Russian Capital Flight, Economic Reforms, and U.S. Interests: An Analysis

Russian capital flight is a longstanding problem with very negative consequences for the Russian economy. Authoritative studies estimate Russian capital flight to have totaled $150 billion from 1992-1999. Recent reports of Russian money laundering and other financial scandals involving the Russian Central Bank, the Bank of New York, other commercial banks, and even former President Yeltsin's household involve forms of capital flight and have drawn greater attention to the problem. They have been the subjects of recent Congressional hearings and have focused the attention of Members of Congress and others on U.S. interests in Russia. Some legislation has been proposed as a result of concern over the these scandals and Russian capital flight. Capital flight deprives the Russian economy of critical financial resources that could be used for investment, tax revenues, restructuring pensions, and other social security programs. More importantly, capital flight indicates a lack of confidence by Russian and foreign investors and residents in the Russian ruble, in the Russian financial system, and more generally in the Russian economy itself. Capital flight is a sign that Russia's transition to a market economy continues to be incomplete. An analysis of the rationale for Russian capital flight suggests that to reverse capital flight the Russian economy will have to provide an environment that motivates asset- holders to keep their wealth in rubles and repatriate assets that they have sent abroad. To do so, the Russian policymakers will have to take significant steps to establish and maintain macroeconomic stability and to complete the partial economic restructuring. Post-Cold War U.S. policy has reflected a number of national security, foreign policy, and economic interests. U.S. policy has aimed to decrease the Russia military threat and at the same time encourage the development of democracy in Russia. In the economic sphere, U.S. policy has focused on establishing economic stability and on developing the institutions required for a market economy. The United States also views Russia has a burgeoning trade partner and source of investment opportunities. It can be argued that without a sound economy, Russia will find it difficult to achieve political stability, which in turn might increase the national security threat posed by Russia. Continuing capital flight is an indicator that Russia has yet to realize a functioning market economy. In the near term, U.S. economic policy on Russia is likely to focus on the issue of whether to delay or move forward with pending IMF assistance. However, whether Russia undertakes complete economic reform will be determined by Russia alone. A key question in U.S. policy is whether it can persuade Russian policymakers to proceed with economic reform. This report will be not be updated but will remain available for congressional needs.