The Russian economy hemorrhaged more than $200 billion to illicit financial outflows from 1994 through 2011, a new research report by Global Financial Integrity found.
Russia has also had a massive inflow of more than $550 billion over the same time span, which is drawn from the earliest year for which data are available following the dissolution of the Soviet Union, the report said.
The report estimates that Russia’s underground economy comprised about 46% of gross domestic product over the 18-year period. Illicit financial flows drive the domestic underground economy, which includes, among other things, drug smuggling, arms trafficking and human trafficking, the report said.
“Russia has a severe problem with illegal flows of money,” said Raymond Baker, the director of Global Financial Integrity, in a statement.
Illicit financial flows are a global problem, the group says: It estimates that the flows cost developing countries nearly $1 trillion per year.
The Russia report’s lead researchers, Dev Kar and Sarah Freitas, both economists, said they believe a link exists between the state of overall governance in Russia and the volume of illicit financial flows into and out of the country.
Russia is seen as one of the world’s most corrupt countries, ranking 133rd out of 176 scored on Transparency International’s Corruption Perceptions Index. It ranks last out of the 28 countries the group studied for its Bribe Payers Index, and its defense sector got a D-Minus grade in TI’s study of government defense departments.
Moreover, illicit flows and the underground economy both grew significantly over the 18-year period studied by Global Financial Integrity, driven by a deterioration in governance and widespread tax evasion, the report said.
“So long as the Russian authorities fail to shrink the underground economy, Russia will continue to hemorrhage scarce capital, both illicit and licit, to the detriment of economic and political stability and undermining the nation-state,” they wrote in the report.
The study also found that Cyprus plays a large role in laundering Russian illicit funds, confirming the suspicions of European officials weighing whether to bail out the Cypriot economy.
The Global Financial Integrity study found that Cyprus was the largest source and destination of Russian foreign direct investment from 2009 to 2011. The report, citing International Monetary Fund data, said Cyprus sent $128.8 billion into Russia in 2011, more than five times the size of Cyprus’s GDP.
Kar, in the statement, said: “Cyprus is a laundry machine for dirty Russian money.”
The report listed some recommendations for Russia to cut down on illicit financial flows, including the boosting of its customs enforcement, giving higher scrutiny to transactions involving tax havens such as Cyprus and the Russian government requiring that all banks know an account’s beneficial owner.