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. Last Updated: 07/27/2016

Economists Say Bank Plan Won't Trim Capital Flight




Contrary to Central Bank assertions that capital flight almost halved last year to $15 billion, leading economists said Friday that about $25 billion left the country in 1999, close to the figure for 1998.


Including that increase in foreign assets, capital flight for last year is estimated at the much higher figure of around $23 billion to $24 billion, said Oksana Dynnikova, an economist at the Expert Group.


That's still down slightly from the group's estimate for 1998 of $26.5 billion.


However, as a percentage of gross domestic product, capital flight grew to between 13 percent and 14 percent, up from 9.7 percent in 1998, the group said.


"That means that Russian businessmen are still choosing to invest their funds in other countries than Russia, whether it be in foreign treasury bills or funds kept in correspondent accounts abroad. That's still going to be just as damaging for the Russian economy," Dynnikova said.


The Expert Group's figures were backed up Friday by Andrei Illarionov, a prominent economist known for his sharp criticism of government policies who has recently tied up with a think tank commissioned by acting President Vladimir Putin.


Capital flight, defined as all rubles transferred into hard currency, ran at $23 billion to $25 billion last year, he said in remarks reported by Reuters.


Illarionov also criticized the Central Bank's efforts to forcibly repatriate export proceeds. Under Russian law, exporters are obliged to repatriate all their revenue and sell 75 percent of it to authorized dealers - and Central Bank chairman Viktor Gerashchenko late last year proposed raising the forced resale level to 100 percent.


Illarionov said this measure would not stop capital flight, Reuters reported. Moreover, the obligatory sale of all export revenue would damage the most efficient sectors of the economy and destabilize the ruble, he said.


Deputy Central Bank chairman Viktor Melnikov's statement last week in London that the pace of capital outflow had eased to $1 billion per month from an annual $15 billion in 1999 and $25 billion at the height of Russia's crippling financial crisis in 1998 had immediately met with skepticism from economists tracking Russia.


Melnikov said last Friday that the Central Bank had two more regulatory measures to help stem capital flight.


A new law is to be forwarded to require the compulsory registration of companies that would make it harder to set up fake and temporary companies for channeling funds abroad.


Another law would give banks the right to suspend suspicious foreign exchange deals for up to five days and report them to the authorities.


Melnikov said among signs that deals are suspicious are those involving Russian companies less than three months old or if the foreign company receiving Russian exports is different from the company making the payment.


However, Pavel Busygin, chief spokesman for Probiznesbank, called these measures laughable at best.


"What kind of bank is going to inform on its clients when it's making money out of them," he said.


"Businessmen will just run away from them to other banks that they can do business with. If banks are already allowing their clients to conduct questionable deals then they are going to do continue to let them. It's a good source of income for the banks as well," he said.


"The Central Bank is only treating the symptoms and not the cause. Without a return of trust in the Russian economy and banking system, then Russian businessmen are going to continue to vote against the Russian system and transfer funds to foreign assets," said Peter Westin, an economist at the Russian European Center for Economic Policy. "And this is going to be something that can only be solved in the long term."