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Russia Illicit Outflow Reached $212 Billion, Study Says

Feb. 13 (Bloomberg) -- Illicit capital outflows from Russia were as much as $211.5 billion between 1994 and 2011 as the underground economy moved funds abroad, according to Global Financial Integrity, a group that studies financial flows.

Total illicit outflows were $9.99 billion in 2011, down from a peak of $41.6 billion in 2010, Washington-based GFI said in a report released today. The study begins in 1994, the first year for which Russian balance-of-payments data are available.

Russia is “the most-opaque economy we have analyzed,” and the data probably underestimate the real scale of illicit outflows, Raymond Baker, GFI’s director, said in a note accompanying the report. “By utilizing their own pocket banks to handle the transactions, Russian corporations have been able to transfer hundreds of billions of dollars out of their country.”

Russia will host finance ministers and central bankers from the Group of 20 in Moscow this week. One of the country’s three top priorities for the talks will be “growth through trust and transparency,” according to Russia’s G-20 presidency page.

‘Massive’ Flows

“There are important and serious security aspects of weak overall governance that the authorities should heed in order to strengthen national security,” Dev Kar and Sarah Freitas, economists at GFI, wrote in the report. “The massive illicit flows from Russia and how they both drive and are driven by its huge underground economy are symptomatic of weak overall governance.”

Proposals such as President Vladimir Putin’s plan to ban officials from owning bank accounts abroad “are just a Band-Aid,” Kar said yesterday in a telephone interview. “It’s a combination of a lot of different factors: bribing, kickbacks, corruption in general.”

Lithuania suspended operations of Ukio Bankas AB, the country’s sixth-biggest lender by assets, for insufficient capital and refusing to stop lending to companies linked to majority owner, Russian-born Vladimir Romanov, the central bank said today. Prosecutors are investigating “suspicious transactions” dating back to 2005.

Underground Economy

Based on estimates of the flows, Russia’s underground economy was probably worth 19 trillion rubles ($632 billion) in 2011, or 35 percent of gross domestic product. While rising in absolute terms, the figure has fallen from 77 percent of GDP in 1994 and tumbled to as low as 28 percent in 2009 and 2010, according to the report.

“The problem is making lasting improvements in governance,” Kar said. “You have to have sustained progress, starting from the top.”

The combined outflow figure includes $135 billion of hot money, derived from reported net errors and omissions in the balance of payments. The other $76.5 billion is from so-called trade misinvoicing, which involves a company undercharging for exports or overpaying for imports, usually to a related company, to hide capital flows, according to the report.

“This indicates that the proceeds of bribery, kickbacks and other illegal transactions are primarily transferred out of the country through unrecorded banking transactions,” according to the report.

Including legal outflows of capital, the total amount that has left Russia over the period is $782.5 billion, or an average of about $43.5 billion a year, according to the report. Illicit outflows average $11.8 billion annually.

Russia had net private capital outflows of $56.8 billion last year, according to preliminary central bank data compiled by Bloomberg. That’s down from $80.5 billion in 2011.

To contact the reporter on this story: Scott Rose in Moscow at rrose10@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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