Trimming the wings of flying capital

Issue Number: 
54
Author: 
Vera Kuznetsova
Published: 
2000-03-27


The Russian government would like to slap handcuffs on money "fleeing" Russia, but it can't manage to do it. Acting President Vladimir Putin said that $1.5 billion leaves the country every month. That makes $18 billion a year.

True, government experts say capital flight has dropped considerably. In 1998, it totaled $25 billion. Clearly, the crisis made its impact felt. But, government officials say, it's not only the crisis to thank for decreased capital flight. Measures taken in recent months by various ministries have also put up barriers to capital flight and have brought cases of money-laundering to light.

The problem is that these are all administrative, not market measures. Alexander Gromov, head of the Federal Currency-Export Control Service, admitted as much at a government meeting on capital flight and money-laundering. Gromov also named the two main channels used by dishonest businessmen to get their money out – export contracts and one-day companies.

Gromov said that exporters deliberately lower the prices of their goods and exaggerate the quantity. For example, an oil trader will declare a price $2 lower per barrel than the real price. The money obtained from this manipulation either gets shared with the buyer or goes entirely into the supplier's pocket.

During inspections of the Almazyuvelirexport company last year, currency control inspectors discovered contracts with lowered prices totaling $2.4 billion. Gromov also noted that 30 percent of Russian exports still escape any government control, particularly in the services market.

Gromov proposed introducing compulsory price- and quantity-assessment for all export goods. But the government hasn't thought of a mechanism that would force exporters to voluntarily submit goods to examination and, by law, there can't be forced inspection of contracts.

Ministers were unanimous in saying that one-day firms were the worst evil. It is often through these types of companies that money-laundering is carried out. Currency control inspections recorded cases of up to 16,000 export contracts going through such firms in Moscow in 1999. These contracts represented millions of dollars, while the charter capital of the companies involved was only in the thousands of rubles.

The Federal Currency-Export Service handed material on Transkapitalbank and AKB Moskva, two banks that are particularly active in contacts with such firms, to the Interior Ministry.

But the government isn't unanimous on how to deal with the problem. Central Bank representatives have proposed a license system for export companies. In order to avoid creating monopolies in this sector, restrictions would not be very tough – registration only of companies with charter capital of not less than $50,000, for example.

But First Deputy Prime Minister Mikhail Kasyanov opposed this proposal, saying it would deal a blow to small businesses. Kasyanov proposed that the government act through market measures rather than administrative measures. He attempted to find out from officials just what kind of measures could be implemented, but without success. The officials all chorused that what is needed is an attractive investment climate in Russia. Then there would be no more capital flight.

"We've got nothing left at the moment, so we have to at least patch the holes in the laws so that businesses have fewer opportunities to illegally send capital out of the country," Gromov said.

Head of the Tax Ministry Alexander Pochinok called on the government not to extend or sign any agreements on double taxation with offshore zones. Existing agreements, especially the one with Cyprus, should be broken off, Pochinok said.

Central Bank representatives introduced a number of bans on carrying out operations with export and import contracts through offshore banks. They say this has had excellent results. Previously, up to $1 billion a month left the country through these channels, while in February this year, this figure was brought down to $300 million.

But the meeting on capital flight and money laundering seemed to disconcert even Kasyanov, who presided over it. He noted that the prevailing point of view was a repressive one rather one based on economics. A new draft law on preventing capital flight and money laundering would be ready no earlier than summer.

Thus far, Kasyanov liked the looks of only two of the ideas proposed at the meeting – setting up a common inter-ministerial database on import-export contracts which would also use Central Bank information, and a financial police formed by law enforcement agencies and the tax police. But all this is something for the probably quite distant future.


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