March 27, 2001
The customs lines move glacially for travelers leaving from Moscow's international airports as agents squint at currency declarations, count the bills in passengers' wallets and occasionally paw through luggage if they think something's suspicious. The measures are aimed at preventing money from being spirited out of the country, but aside from an occasional nab, what they accomplish is mostly delays and annoyance.
Tens of billions of dollars in money that Russia badly needs escape the country every year, and the pace of so-called ``capital flight'' appears to be increasing even as Russian officials claim the economy is recovering from the financial crisis of 1998. Much of the lost money clearly goes into luxury consumption such as buying overseas villas, said Russia analyst Nik Malyshev. ``On the French Riviera, everybody talks about how much Russian is spoken there,'' he said.
Last year, capital flight rose 30 percent over the year before, to $24.6 billion, according to analyst Mikhail Delyagin of the Institute for the Problems of Globalization, an independent think-tank. The Troika Dialog investment bank gave a more conservative estimate of $20 billion in a report calling capital flight ``a disease under control,'' but now sees the outflow increasing. Capital flight caught wide international attention in 1999 when U.S. authorities said some $7 billion of Russian money had been laundered through the Bank of New York, but the problem has worried economists since the collapse of the Soviet Union a decade ago.
In hearings on the problem Monday, the lower house of parliament heard calls for creation of a national agency to monitor and control capital flight. But economists say efforts to control capital movement don't address the root of the trouble — why the money leaves in the first place. In pure economic terms, it's irrelevant whether the money leaves the country legally — sent by individuals and companies who want to put their earnings in currency more stable than the ruble — or illegally via phony paperwork or in a wad of greenbacks strapped to a traveler's leg. In either case, it's money that's being put to uses other than investing in restoring Russia's troubled industries.
The estimates of last year's capital flight are about double the $9.6 billion that Arkady Volsky of the Russian Union of Industrialists and Entrepreneurs said came into the country as foreign investment in 2000. ``These are resources that are not being used for machine-building and redeveloping the industrial sector,'' said Oleg Vyugin, a former deputy finance minister who now is chief economist at Troika Dialog. In addition, the revenue-strapped Russian government doesn't collect taxes on capital that leaves the country clandestinely, stifling efforts to restore social services, pay pensions and pay off staggering foreign debts.
Even as officials tout an economic revival, Russia this year hasn't kept up with payments on its debt to the creditor nations known collectively as the Paris Club. The government says it can find extra revenue to make the payments, but that assumption appears based on continued high world prices for its oil exports. Because of that, capital flight could force Russia into a crisis by 2003, Delyagin predicted. Russia faces an especially high foreign debt payment of more than $17 billion that year, and by that time oil prices may be substantially lower, Delyagin said.
With its potential to cripple the economy, capital flight may look like a disease, but economists see it as simply the symptom of a larger disease. The money that leaves Russia legally does so because of legitimate concerns, Delyagin said. ``It is not the cause of our misfortune, but a result of our insufficiencies, a consequence of these causes. Capital runs from the country because ... private property is not protected,'' he said. Delyagin especially criticized the power of Russia's natural resources monopolies and behemoth companies in forcing their will on smaller enterprises and said laws must be changed to effectively ``decriminalize'' bankruptcy.
Russian media have reported that the Ministry of Finance is drafting proposals on stemming capital flight, but when those might come to a vote in parliament is unknown. The only measure taken so far under Vladimir Putin's presidency that could directly affect capital flight is the simplification of the tax system. The package contains some positive, innovative moves, said analyst Malyshev of the Organization for Economic Cooperation and Development. But the changes went into effect only at the beginning of the year, and Russia often has failed to follow through on good ideas, he noted. ``The problem with Russia has always been implementation,'' he said.
