External Sector of the Russian Economy: Low-Yield Investment and Capital Flight

Abstract

According to the Bank of Russia (BR), Russia has been a large net creditor to the rest of the world over the last two decades. However, the rest of the worlds net debt to Russia has hardly increased in these years. This paradox is explained in the paper: net lending amounts in Russias official balance of payments (BoP) were largely ephemeral, and some provisions of the Russian BoP methodology were contentious. The issues related to Russias low foreign investment returns are also reviewed. Special attention is given to the statistical discrepancy in the Bank of Russia and Eurostat data on the direct investment flows between Russia and the EU. With the latest statistics according to the directional principle, it is demonstrated that the Bank of Russia compared with Eurostat greatly overstates the amount of the Russian foreign direct investments (FDI) in the EU and understates the scale of the Russian illegal capital flight. It is concluded that part of the funds appearing in the BR statistics as Russias FDI to the EU is regarded by Eurostat as irreversible capital flight from Russia. The extent of the Russian FDI round-tripping out of Russia - to EU special purpose entities - back in Russia is assessed.