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Analysis & Opinion
23.11.10 Fighting Capital Flight
By Tai Adelaja

Hard-hit by the double whammy of a sudden decline in capital inflow and a recent spike in capital outflow, the Russian Finance Ministry is planning to classify some import-export operations as “money laundering.” According to information posted on its Web site last week, the Finance Ministry is seeking to amend the country’s foreign trade regulations by imposing stricter controls on some aspects of the country’s foreign trade in order to stem soaring capital flight.

The amendments being proposed by the Finance Ministry are expected to plug some loopholes in the present regulations, compel companies to repatriate export proceeds and deliver imported goods that have already been paid for through contractual agreement. If passed, companies would no longer be able to close an ongoing transaction under the pretext that its currency-transaction particulars or passports have been transferred to a foreign bank.

Companies would need to supply stage-by-stage details of import-export operations to their domestic banks, and refusal to repatriate proceeds will be deemed a money-laundering offence. The Finance Ministry also wants to put in place a system of electronic confirmation of export or import transactions at customs, in an effort to combat delivery of “phony cargoes.”

The latest Central Bank figures on the country’s balance of payments show that the amount of capital which is not repatriated has soared in recent months. This is despite domestic companies borrowing heavily and taking advantage of a record-low interest rate, which stood at a yearly average of 8.9 percent in October, down from 9.7 percent in September. Last week, the Central Bank more than doubled its projection for 2010 capital outflow to $22 billion, up from $8.7 billion projected in August. The foreign assets of Russian companies have also soared, reaching $24.8 billion in the first half of the year, figures from the Central Bank show.

However, while acquisition of foreign assets by Russian companies increased this quarter, domestic acquisitions fell to $1.6 billion from $6.9 billion in the previous three months and $22 billion in the second quarter, according to data compiled by Bloomberg. At the same time, foreign direct investment (FDI) has not been forthcoming, as foreign investors continue to prefer the faster-growing economies of Brazil, India and China to Russia's.

Experts have generally attributed the noticeable increase in capital outflow from Russia in the recent months to the import-export transactions that received a tremendous fillip when liberal regulations were introduced in 2005. “The current situation reminds me of the situation that existed in the 1990s, when significant capital outflow from Russia took place through import-export operations,” Vladimir Tikhomirov, the chief economist at Moscow-based Otkritie, said in an interview on Tuesday. “The liberalization of the currency-control regulations in 2005 basically removed obstacles to the free-flow of capital in or out of the country.”

Tikhomirov said, however, that the impetus for the recent spike in capital flight could have more to do with the recent shakeups in economic and political establishment in the central part of the country. “The reason for this could be that a number of companies are suddenly shunning exposure by not reporting the amount of capital that they are taking out of Russia, because of taxation or other issues,” Tikhomirov said. “My guess is that this could be connected to recent shakeups in the government, especially in the central part of Russia. The changes might have spooked some people to close their businesses and move their capital out under the guise of trade transactions.” Tikhomirov added that some of the capital being moved out could belong to those who have recently lost their positions in the Moscow government.

Some of the unorthodox methods currently being used by some Russian businessmen to transfer capital abroad include inflating prices payable for import-export goods in their contractual agreements, the Vedomosti daily reported on Monday. Most of the contracts, the paper said, are inked with non-existent foreign business partners in attempts to keep cash abroad. Others appear to be dodging Russia’s shaky property rights by keeping capital away from the reach of law-enforcement agencies, some analysts say. But other experts, like Tikhomirov, believe there was no evidence to suggest that attacks on capital ownership in Russia have been pushing some people out of the country.

Russia is also witnessing an upswing in the number of overseas investments by Russian banks and companies, which is contributing significantly to capital flight, experts say. Russian companies have announced $27 billion of foreign purchases this quarter, the most since the third quarter of 2008 and triple the amount in the last three-month period, data compiled by Bloomberg shows. Some of the notable deals include that by VimpelCom, Russia’s second-largest mobile-phone operator, which agreed last month to merge its phone assets with Egyptian billionaire Naguib Sawiris to create the world’s fifth-largest mobile-phone company, in a transaction valued at about $6.5 billion. VimpelCom is raising a $4 billion bridge loan to fund its bid, Reuters reported.

The Russian oil venture TNK-BP agreed to buy assets in Venezuela and Vietnam from BP Plc for $1.8 billion in October. Rosneft, Russia’s largest oil producer, is considering acquisitions of retail assets in Germany and other European countries, and plans to close a $1.6 billion deal to buy Petroleos de Venezuela SA’s 50 percent stake in German refiner Ruhr Oel in the first quarter of next year, Chief Executive Officer Eduard Khudainatov said, Bloomberg reported. Sberbank, Russia’s biggest lender, hired 14 foreign banks to arrange a $2 billion syndicated loan to meet client demand for the U.S. currency on November 16. The loan is the largest of its kind for a Russian bank, the Moscow-based bank said in a statement. Sberbank also raised $140.5 million in five-year bilateral term loans arranged by WestLB AG the same day.

In addition to contributing to the large pool of capital outflow, the growth in overseas investment has increased the vulnerability of a swelling foreign debt for the Russian Central Bank, experts say. Russian banks and companies have about $16 billion in foreign debt, including interest rate payments, due in December – twice the $8 billion in October and November, according to central bank figures. “While the volatility in the global market is keeping local businesses jittery, Russian companies continue to acquire assets in different sectors abroad, and money spent on some of those acquisitions always ends up there,” said Yaroslav Lissovolik, the chief economist at Deutsche Bank Russia. “We’ve seen greater pressure on the ruble to depreciate most recently, and some of this is related to an increase in capital outflow that the Finance Ministry is now trying to address.” If implemented, Lissovolik said, the measures suggested by the Ministry of Finance could stamp out some of the shadow-economy practices, as well as those associated with capital flights.

But while tightening the screws on import-export operations could yield some benefits, economists and analysts say that it could also complicate life for domestic bankers, who will be required to trace every deal and monitor heavy cash movements. Some analysts have also suggested that stiff opposition from the bank lobby will prevent the Finance Ministry’s amendments from ever being passed by the State Duma. “There are thousands of deals being signed everyday on export-import operations and banks will have to report each deal of over $200,000 to the state agencies,” Tikhomirov said. “This means banks would have to hire special staff to fill out special forms on what they call passports of currency transaction. They will also have to control how the transactions are being executed. This is going to be a very heavy burden on banks.”
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