Financial Transparency Coalition

Editors note: Global Financial Integrity will release a new report, titled, “Russia: Illicit Financial Flows and the Underground Economy” later this month. To help preview the report, and the relevant issues that Russia and the global economy are dealing with, below is a December 2011 post on corruption in Russia from GFI Lead Economist Dev Kar, who is co-author of the new report. The post has been updated to include the latest data from the report, Illicit Financial Flows from Developing Countries 2001-2010, to avoid confusion.

[Paragraph Updated: 1/16/2013] As tremors of distrust resonate throughout Russia due to widely-believed allegations of fraud in Sunday’s Parliamentary elections, new research reveals that US$152 billion in illicit money has left the country in the ten years (2001-2010) following Vladimir Putin’s rise to power. The report, Illicit Financial Flows from Developing Countries 2001-2010, was published in December by Global Financial Integrity (GFI).  To make matters worse, The Wall Street Journal reports that Finance Minister Anton Siluanov has predicted net capital flight upwards of US$85 billion for this year, further adding to the illicit component of GFI’s estimates.

A statement released by the Organization for Security and Cooperation in Europe (OSCE) described the contest as “slanted in favor of the ruling party,” pointing to “several serious indications of ballot box stuffing.” By Tuesday, police arrested around 800 protesters across Russia, including those defying the rally ban in Moscow, and were bracing for a potential protest of 14,000 this coming Saturday in what could be the decade’s largest opposition demonstration in Moscow.

However, I doubt that the average Russian protester on the street is simply unhappy with Vladimir Putin. They are looking to their left and their right and seeing Russia’s enormously wealthy ruling class prosper through corruption, tax evasion, and crony capitalism. Indeed, wealthy Russian officials and businessmen have been transferring massive amounts of capital out of the country.

There are several reasons as to why capital flight could increase this year. First, Putin’s promise to restructure his cabinet post-presidential elections in March worries companies that have shady dealings with bureaucrats. Second, in a country where tax evasion and transfer pricing are commonplace pastimes, Russia is finding that its revenues are not quite up to par for debt repayment—especially when one considers the projected drop in oil prices. A global recession has caused investors to look to the dollar as a safe haven, implying a fall for weaker currencies like the ruble. In an attempt to avert a depletion of reserves, Russia has capped purchases of foreign currency. In a lucky twist, food and commodity prices have moderated, leading to a decline in consumer inflation deceleration. Despite this, we see two unsustainable outcomes from illicit money transactions: step-wise devaluations in the Russian currency and increases in rates of core inflation (which abstract from food prices).  

It is clear that Russia, a country with growing income inequality, cannot continue to hemorrhage scarce capital without serious consequences. Russians should demand that their government fight tax avoidance through automatic tax information exchange and strengthening anti-money laundering laws.  With efforts to strengthen regulation and oversight in these two areas, Russia can better monitor corrupt practices, improve corporate governance and responsibility, and increase tax collections.