Influx of Foreign Investment in Russia: Destructive Force of Offshores

The share of foreign investment in Russia coming from three offshore areas hiked 2% to 32% in the span between 1995 and 2006. Such an increase of dirty capital displaces the clean influx from US and Germany. So how in reality these offshore capitals affect Russian economy? What is a way out? And are there any ways to take advantage out of this capital?

It will be hardly erroneous to maintain that whatever growing economies are competing among themselves for the world capital in the shape of foreign investment. Russia has long been in the midst of this strife. However, this process has its underwater rocks, since the capitals can be different in nature and arriving for different purposes. It is mainly characteristic for the money flows from the so called world laundry – offshore areas. They are where the dirty money is laundered, and from where the shady deals are ordinarily financed.

The optimal situation is when the recipient country gets the capital from the “good” countries. This creates the necessary openness of business and makes it possible to exercise financial control over the economic operations of foreign investors. Less desirable is when the capital comes from offshore, which are opaque for regulating bodies. In a number of cases, the authorities connive at it in the belief that any kind of investment is better than none.

Russia has maintained special relationship with offshore business since the very start of economic reform. For example, back in 1990s huge criminal capitals of the Moscow megalopolis were accumulated in local banks, thence to be moved to fictitious companies with bank accounts on the Channel Islands.

Ultimately the money was transferred to New York. As remarked by J. Robinson, a top specialist in offshore business, via that channel only, Russia exported, laundered and dropped in The Bank of New York in excess of $7b. Early in 2000s, Russian criminal organizations operated most of 48 000 “mailboxes” registered on Cyprus alone. Of that number, 47 000 had neither office, nor telephone, nor mail address. That was the way in which the Russia in transition fed up the world’s offshore area with its capitals.

            Today’s economic and political situation has largely stabilized in Russia, which normally calls for more capital. OK, the flow is brisk enough. The only question is: where from?

Geographic Structure of Foreign Investment in Russia, %

As appears, miraculous changes have been worked here. Within no more than a decade, the structure of capital influx into the country radically transformed toward greater offshore share. Namely, the share of capitals from the offshore nucleus of three tiny states Cyprus, Luxembourg and Virgin Islands went up 1,500% in the period between 1995 and 2006, to equal 32% of the total foreign investment in Russia (see table). The share of the Mediterranean island of Cyprus went 1,280% up, the share of Virgin Islands in the Caribbean – 520%, that of the tiny continental European country of Luxembourg – 10,700% up. The figures cannot but impress, and they bear a new witness of the growing dependence of the Russian economy on the offshore countries.

However, the above shift was not made autonomously; it was worked out by displacing the countries with higher financial reputation from the list of foreign investors. For example, the overall increment of the offshore nucleus was slightly more than 30 points, which exactly equaled the total decrease of the US/Germany share: 26 point. Ironically, the capitals of three dwarfish states displaced those of giant economies, pushing away several other sovereign states into the bargain. In this manner, by acquiring dubious investors with expressed short-term speculative interests, Russia loses strategic business-partners with far-reaching designs. Incidentally, the US is as good as lost for Russia: its share dropped to 3%, to become 3.6 times lower than that of Luxembourg.

It can be rightly stated that at this moment the formation cycle of investment flow has been completed. At first the criminal capitals left Russia for offshore areas, now they are coming back. Such recirculation of the capital can go on forever. We can only hope that the former dirty money will gradually deposit in legal business.

Well, is there an alternative to offshore capitals?

Yes, Sir. It’s the capital of the leading transnational corporations. At the very least, they are leading a legal, understandable, and even useful activity. And this can never be said about the offshore business. While the main danger of the accomplished restructuring of the foreign investment in Russia is that the clean private capitals inside the country may well fuse with the criminal offshore capitals within joint business projects. In that case, the rate of dirty investment’s circulation will only be on the steady and continuous growth.

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