The External Sector of the Russian Economy: Low Investment Yields and Capital Flight

ABSTRACT

According to the Bank of Russia (BR), Russia has been a large net creditor to the rest of the world for the last two decades. In this period, however, the rest of the world’s net indebtedness to Russia has seen almost no increase. This article provides an explanation for this paradox: The net lending in Russia’s official balance of payments (BP) was to a large degree ephemeral, and several provisions in the methodology of these balances are debatable. The article also studies questions connected to the extremely low yields of Russia’s external investments, and it pays special attention to the divergence between the Bank of Russia’s and Eurostat’s statistics for direct investments between Russia and the European Union (EU). Based on the latest statistics constructed on the directional principle, it is shown that as compared to Eurostat, the Bank of Russia greatly inflates the volume of Russian direct investment into the EU and understates the scale of illegal capital flight from Russia. Finally, the article comes to the conclusion that some of the funds that the BR includes in Russia’s foreign direct investment (FDI) into the EU are considered by Eurostat to be capital irreversibly withdrawn from Russia. It also assesses the amount of Russian investment that makes round trips from “Russia $\to$ EU special-purpose entities $\to$ Russia.”

KEYWORDS:

• balance of payments
• Bank of Russia
• capital flight Eurostat
• international investment position
• yields of foreign investments

This article is the republished version of:

The External Sector of the Russian Economy: Low Investment Yields and Capital Flight

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

^1. See https://cbr.ru/statistics/?PrtId=svs (date accessed: May 14, 2018).

^2. According to the BR, in recent years, the European Union has accounted for more than 70 percent of FDI into and out of Russia. Therefore, FDI between Russia and the EU in many respects preordains the general picture of FDI between Russia and the rest of the world.

^3. All Eurostat data used in this article are taken from its database (available at http://ec.europa.eu/eurostat/data/database [Economy and Finance section], date accessed: June 7, 2018).

^4. See https://www.imf.org/external/russian/pubs/ft/bop/2007/bopman6r.pdf (date accessed: July 4, 2018).

^5. See https://www.oecd.org/daf/inv/investmentstatisticsandanalysis/46229224.pdf (date accessed: July 4, 2018).

^6. This article does not review Russia’s foreign trade balance in detail. More detailed studies of this balance can be found in the survey articles [Bulatov, 2016; Bulatov, 2017].

^7. See http://www.world.investfunds.ru/indicator/view/354 (date accessed: May 19, 2018).

^8. See https://www.goldreporter.de/goldreserven-venezuelas-schmelzen-weiter-ab (date accessed: May 19, 2018).

^9. Both values were obtained by summing up the BR’s corresponding external-sector statistics for EU member countries.

^10. FDI between sister enterprises, which is not large in volume, was not taken into account. Sister enterprises (enterprise partners) are defined in the IMF guideline indicated earlier.

^11. An SPE is called a conduit if it transfers its own or raised funds to its direct investor or to another affiliated enterprise.

^12. See https://www.imf.org/external/russian/pubs/ft/bop/2007/bopman6r.pdf (date accessed: July 4, 2018).

^13. See https://lenta.ru/news/2017/06/06/nalogivizgnanii (date accessed: July 5, 2018).

^14. See http://www.mirec.ru/upload/ckeditor/files/mirec-2017-1-zakharov.pdf (date accessed: July 5, 2018).