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. Last Updated: 07/27/2016

Russia Avoids 'Hot Money' Sanctions

Russia has escaped global "dirty cash" sanctions but will continue to be blacklisted by an international task force on money laundering for at least another year.

The Paris-based Financial Action Task Force on Friday said after a three-day, closed-door meeting that while Russia had "enacted significant legislation over the summer," it had yet to do enough to be taken off the blacklist of "noncooperative jurisdictions" altogether.

The key for Russia being removed from the list is the "effective and timely implementation" of new laws, FATF chief Clarie Lo, who is also Hong Kong's narcotics commissioner, said in Paris, news agencies reported.

The FATF, an arm of the 29-nation Organization for Economic Cooperation and Development, also added two nations, Ukraine and Grenada, to its blacklist, bringing the total number of countries and territories to 19.

Top Russian officials hailed achieving the main goal of avoiding sanctions, which would have made it extremely difficult for Russian citizens or entities to do business or open new bank accounts in the world's major industrialized nations. Financial transactions by exporters and importers, for example, would have been subjected to much greater scrutiny by law enforcement bodies and financial watchdogs in FATF member countries.

But they also said that remaining on the blacklist was a political embarrassment.

"It would have been great if they had struck us off the blacklist altogether," said Yury Chikhanchin, head of currency controls at the Finance Ministry and head of Russia's delegation in Paris. "But ... most important is that sanctions will not be applied," he said.

Alexander Shokhin, head of the State Duma's banking committee, said Russia had avoided the worst but still had a long way to go before foreign financial institutions dropped their mistrust of Russian companies. He told Reuters that the simple fact that Moscow remained on the FATF's blacklist was reason enough for financiers around the world to shun Russian counterparts.

Some $1.5 trillion is laundered across the world every year, with $2 billion of that going through Russia, according to the FATF.

Russia has been on the FATF's blacklist since 2000 and in June was warned, together with the Philippines and the Pacific island of Nauru, that it would face sanctions if it didn't clean up its act by the end of September. On Friday, the FATF said that it was keeping its sanctions deadline of Sept. 30 for the Philippines, while Nauru, a tiny island with a reputation for being one of the biggest transit points for grand-scale international laundering schemes, was given another month to show clear signs of improvement.

The threat of sanctions played a major role in the recent push by President Vladimir Putin to deliver on a number of prominent, although mostly declarative, measures to soften up the FATF.

These measures include a new anti-money-laundering law signed by Putin this summer and the creation of a financial watchdog with unprecedented powers to fight "hot money" financial schemes.

The law, which requires banks to report large or suspicious transactions by their clients, will bring Russia into compliance with an international convention on money laundering. Russia joined the convention in May 1999, but the Duma didn't ratify it until April 2001, a delay that contributed to Russia earning a place on the blacklist.

The new law, however, does not become operative until February, and the new monitoring body won't be up and running for a year after that, prompting concerns about just how eager Russia is to conform to international financial standards and curb capital flight.

"I don't think that Russia will be moving much further down the path of tougher control over financial flows," said Alexei Moiseyev, a senior economist with Renaissance Capital investment bank.

"The problem for Russia is that its money-laundering problems are less related to actual money laundering, as with funds linked to, say, drug dealing," said Moiseyev. "It is mostly the economic conditions within the country that [encourage] businesses to send their capital to safer places or to invest it outside of Russia."

According to Moiseyev, capital flight, a major reason for Russia's poor reputation with the FATF, is dropping. This is not because of international efforts to combat money laundering, but because businesses and investors find the domestic economic climate more friendly. In July, for example, he said that a total of $900 million left Russia, through either legitimate investments, criminal capital flight or money laundering -- down from $2 billion in July 2000.

The new tax code, reforms limiting bureaucratic levers for regulating businesses and a stronger ruble all helped create the necessary sense of stability, Moiseyev said.

Vladimir Tikhomirov, a senior economist at brokerage NIKoil, said that FATF sanctions would have damaged this new sense of stability.

"[Sanctions] would have been essentially a political measure, but still, it would have been unpleasant, especially for the country's image," Tikhomirov said. "But it is certainly good that even while blacklisted, we are not punished."

Tikhomirov was also skeptical of Russia's stated desire to create a more stringent regulatory system for financial flows.

"Russia is facing a dilemma. In order to build a free-market economy, minimal state interference in business and finance is a must. Any administrative measures then become a facade to maintain Russia's image abroad," he said. The more Russia tries to limit or monitor financial transactions, the more capital flight and money laundering it will encourage, he added.

Joining Russia on the FATF blacklist are the Cook Islands, Dominica, Egypt, Guatemala, Grenada, Hungary, Indonesia, Israel, Lebanon, the Marshall Islands, Myanmar, Nauru, Nigeria, Niue, the Philippines, St. Kitts and Nevis, St. Vincent and the Grenadines and Ukraine.