Money does not flow out of Russia like rivers anymore

The Russian government says the flight of capital has recently decreased. According to experts of the Institute of Globalization Studies, the money keeps flowing abroad, and the methods of moving it are becoming more sophisticated as Russian companies in this country are supplanted by foreign businesses. A correspondent of Arguments and Facts speaks with Mikhail Delyagin, head of the Institute of Globalization Studies:

The flight of capital from Russia was more noticeable in the 1990s. According to estimates by the Russian Finance Ministry, which look the most accurate of all the estimates pertaining to the issue, the amount of net capital flight totaled 265 billion to 285 billion rubles during 1986 through 1995. Taking into account the amount of capital moved out of the country in the recent past (142.3 billion), Russia has lost about 430 billion rubles during the years of economic reforms.

As for the estimates released by experts of the Association of the Russian Banks, they look far more alarming. The experts believe the flights of capital in the 1990s amount to a sum ranging from 800 billion to 1 trillion rubles.

Increasingly high pressure on business in this country is the main cause of the flight of capital. Russian entrepreneurs have started calling it quits en masse since 2004 after coming under strong pressure from the government. The businessmen were driven into a corner. On the one hand, they had to withstand the “authorities” fronting for corrupters and racketeers. On the other hand, the foreign corporations put a lot of pressure on them too. As a result, they were forced to sell their companies either to the former or the latter, and moved abroad.

Russian companies rely heavily on the offshore zone i.e. the countries of preferential tax treatment. There are more than 60 thousand offshore companies involved in transactions of the Russian capital worldwide at the moment, and the number keeps growing. The following countries “cooperate with the Russians” in the most active way: the Antilles , the Bermudas, Cayman Islands, Cyprus, and Lichtenstein. Around 2,000 Russian companies are based in Cyprus alone.

The story began in the 1990s when big business opted to use the offshore operations for tax evasion purposes.

According to Oleg Vyugin, head of the Federal Service for Financial Markets, it is extremely difficult to trace the offshore transactions these days because the scheming is getting more sophisticated.

The banks play a key role in the schemes for pumping the money abroad. The methods include the use of multiple accounts opened in the name of straw parties. A network of agents (legal advisers, intermediaries, accountants, dummy corporations) is in place to ensure that things run smoothly. The funds are transferred from one account into another, they travel bouncing off the various accounts only to vanish without a trace in the end. On the face of it, a huge number of parties are involved in the transaction. In actuality, all the parties can be either closely interconnected or related to the same entity.

Paying dividends is yet another way of moving money out of the country. Besides, it is perfectly legal. For example, TNK-BP was quick to pay its shareholders the dividendsto the amountof $3.9 billion in 2004. The amount equaled more than 95% of the company’s net profit. By opting for the dividends, the shareholders effectively voted against development capital. They simply chose to get cash and invest the money in other companies including the foreign ones.

The number of fixed assets acquired by Russian companies abroad increased dramatically last year. For example, Alfa Telecom paid $1.6 billion for a stake in the large Turkish mobile phone services provider Turkcell in November 2005. Last April Severstal paid $430 million for 62% of shares of Lucchini, an Italian steelmaker. Last spring the Russian tire producer Amtel finalized the acquisition of Vredestein Banden, a Dutch tire producer. Amtel paid 196 million euros for 100% of the shares. Kalina, a large-scale cosmetic manufacturer, bought a 60% stake in the small German company Dr. Scheller for 15 million euros. MTS, one of biggest Russian mobile phone services operators, paid $150 million for a controlling stake in Bitel, a Kyrgyz mobile operator. The list of acquisitions is incomplete.

No doubt about it, the flight of capital does not always have a negative impact on the national economy. Some foreign companies are bought with an intention of making them work for Russia’s interests. On the contrary, the flight of capital implies a movement of funds away from the country, the funds that will generate no profits for Russia.

Vladislav Surkov, the Kremlin deputy chief of staff, has coined the term “offshore aristocracy.” He admitted that the lack of the elite motivated by national interests was Russia’s biggest problem. The present-day elite mostly live abroad, their children are educated in foreign schools and universities. Ruling Russia is their second job. This country is like some kind of a plantation to them.

According to The Times, 23 thousand wealthy Russians currently reside in the U.K. Some unofficial reports indicate that $60 billion have been pumped from Russia to the U.K over the last six years. One can look up the names of the most successful money movers in Forbes magazine.

Take Alfa Group as an example. It never concealed the name of its parent company – Gibraltar-based CTF Holdings Ltd. As for Alfa banking group, it is owned by ABH Holding, which is registered in the British Virgin Islands. Given the above circumstance, shall we consider the acquisition of the Turkish mobile operator and other foreign assets by Alfa as expansion of a Russian company? Does Russia gain any profit of this kind of operation? Perhaps the “offshore aristocrats” are simply buying new assets.

No sensible person would demand that the state build a barrier to prevent the flow of the Russian capital to foreign countries. The Americans are also actively minimizing taxes via offshore operations. In the meantime, U.S. companies side with the federal government by turning capital movements into the complex U.S. expansion around the globe. On the contrary, the Russian “offshore aristocrats” mostly work for their own benefit while using the government institutions for aggressive lobbying of their interests.

Arguments and Facts

Translated by Guerman Grachev

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Author`s name Dmitry Sudakov