The true state of Russia’s weak economy? Most of it is overseas

Up to four fifths of Russia’s economic wealth has transferred beyond its borders, according to a leading academic who says it may have put many Russians beyond the grip of western sanctions

  • By Elliot Wilson
  • 07 Oct 2015
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As much as 80% of Russia’s economy has been transplanted overseas to hide the identity of company and asset owners from the government’s prying eyes — threatening the country’s very financial future.

Much of the country’s economy — up to four-fifths, according to some estimates — no longer exists within Russia’s borders, but is owned by a dizzying and interlocking set of secretive companies based in offshore and low-tax havens stretching from Luxembourg to the British Virgin Islands.

Anastasia Nesvetailova, director of the Political Economy Research Centre at City University in London, has spent the past few years digging deep into Russia’s economy, and locating the ultimate owners of many of the country’s most valuable assets.

She believes that up to 80% of the economy has now, in her words, been “offshore-ised”. Or to put it another way, it has been transplanted overseas to hide the identity of company and asset owners from the government’s eyes.

Fourteen of the country’s 20 largest private firms are registered offshore, mostly in Cyprus and the Netherlands. “This is not a new process — it started back in the 1980s, but it has accelerated sharply in recent years,” she said. “It’s not done for tax reasons, as would normally be the case, but because the ultimate owners of assets don’t want anyone to know who they are, or what they own.”

Experts say that Russian president Vladimir Putin permitted and even encouraged offshore-isation, on the basis that it bolstered his support among oligarchs and leading asset-owning military-security powerbrokers, or siloviki. So when he clamped down on the phenomenon in 2012, ordering the country’s wealthiest individuals to repatriate capital for reasons of loyalty, he was ignored.

“I don’t see the problem disappearing any time soon,” said Nesvetailova. “Putin has declared full amnesty on anyone transferring assets back to Russia, but it would be a risky thing for anyone to do.”


The problem could in fact be getting worse. Experts say offshore-isation now threatens the country’s financial future. The process was tacitly permitted when oil prices were high, papering over fissures in the economy and channelling capital into the pockets of 20m state workers (that number has risen sharply from 16.4m 10 years ago), and government officials. Yet the tax take is falling, and the government is battling to find new ways to replace the easy rivers of silver once provided by high energy prices.

Russia’s brittle economy is set to shrink by 3.8% in 2015 and 0.6% in 2016, the IMF said in its latest World Economic Outlook, issued on Tuesday.

Yet Russia is on the horns of dilemma. On the one hand, it desperately needs this nexus of offshore capital to return to the motherland, in order to prop up an ailing and sickly economy.

Offshore-isation has proven to be extremely useful both at recycling capital back home (meaning that much of the country’s inward ‘foreign’ direct investment is actually Russian in origin) and in integrating it seamlessly into global capital markets.

On the other, offshore-isation, though it corrodes the very heart of the country’s economy, has ironically helped many of Russia’s wealthiest people to evade the effects of sanctions. “If Western governments really wanted to sanctions to work, they would order their big banks not to fund these Russian outfits in offshore havens,” said Nesvetailova.

“But that is unlikely to happen. Wealthy Russians on the sanctions list may not be able to travel, but their access to offshore financing, and their ability to put that money to work, remains very much in place.”

  • By Elliot Wilson
  • 07 Oct 2015

All International Bonds

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