Russia: Illicit Financial Flows and the Role of the Underground Economy
February 13, 2013 | Report
By Robert L Muse, Nadia Elguindy, Sabrina Cleary, Win Without War, Victor Salcedo, Alex Dobyan, Kimberly Grano, Leslie Adkins, Isabel Custodio, Angela Miller, Jack Blum, Joshua Clement, Sarah Kinosian, Porter McConnell, Anya Landau French, Sustainable Defense Task Force, Natalie Chwalisz, Charles Knight, Carl Conetta, Amnesty Int’l, WOLA, LAWG, Daniel Resnick, John O. Niles III, Avoided Deforestation Partners, David Cortright, Jacob LaViolet, Katherine Magraw, Shukria Dellawar, Don Soldini, Francesc Vendrell, Dietlind Lerner, Winifred Tate, Craig Eisendrath, CIP, Caitlin Ward, Lourdes Villanueva, Tiana S. Gierke, Bruna Genovese, Eva Silkwood, Jennifer Schuett, Donald Herr, James Morrell, Lauren Gilbert, Global Financial Integrity, Fiorella Mejia, Elizabeth Newhouse, Ingrid Vacius, Dessima Williams, Lucy Lehman, Conrad Martin, Luís Murillo, Robert Stark, Philip Brenner, Tom Cooper, Karly Curcio, Jeremy Haken, Sarah Stephens, Vincent Parascandolo, Barton Beeson, Darcy Burner, Jennifer Schuett, Jim Mullins, Cynthia McClintock, Gilbert Brownstone, Matt Balitsaris, Alfredo G Duran, Joseph Eldridge, Paul Sack, Tom Andrews, Robert White, Adam Isacson, Bill Goodfellow, Wayne Smith, Meredith Pierce, Abigail Poe, Paul Lubeck, Stephen Miles, Drew Ann Jubert, Glenn Hurowitz, Matthew Hoh, William D. Hartung, Selig S. Harrison, Melvin A. Goodman, Monique Perry Danziger, Frick Curry, Laura Carlsen, Sarah Bracht, Landrum Bolling, Harry Blaney, Michael Barnes, Tom Barry, Nicole Ball, Jeff Horowitz
This study quantifies and evaluates the volume and significance of illicit financial flows from Russia since 1994, the earliest year for which balance of payments data are available for the country. We use the balance of payments framework, which permits estimation of three types of capital flows— broad capital flight consisting of a mix of licit and illicit capital, legal or licit capital flight, and illicit financial flows. While the World Bank Residual (WBR) method affords a measure of broad capital flight, the net errors and omissions or the Hot Money Narrow (HMN) measure, which is part of the balance of payments, permits a sharper focus on illicit flows. Hence, we use the HMN method in line with those followed by the Central Bank of Russia and used in IMF country reports.
That said, we point out that economists have netted out inflows and outflows of capital regardless of whether they are licit or illicit. They also net out inward from outward capital flight when it comes to the WBR method. We discuss at length why a net measure is logically flawed. For example, deriving a net balance position may make sense when it comes to licit flows like FDI or recorded capital flight, netting out illicit flows makes little sense. This is because when it comes to illicit capital, flows are illicit in both directions and netting them out would be akin to deriving a position that corresponds to “net crime” rather than a net benefit or cost to an economy. In light of this argument, we develop estimates of net licit flows, gross illicit outflows, and broad capital flight from Russia. We also introduce the concept of total illicit flows (i.e., illicit inflows plus outflows) to examine the link between the total volume of such flows and underground economic activities in Russia.
The study finds that over the period 1994-2011, outflows consisting of a mix of licit and illicit capital from Russia amounted to US$782.5 billion or about US$43.5 billion per annum on average. This compares to outflows of US$211.5 billion in illicit capital or about US$11.8 billion per annum. These estimates include outflows due to the deliberate misinvoicing of trade. Because we do not provide estimates of broad capital flight or illicit financial flows on a net basis these estimates cannot be directly compared to those found in previous studies. Nevertheless, we present different estimates of capital flight from Russia in order to afford readers a sense of the variation in estimates, keeping in mind the differences in their underlying methodologies. While there is considerable variation in capital flight estimates, we find that CED+GER estimates are closer to the IMF’s net estimates of capital flight even though the former are on a gross outflow basis. CED estimates correspond to outflows obtained through the WBR method while GER estimates correspond to outflows due to trade misinvoicing.