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.
DEVILISH DEAL. 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.