Tough Steps Planned To End Capital Flight

The Russian government is planning new steps in its crusade against capital flight from the country, this time targeting Russian banks' offshore accounts.


Alexander Pochinok, head of the finance department of the government staff, told Ekho Moskvy radio that the government was discussing draft bills to impose restrictions on Russian banks opening accounts in foreign banks registered offshore.


The bills must be then approved by parliament.


Pochinok said 6,600 Russian banks had such accounts, 90 percent of them in the Pacific island republic of Nauru, and are channeling $10 billion a month through them.


Pochinok did not elaborate on how exactly the government was planning to single out perpetrators, but analysts said it had few means at its disposal of preventing capital outflow.


Capital outflow through fake contracts was "standard practice" in Russia, Pochinok said.


Picking up on recent complaints by the Central Bank, he complained that it is possible for an importing company to take hard currency it buys on the market out of the country under a fake contract without actually importing anything.


The firm can make a prepayment, transfer the money to an affiliate abroad and then write it off as a bad debt.


Exporting companies have also found ways not to repatriate their profits, 75 percent of which they are obliged to sell on the market.


The Central Bank last week moved to prevent capital flight through fake contracts by obliging importers to deposit the sum cited in the contract in an account pending the goods' delivery.


By doing this, the bank is effectively forcing importers to pay twice as much money as before for the same operation, said Andrei Ivanov, a banking analyst with Troika Dialog. Companies will also lose some of the money deposited on the account as the ruble depreciates.


The rule will affect first of all small- and medium-sized importers, he said. Larger importers and those with a parent company abroad can avoid the rule by having goods delivered as a commodity loan that they repay upon delivery.


The biggest question about the new regulations is how the state is going to single out those accounts used for exporting cash rather than doing legitimate business, said Margot Jacobs, an analyst with United Financial Group. "It is not always easy to identify what is business and what is capital flight," she said.


One thing is for sure, Jacobs said, "the result of any such measure will be increased bureaucracy" for any company, honest or dishonest.


The new rules won't prevent capital outflow, only make the process of channelling the money abroad costlier, said an expert with Rating Information Center, a bank watch agency that has access to Central Bank data. But people would rather pay more than risk losing all of their money to devaluation, he said.


"The situation in Russia is such that by keeping ruble funds in the country, one is almost certainly guaranteed to lose it," he said. Companies will simply use more costly schemes to take hard currency out of the country.


"The choice is between losing some of your money or all of it," said the expert, who declined to be identified.


The stakes in the game are so high that "even if they take you out and shoot you" for taking hard currency out of the country, some people will still venture to do this, the expert said.


"The profits outweigh the risks," Ivanov said.


Experts said that although the capital flight problem is a grave one, the $10 billion monthly outflow figure cited by Pochinok appears to be way too high.


Most economists estimate that capital flight from Russia stands at $1 billion to $2 billion a month.


According to Pochinok, under the new regulations, Russian individuals will be allowed to take up to $10,000 out of the country and foreigners a sum not exceeding that brought in.