Why Russians keep dollars under beds

President Boris Yeltsin linked to latest allegations of financial

The Kremlin is busy issuing denials after allegations surfaced implicating President Boris Yeltsin in the latest in a string of financial scandals to hit Russia.

The claims that an Italian company with a Kremlin contract paid more than $1 million to cover expenses for Mr. Yeltsin and his daughters during a 1994 trip to Hungary appeared Wednesday in Italian newspaper Corriere della Sera. It's the first time the president has been directly linked to allegations of financial impropriety.

As Russia heads into a period of elections and political transition, the emerging appearance is one of a government, and business sector, preoccupied with skimming funds or moving money offshore. According to some reports, even money lent to Russia by the International Monetary Fund may have been spirited out of the country.

In a separate case, unnamed FBI sources say $15 billion in cash thought to be connected to Russian organized crime figures many have passed through two New York banks, according to USA Today.

Prosecutors in Geneva recently confirmed they are examining the Swiss bank accounts of 24 past and present Kremlin officials on suspicion of money-laundering. Last week, the Swiss froze a $67 million account owned by Boris Berezovsky, one of Russia's richest men and a reputed personal financial adviser to the Yeltsin family.

But Russian experts say that's just a tiny drop in the nonstop cascade of capital that has poured from post-Soviet Russia.

"What we hear about is probably just the tip of the iceberg," says Yuri Pavlov, an expert with the independent Russian-European Center for Economic Policy.

The best estimates available suggest an average of $2 billion has left Russia every month since the 1991 collapse of the Soviet Union. And the problem may be accelerating. A joint Canadian-Russian study concluded last year that the outflow has been greater than the combined capital flight from Brazil, Venezuela, Mexico, and Peru during the turbulent 1980s.

"While capital movements are very common the world over, Russia has experienced an abnormal, even cataclysmic, loss of vital resources," says Leonid Abalkin, director of the Institute of Economics in Moscow and one of the report's authors.

Russian criminals and politicians moving money through Western banks are part of the story.

But with these examples before them, it is hardly surprising that legitimate companies and even ordinary Russians are frantic to get their money out of the sagging ruble, and out of the country altogether.

Experts say many Russian companies routinely use "false contracts" to get around the country's superficially strict currency controls. For example, a company might obtain a license to export raw materials, but sell them at below cost to an offshore subsidiary - which retains the excessive profits. Or it might obtain legal permission to transfer money abroad as payment for fictitious imports.

"False contracts probably account for 80 percent of all capital flight," says Yevgeny Wittenburg, President of Intelbridge, a financial consulting firm in Moscow. "This is considered a normal part of doing business."

AT THE root of the problem is Russia's failure to create a stable climate for business, large or small.

"People worry about the risk and do not trust anything the government tells them," says Mr. Pavlov. "Corruption is rampant on all levels. There are no effective laws to protect property or the rights of investors. The political situation is one of constant upheaval. Why would people trust enough to invest their money here?"

A related problem is what some analysts call "internal capital flight," the tendency of average Russians to trade rubles for dollars as fast as they can. Economists estimate there may be as much as $40 billion stuffed in mattresses, hidden under floorboards, and buried in kitchen gardens across Russia.

"It's a real vote of no confidence in the Russian economy," says Pavlov.

The result is a crippling net outflow of resources from Russia. "Capital investment, from outside and inside the country, is at a low ebb," says Natalia Smorodinskaya, an expert on capital flight with the Institute of Economics in Moscow. "That translates into crumbling infrastructure, low business activity, and mass poverty. Those are all the things we see around us today. If we could reverse the flow and get investment coming back we would start to reverse all those things too."

SHORT of making Russia a prosperous, well-governed, and investor- friendly country, experts say there are steps that could reduce the outflow. These include more state control on import-export operations, a tax on cash transfers abroad, more international cooperation to report movements of large sums of money, and an amnesty from prosecution for Russians who voluntarily repatriate their capital.

Vyacheslav Senchagov, director of the independent Center of Financial and Banking Research in Moscow, says projections for capital flight in 1999 are hard to make, in part because Russia's crisis-hit banking system barely functions. "But I think it's safe to say it's speeding up. There is a frenzy to get money out of the country."

Any hopes that political stability will return to Russia must await the outcome of parliamentary elections in December and the crucial presidential contest next June.

The strongest current contender to win both elections is a centrist coalition led by former Prime Minister Yevgeny Primakov, whose economic views are known to be generally state-centered and protectionist. Allied with him is the powerful mayor of Moscow, Yuri Luzhkov, who is famous for his interference in the city's businesses.

Arrayed against them are the Communist Party, an as-yet unformed pro-Kremlin coalition, and Yabloko, the lone liberal party still standing on Russia's turbulent political stage. Opinion polls presently show Yabloko with less than 10 percent of the vote.

"There are measures that could stem capital flight and bolster confidence, but they could only be enacted by a government of clean-handed reformers," says Dimitri Golubkov, head analyst at Center-Invest, a Moscow consultancy. "The prospects for getting such a government don't look good."

(c) Copyright 1999. The Christian Science Publishing Society

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