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. Last Updated: 07/27/2016

Capital Flight Halves In First Half of 1999




Capital flight is slowing down, but the gray economy is flourishing as Russians continue to put their trust in the U.S. dollar instead of the ruble.


Addressing the 12th annual Global Panel meeting of politicians in The Hague, Alexander Livshits, Russia's envoy to the Group of Seven leading industrial nations, said this week that year-on-year capital flight slowed to $7.5 billion in the first half of 1999 from about $15 billion. The annual outflow averages $20 billion.


Livshits, however, lashed out at the International Monetary Fund and certain countries, saying they should shoulder some of the burden for Russia's economic woes.


"Fifty percent of the responsibility [for capital flight] should lie with the countries that accept the capital," Reuters quoted him as saying.


Livshits accused the IMF of setting inconsistent economic policies, saying: "On the one hand, the IMF insists that Russia decrease the amount of gray capital. On the other hand, the IMF is not always happy with the adopted measures taken by our Central Bank to meet this goal."


In another positive economic development, Livshits said the misreporting of export revenue accounts now for only 5 percent of total exports, a huge drop from 50 percent in the early 1990s.


Credit for that drop and the fall in capital flight goes to recently drawn-up Central Bank regulations that attempt to tighten control of money flows, Livshits said.


However, he added, shadow businesses are finding ways to work around the controls.


The U.S. dollar continues to reign king among Russians, and is a major part of the currency used as working capital by all businesses and households, economists said.


Russians hold some $50 billion in cash, Michael Hudson, president of the American Institute for Economic Trends, told State Duma deputies Wednesday, Interfax reported.


Other economists agreed Friday.


"Usually, estimates vary between $30 and $60 billion, so $50 billion looks like an average," said Alexei Zabotkin, an economist with United Financial Group.


At $50 billion, Russia would account for about 10 percent of all paper money printed by the Federal Reserve. The reserve estimates that two-thirds of all U.S. bills circulate outside of the United States.


"Russia is probably one of the largest recipients of dollars," said Bruce Bartlett, senior fellow for the National Center for Policy Analysis. "The currency is also widely used in Mexico and Canada."


Foreign currency holdings soared from $30.5 billion in 1973 to $370 billion this year, the Federal Reserve said.


The export of dollars has even became a profitable business for private institutions in the United States. Palms & Company, Inc., for example, offers dollars outside Russia in exchange for rubles delivered inside Russia for a rate of 110 to 140 percent higher than the official exchange rate.