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Capital Outflow Problem Cripples Already Ailing Russian Economy

By David Hoffman

The economy of modern Russia is hemorrhaging cash: every month, $1 billion to $2 billion slips out in wire transfers, phony import-export documents and insider price manipulations. About $100 billion to $150 billion has fled abroad since 1992, according to Russian and Western estimates, outstripping the international aid coming into the country.

Capital flight is one of the most debilitating woes of Russia’s eight-year attempt to transform the centrally-planned economy of the Soviet Union into a free market. All of the country’s other troubles -- political upheaval, lawlessness, hyperinflation, oligarchic rule -- have combined to drive wealth that might otherwise go toward rebuilding and growth into overseas bank accounts, real estate, luxury resorts and offshore tax havens.

The breadth of the problem has been highlighted this month with the disclosure that U.S. law enforcement officials are investigating transfers of as much as $10 billion in Russian money through the Bank of New York over the past year and a half. Some of the money appears to have come from Russian organized crime bosses, and investigators have described some of it as part of a money-laundering scheme to conceal the origin of criminal profits.

But the enormous transfers also appear to be part of a broader phenomenon of capital flight, money on the run from Russia from a variety of sources and for a host of reasons: to hide it from taxes or business partners, to conceal pillage of natural resources or stripped factory assets, or to skirt political and economic upheaval at home.

According to Russian bankers, economists and analysts, the Bank of New York transactions are typical of several “clean pipes” carrying Russian capital out of the country to the West. These channels are often run by intermediaries from Switzerland, Cyprus and elsewhere, who specialize in getting the money to a safe haven. The “clean pipe” may be carrying the money of dozens of different people and companies, whether legal, shadowy or criminal, and to different destinations.

Even in the final years of the Soviet Union, capital flight was underway, as smart young financiers and the Communist Party elite learned to hustle money overseas. The collapse of the Soviet police state, and its rigid restrictions, then opened the floodgates.

Since the collapse of the ruble a year ago, the dimensions of Russia’s capital flight problem have been thrown into high relief. The crisis itself was a shock, propelling billions of dollars abroad, and the aftermath underscored how widespread the practice had become. According to many businessmen here, Russia’s financial and political elite, from mid-level bureaucrats to high-level Kremlin officials, from factory directors in the provinces to Moscow moguls, have moved capital and assets abroad with impunity. While there are rules against exporting capital, they are widely ignored and almost never enforced.

“You see, it’s a very, very easy thing to do this,” said a Moscow banker. “It’s not a problem, technically.”

In one of the more striking cases, shares in Russia’s second-largest oil company, Yukos, were moved offshore late last year and earlier this year after the parent bank defaulted on Western loans for which it had pledged the shares.