Russia's capital flight returned to "normal" levels after "only" $56.7bn left the country in 2015, according to preliminary estimates by the Central Bank of Russia (CBR), released on January 18.

Much lower than official estimates as late as in November last year, that is still high by international standards. But compared to GDP it was equivalent to a more modest 3.2%, which is on a par for most of the crisis period since the collapse of Lehman Brothers sparked the Great Recession in 2008, and way below the approximately 15% or more of GDP that marked much of the 1990s.

Moreover, the structure of capital flight has been changing and is affected by quirks of Russia's national accounting methods and Russian companies need to pay off international debt thanks to financial sanctions on Russia.

Capital flight reached an all time high in the midst of the 2008 global meltdown when $133bn left the country, or 7.9% of GDP. Much of this was genuine capital flight as oligarchs and Russia’s middle class transferred their cash out of the country fearing a systemic banking crisis.

Just how big a role the middle class transfers play came to light during the Cypriot banking crisis in 2012-2013 after billions of dollars worth of deposits at banks were frozen and anyone with more than $100,000 on deposit was forced to take a haircut. Large numbers of normal Russians were affected, but relatively few oligarchs, according to reports at the time.

In 2008 and 2009 especially, which saw $56.1bn of outflows, some of this money was not Russian oligarchs escaping danger, but an estimated $20bn in foreign banks in Russia being sent back to their Western parents, which were suffering from the lack of liquidity in their home markets. The problem got so bad that the CBR famously called in foreign bankers and warned them they would lose their licenses if it continued.

In the following years, while the absolute value of capital flight remained high – a problem for the government, although the large current account surplus running at about $200bn meant that most of the outflows could be covered – but the share of GDP fell back to between 3% and 4%. It was only during the ruble's sharp devaluation in December 2014 that the share spiked again, part of which is due to devaluation effects on the value of the economy in dollar terms.

Slip out the back, Jack

Capital flight has been a fact of life since the collapse of the Soviet Union in 1991, apart from two golden years at the height of Russia's boom in 2006 and 2007. However, capital is far milder today than it was in the Yeltsin-era. Estimates vary wildly but according to US state economist estimates capital flight was $150bn between 1992 and 1999 while another estimate by the Russian Finance Ministry puts the number at $430bn aggregate outflow during 1986 through 2004. Both those estimates are more than the entire economy was worth in the 1990s.

"The reasons for the massive scale of capital flight included political instability under Yeltsin, loss of confidence in the ruble as a store of value after the high inflation of 1992, the desire to avoid excessive and arbitrary taxes, and the continuing poor protection of property rights," the US-Russia Business Council said in 2007 when Russia saw its first ever net inflows.

"The annual net capital outflow was $8bn in 2002, $2.9bn in 2003, $8bn in 2004, but reversed into a capital inflow of $300mn in 2005 and jumped to a gross inflow of $41.6bn in 2006. Net capital inflow during the first eight months of 2007 was $59bn. In late 2006, the Bank for International Settlements reported that Russian citizens were holding $219.6bn in bank accounts abroad," the council said in a report at the time.

While those numbers look small now, so was the economy. Worth a few hundred billion dollars at best before the boom began in the noughties, the share of capital in GDP was pushed up into the teens, according Ivan Tchakarov, head of Russian economics at Citi. Russia had a GDP of about $280bn in 2000 but that octupled to $1.6 trillion by the time of the crisis in 2008, reducing the relative size of Russia's capital flight. Briefly passing the $2 trillion mark in the intervening years, the value of the economy is now approximately $1.8 trillion, although a dollar valuation is made complicated by the confused the volatility of the currency is causing, and it could be worth less.

Russian bean count

The upshot of the extraordinary growth of the economy in the last decade is capital flight actually decreased in GDP percentage terms. The picture is further confused by national accounting peculiarities and the financial sanctions imposed on Russia by the West in 2014 over its actions in Ukraine.

Despite the rapid accumulation of hard currency reserves in the noughties, Russia has always a net exporter of capital, investing more in other countries than it invests in itself. Any decent Russian business from retail and mobile telephony to steel plants and banking has invested in the "near aboard", a market of over 300mn Russian speaking former vassal states.

Any investments made, and uniquely to Russian accounts, any net profits these companies make that are reinvested in the local business is counted as "capital flight".

In his heyday, oil tycoon now turned political activist Mikhail Khodorkovsky had a family office called GML that had a brief to invest into assets anywhere except Russia and except oil. This trend of investing anywhere other than Russia has accelerated as President Vladimir Putin tightens his grip.

When fellow 1990s oligarch Mikhail Fridman, the owner of the Alfa Group, took some $17bn out of a deal to sell oil company TNK-BP to state-owned Rosneft in October 2012, Putin "advised" him to invest it into Russia. Fridman promptly invested $1bn into New York real estate and then in March 2015 Fridman's Luxembourg vehicle LetterOne (L1) announced it acquired RWE Dea, the oil and gas arm of Germany's RWE, for €5bn, only to see a nervous UK government cancel the deal later the same year. Russia's oligarchs are desperately trying to diversify away from Russia.

Financial sanctions have also been driving "capital flight" under Russian accounts, but rather than oligarchs squirrelling cash away in the BVI a large part of the money leaving in the last two years has been simply Russian companies, unable to roll loans over, paying off their international debt. In the first quarter of last year, of the $32bn that fled Russia, $28bn went to pay down corporate debt, a trend that continued throughout the first half of last year, according to Evgeny Gavrilenkov, chief economist at Sberbank.

This process was coming to an end, thanks to soaring corporate profits in 2015, the Bank of Finland (BOFIT) said in its monthly update in October. Russia even saw its first net inflow of capital since 2010 in October last year, totalling $5.3bn.

"The special profit situation has meant companies have been able to pay down their foreign debt without relying very much on new borrowing from domestic banks," the update said. "In addition to paying off their debts abroad, the corporate sector this year has also continued to ship capital abroad e.g. in the form of direct investment."

Better than before

All this is not to say that Russia doesn't have a problem with capital flight. It does. The chart below highlights that rather than the growing confidence in Russia's future manifesting itself in the return of flight capital, today oligarchs are back in the 1990s mentality of being sure to build up significant reserves abroad.

 

Even the conservative estimate of 3% of GDP is a relatively high number, and given the size of Russia's economy it translates into an enormous amount of cash, a big chunk of which has found itself in the London property market amongst other places, as bne IntelliNews reported in its cover story "Infected Capital" in March last year.

The Kremlin has tried to encourage money to come back. It introduced a capital flight amnesty law on March 1, 2007, that ran to January 1, 2008, with paltry results. Another capital amnesty law was passed last year, again with no affect, that will be extended this year. But the obviously frustrated Putin has also launched a de-offshorisation campaign to force money to return that has had a little more success.

But Russia is still suffering from the lack of trust its own citizens have in their own government to ensure their property rights and prosperity – a story not unique to Russia. There are no numbers on Ukraine's capital flight at the moment, but it is likely to be as high as Russia's in the 1990s given that more than half the economy is black, according to some estimates. Ukraine's former grey cardinal Viktor Medvedchuk blamed the collapse of the hryvnia in March 2015 on massive capital flight.

"The Central European countries that joined the EU in the first eastward expansion, the Czech Republic, Hungary, Poland, Slovakia and Slovenia generally have low levels of capital flight until 2002 or 2003. Relative to PPP GDP, capital flight from these countries is around 1 percent of GDP per annum, with some exceptions in 1998, and there are also years in which there are small unrecorded net inflows of capital," a report by the CASS business school concluded. "When measured against official GDP, the ratio of capital flight is higher, in the neighborhood of 3% to 5% on average due to the undervaluation of these countries' currencies."