Russia: Illicit Financial Flows and the Role of the Underground Economy

Kar, Dev; Freitas, Sarah

doi:10.2139/ssrn.2335008

Cited by 20 publications

(21 citation statements)

References 15 publications

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“…This indicator reflects the average weighted availability of balanced stocks of principal natural resources in the Russian regions. We suggest that the availability of natural resources is positively associated with inward FDI (both offshore and real) because it lowers the costs associated with obtaining the natural resources needed for local production and also because a foreign firm might be interested in the natural resources for its own purposes (i.e., it might export them to its home country or to a third country; see also Ledyaeva, Karhunen, and Kosonen ). We further suggest that this relationship would be expected to be stronger for offshore investors as being Russians by origin, they might have better access to high‐income resource‐based projects (in the “Data Description” section, we already found that offshore FDI tends to be more concentrated in resource‐abundant Russian regions than real FDI; see Table and its discussion).…”

Section: Methodology and Variablesmentioning

confidence: 95%

“…Recent attempts to model illicit capital flows include the contribution of Perez et al (2012), who estimated that 6-10 percent of total FDI outflows and over 20 percent of FDI to OFCs from their sample of Eastern European economies (including Russia) were made to facilitate illicit money flows. In the same vein, Kar and Freitas (2013) estimated that over the period 1994-2011 nearly a third of capital outflows (consisting of a mix of licit and illicit capital) from Russia were illicit capital flows.…”

Section: Economic Geographymentioning

confidence: 98%

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Offshore Foreign Direct Investment, Capital Round‐Tripping, and Corruption: Empirical Analysis of Russian Regions

et al. 2015

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Recent economic geography research has identified the round‐tripping of capital from emerging economies to offshore financial centers (OFCs) and back as foreign direct investment (FDI) as a central element of the global offshore FDI network. However, the factors behind this phenomenon are not yet fully understood. Our study develops a general framework that conceptualizes the phenomenon of round‐trip investment. In particular, we argue that secrecy arbitrage, defined as interplay of onshore corruption and offshore secrecy, largely explains round‐trip investment between onshore jurisdictions and OFCs. First, we argue that part of the round‐trip FDI consists of proceeds from corruption, which is laundered in OFCs and reinvested back to the location of origin. Second, we maintain that the secrecy dimension of the OFC also motivates the round‐tripping of licit capital, as businesses use the secrecy provided by OFCs to hide their true identities from corrupt authorities in the home location. To test the validity of our argument about onshore corruption as a driver for round‐trip investment, we empirically analyze firm‐level data on the distribution of offshore FDI (which, we argue, is largely round‐trip) across Russian regions. Our empirical findings confirm that FDI from OFCs is positively associated with host region corruption, and this relationship is stronger for OFCs with a higher secrecy score. Hence, we conclude that round‐trip FDI is strongly motivated by the interplay between onshore corruption and offshore secrecy.

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Section: Methodology and Variablesmentioning

confidence: 95%

Section: Economic Geographymentioning

confidence: 98%

Offshore Foreign Direct Investment, Capital Round‐Tripping, and Corruption: Empirical Analysis of Russian Regions

et al. 2015

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“…When illicit flows are taken into account, a recent study by economists from the International Monetary Fund and Global Financial Integrity finds that a total of licit and illicit outflows from Russia between 1994 and 2011 amounted to $782.5 billion (or about $43.5 billion annually, on average). 61 The same study estimates that the deliberate misinvoicing of trade produced $211.5 billion ($11.8 billion per annum) of illicit flows during the same period. 62 There are several main channels used to take capital out of the country.…”

Section: Where Does Capital Fly To? Offshores and Real Estate Marketsmentioning

confidence: 95%

“…when funds are transferred abroad first and then brought back into the country as foreign investment, is an important example of institutional arbitrage. Such a strategy could be used to avoid taxes, hide illicit funds that are "illegally earned, transferred or utilized" 87 or protect the funds from predatory state or private actors. In the case of China, where government policy encourages and privileges foreign investors over domestic investors, such strategies are likely to also be motivated by the financial incentives provided by the government.…”

Section: Russia's Round-trip Investors: When Does Capital Return?mentioning

confidence: 99%

The Escape from Institution-Building in a Globalized World: Lessons from Russia

Sharafutdinova¹,

Dawisha²

2017

Perspect. polit.

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Strong institutions and accountable governments are imperative for any country’s long-term prosperity. Yet the development of such institutions has presented a continuous challenge for many countries around the world. Using Russia as a case, this study brings attention to the unexpected negative impact of global interdependence and shows that institutional arbitrage opportunities have enabled economic actors to solve for institutional weaknesses and constraints in the domestic realm by using foreign institutions, thereby limiting the emergence of a domestic rule of law regime. We argue that such opportunities lower the propensity of asset-holders, normally interested in strong institutions at home, to organize collective action to lobby for better institutions. We demonstrate the main ways through which Russia’s capital-owners make use of foreign legal and financial infrastructures such as capital flight, the use of foreign corporate structures, offshore financial centers, real estate markets, the round-tripping of foreign direct investment, and reliance on foreign law in contract-writing and foreign courts in dispute-resolution.

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“…The latter expanded during the 1990s whilst people faced severe diminution of labour. According to Kar and Freitas , p. 12), on average the shadow economy in Russia was around 43.8 percent of the GDP during 1999–2007. Obviously Acemoglu and Robinson (, ) do not include the informal sector in the constraints and one has to note that informal income distribution can significantly change the hardship level, bearing in mind Equation .…”

Section: Stylized Facts: Inequality and Protestsmentioning

confidence: 99%

Economic, structural and socio‐psychological determinants of protests in Russia during 2011–2012

Hagemann

Kufenko

2015

Econ Transit

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This empirical analysis is based on the latent variable framework to identify key determinants of protests in Russia during 2011–2012. We derive logistic regressions from the revolution constraints based on economic (the political Kuznets Curve) and socio‐psychological (grievance) theories of protest. Our findings suggest a positive linear relationship between income and income inequality, contradicting the Kuznets curve. Our estimations show that inequality, share of the poor, the relation of the governor's family income to the average family income, distance to Moscow and accumulated human capital increase the risk of protest, whereas transfers and subsidies decrease these risks.

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Russia: Illicit Financial Flows and the Role of the Underground Economy

Cited by 20 publications

References 15 publications

Offshore Foreign Direct Investment, Capital Round‐Tripping, and Corruption: Empirical Analysis of Russian Regions

Offshore Foreign Direct Investment, Capital Round‐Tripping, and Corruption: Empirical Analysis of Russian Regions

The Escape from Institution-Building in a Globalized World: Lessons from Russia

Economic, structural and socio‐psychological determinants of protests in Russia during 2011–2012

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