Capital Flight From Russia

The continuing economic turmoil in Russia is a matter of growing concern both to financial markets and the world's political leaders. Although much weakened by political and economic unrest, Russia remains a force to be reckoned with. But it has gotten itself into a "Catch 22" situation. It needs political stability to achieve economic stability, but it cannot achieve the former without the latter. This has led to a downward spiral that shows no sign of abatement. At the root of Russia's economic problem is capital flight. Capital flight occurs when governments adopt policies that expropriate capital or fail to protect it. It may take the form of people literally smuggling money out of a country in suitcases or it may be done through sophisticated banking transactions. The result is to impoverish the country from which capital escapes to the benefit of safe havens, such as Switzerland, where capital historically has been protected. Although denounced by politicians, capital flight has generally been viewed in a positive light by economists, who see it as a check on arbitrary state power. As economist Albert Hirschman put it, "the possibility of exit of the wealthy and their capital...was hailed in the eighteenth century as a restraint on the caprices and on the vexatious or confiscatory policies of the sovereign. The power of the capitalists to react through exit [capital flight] to actual or prospective policies they disliked was therefore deemed a beneficial restraint on policy." Capital flight ultimately punished the country that encouraged it, reducing employment and wealth. Indeed, Adam Smith noted that taxes on capital were often counterproductive for this very reason. "A tax which tended to drive away stock from any particular country, would so far tend to dry up every source of revenue, both to the sovereign and to the society," he wrote in "The Wealth of Nations." Thus governments should always strive to accommodate the capitalist, lest this "citizen of the world" pack up and move his capital to greener pastures. Western analysts put capital flight from Russia at a minimum of $25 billion to $50 billion and perhaps as much as $300 billion. It appears that virtually every penny of foreign aid, foreign investment and loans from Western banks has ultimately ended up in Swiss banks or other offshore havens. Russian billionaires simply look upon each new "rescue" package as another opportunity to get their frequently ill-gotten gains out of the country, where it will be safe from heavy taxes and expropriation through inflation. This is one reason why House Majority Leader Dick Armey, Republican of Texas, continues to fight against appropriating another $18 billion to the International Monetary Fund. All it will do, in Armey's view, is permit more temporary bailouts that never seem to fix the underlying problems in Russia, Indonesia or anyplace else. "Russia simply took*************** ********************************************************************** ********************************************************************** ********************************************************************** ********************************************************************** ********************************************************************** ********************************************************************** ********************************************************************** *******se capital flight and get its own capitalists to invest there instead of buying gold, U.S. Treasury bills or other assets that yield no benefit to Russia. That will only happen when the currency is stabilized, taxes on capital are reduced, and property rights secured. Until then, Russian capital will continue to flee for safer shores. Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, September 9, 1998. For more Opinion Editorials by Bruce Bartlett see: