wants to preserve stability in a country full of nuclear
weapons, just say so. It’s time to stop pretending