MOSCOW BLOG: Russia central banker slams vast criminal cash exports

By bne IntelliNews February 21, 2013

bne -

A big day for Russia's anti-corruption drive was topped off by the shock announcement from Sergey Ignatiev, governor of the Central Bank of Russia (CBR), that some 60% of last year's capital flight, or a massive $49bn, was sent out of the country "illegally."

Is there a reason why the normally dour and press-shy Ignatiev dropped this bomb on Russia's media? Ignatiev usually confines himself to grey statements about interest rates or academic judgments on the health of the economy, and leaves schmoozing the media to his erstwhile deputy (and possible successor in June) Alexei Ulyukayev.

But in a frontpage interview with Vedomosti, Ignatiev said that nearly $50bn, or 2.5% of the national income, had been sent abroad illegally in 2012, much of it controlled by a single group of people - whom he did not identify. "You get the impression that they are all controlled by one well organized group of people," Ignatiev said after a study by the bank found that more than half the flows involved firms linked to each other. "With a serious concentration of efforts by law enforcement agencies, I think it is possible to find these people."

He is talking about government employees. It is buried in some puff, but in the Russian context the message is clear enough. "It can be payment for narcotics... 'grey' imports... bribes and kickbacks to officials (and) managers making large-scale purchases," Ignatiev told Vedomosti. "It can be schemes to avoid tax."

During the Bank of New York scandal in 1999, which was accused of laundering Russian "mafia" money, the subsequent investigation found the amount of drug and arms money in the total $7bn in question was tiny; the bulk belonged to big businessmen and was simply capital flight and tax avoidance. Even the Yeltsin family was caught up in the scandal. Since the arrest and jailing of Yukos owner Mikhail Khodorkovsky, Russian big business has become a lot whiter than it was, so that leaves the government officials and managers of state-owned companies as the main culprits - both of whom Ignatiev names in his quote and pointedly doesn't allude to the oligarchs in any way.

The amount is shockingly high. According to a study by the Russia Direct Investment Fund and Ernst & Young, less than half of the $80bn that left Russia last year, or about $32.3bn, was true capital flight, which tallies with investment bank estimates, but are still a big jump up from pre-crisis levels. Moreover, another study found outflows to offshore havens in 2012 matched inflows from the same havens, which suggests oligarchs are not the ones sending funds overseas. "The research relied on the net errors and omission figures, which are the core of illicit capital outflow and have been rather stable at around $8bn per year in the last 10 years. The historical figures were also not surprising due to the capital controls Russia was employing until 2006," Natalia Orlova, chief economist at Alfa Bank said in a note.

"Out of $49bn in illicit capital outflow in 2012, 30% ($14bn) was due to trade transactions while $35bn were illicit outflows through the capital account, accounting for 60% of last year's net capital outflow. It thus seems that the CBR investigation is related to the nature of revenues used to finance such transactions rather than to the channels of capital outflow," says Orlova.

Read that paragraph again: the CBR, which is the bank regulator, has been investigating "the nature of revenues" - ie. where the money comes from - rather than what tricks the banks use to get funds into offshore havens. This is a sea change, as for the last two decades no one has bothered to ask where the money came from before - only where it was going.

Ignatiev's comments can be seen as a threat: "We are now investigating where your money comes from and if we are not happy with the answers then we will take it away."

Specifically, he called for "urgent legislation" that would "allow banks to close down accounts being used for dubious purposes" and also urged lawmakers to tighten rules for setting up companies.

If this is the intention, then it tallies with what bne identified as Russian President Vladimir Putin's second oligarch meeting - his state of the nation address in December where he offered the collected governmental elite the same deal that he offered the collected heads of business in 2000 after he first took office: "keep what you have, but stop the stealing."

And action on the corruption front has been rapidly scaled up recently. On the same day as Ignatiev's interview, Russia's fisheries agency (Rosrybolovstvo) chief was called in for questioning; the Duma head of ethics committee Vladimir Pekhtin quit after it was revealed that he failed to declare several million dollars worth of property in the US; Prosecutor General Yury Chaika said damage from corruption in Russia exceeded RUB20bn rubles in 2012; former defence minister Anatoly Serdyukov was refusing to answer questions in another investigation into corruption in his ministry; state-owned power holding RusHydro handed in the result of an internal embezzlement investigation to the Interior Ministry; and a dozen shipping agents were raided on suspicion of operating a cartel.

That adds up to as much anti-corruption action as happened in all of 2010 in just two days. Whereas individuals were either sacked or jailed in the last couple of years to serve as an example to each of the branches of the administration, now the investigations are starting to dig into the books of large state-owned companies and government departments specifically looking for wrong doing - and threatening the responsible people with jail.

But Ignatiev offers a new dimension - if they catch you, they will take your money too.

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