Staying home, for now at least.

Photographer: ALEXANDER NEMENOV/AFP/Getty Images

Deutsche Bank's Russian Scheme Isn't Needed in 2017

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Deutsche Bank, for which fines have become almost a routine expense, has agreed to pay $630 million to end U.S. and U.K. investigations into a scheme that helped wealthy Russians move $10 billion out of Russia. But those clients have little need for such a channel anymore: Capital outflow from Russia has slowed to a trickle.

Between 2012 and late 2014, Deutsche Bank's Moscow office executed a long series of strange trades. Clients instructed it to buy blue-chip Russian securities for rubles and then sell the exact same amounts of these securities in London or New York for foreign currency. Sometimes, Deutsche executed only one side of the "mirror trades," whose only purpose was to expatriate capital. 

It's unclear exactly who the clients were. It has been reported that they included President Vladimir Putin's close associates, Arkady and Boris Rotenberg, and Chechens close to the leadership of their autonomous republic within Russia. The mirror scheme, in any case, provided a major loophole for importers that wanted to avoid Russian taxes or merely put their cash outside the reach of Putin's repressive machine. Each of the trades taken separately was perfectly legal. The U.S. and U.K. investigators' problem with Deutsche's behavior was the laxity of its know-your-client and other compliance checks. "The offsetting trades here lacked economic purpose and could have been used to facilitate money laundering or enable other illicit conduct," New York Financial Services Superintendent Maria Vullo said in the press release announcing the settlement. 

It's doubtful whether the mirror trades can be described as money laundering. After March, 2014, when Putin annexed Crimea, and especially after oil prices started falling later that year, keeping ruble cash on the books became unwise -- it was clear that the currency would suffer, and it did. Besides, what looked then like Russia's deliberate self-isolation required that business people with international ambitions strengthen their overseas capital bases. In 2014, Russia saw a record private sector capital outflow of $152.1 billion, more than half of it in the fourth quarter. The Deutsche Bank trades only accounted for a tiny fraction of the capital flight.

Last year, however, Russia's capital outflow was the lowest since 2008, according to the Russian Central Bank -- about one-tenth of the 2014 record:

Russian Capital Is Staying Put
Russian balance of payments data on private sector capital inflows and outflows, $ billion
 
Source: Central Bank of Russia

In 2015, a different wave of capital outflow followed the previous year's panic flight. As Western sanctions and a shrinking economy made it more difficult for Russian banks and companies to obtain foreign funding, Russia deleveraged. There was no option for companies and banks but to pay down their debts: Russian was deemed so toxic that counterparties often wouldn't roll it over or would make it too expensive. The net change in Russian banks' foreign financial obligations reached a record negative $60 billion in 2015, and non-financial companies' foreign obligations shrank by $5.8 billion, another record. 

Last year, however, that changed. The central bank surveyed 27 banks on their foreign debt situation and reported that while the expected repayments to foreign banks in October 2016 through July 2017 was higher than the year before, "about 40 percent of the interbank loans are expected to be refinanced, whereas last year banks expected a full repayment of debt to foreign banks."

In 2016, Russian banks' foreign obligations shrank by $27.4 billion -- less than half of the 2015 drop -- and non-financial companies took on a net $21 billion of foreign debt. The total debt of the Russian corporate sector remained almost unchanged at $518.7 billion. That, for the most part, explains the small net capital outflow in 2016: Foreign money is back for Russian borrowers:

The Great Deleveraging Is Over
Russian entities' foreign debt, $ billion
 
Source: Central Bank of Russia

The Russian government has been slightly bolder in terms of foreign borrowing, since it had a budget deficit to cover, but it also managed a slight bump in international reserves, which increased to $377.7 billion in December, up from $368.4 billion a year earlier.

Though the Russian economy is stagnant -- after two years of recession, economic output is only expected to grow by 1.2 percent -- there are few reasons for private business to move money out of the country. Last year, the ruble staged an impressive rally, adding 20 percent versus the U.S. dollar. If U.S. President Donald Trump comes through for Putin and alleviates sanctions, more Western money is likely to move into undervalued Russian assets, including debt. It will also give the ruble's exchange rate another boost which a company with ruble cash shouldn't want to miss -- even though the government will be doing its best to damp it because it needs a weak ruble to balance the budget.

The government might almost wish for a greater capital outflow, even though Putin has publicly boasted about the low number. But it won't happen. Russia is a coiled spring: If the West gradually resumes business as usual with it, the more positive narrative will make it hot as quickly as Putin's escapades and the oil fiasco made it toxic in 2014 and 2015. Schemes like the one that cost Deutsche Bank $630 million are out of fashion for now.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Mark Gilbert at magilbert@bloomberg.net