Capital flight from Russia

Abstract

This paper documents the scale of the capital flight problem in Russia, compares it with that observed in other countries, and reviews policy options. It finds that capital flight seems to have reached a historical high in Russia over the past couple of years. Russia's experience stands in sharp contrast to that of the advanced reformers in Central Europe and the Baltics in recent years, as well as that of Latin America in the early 1990s. In these cases, capital flight was curbed or reversed by a sustained improvement in macroeconomic performance or institutional reforms. Cross-country studies do not find evidence, however, that capital controls stem capital flight. Indeed, capital controls have clearly not been successful in preventing capital flight from Russia over the past few years, although they may have had some short-term impact in mitigating flight in the immediate aftermath of the August 1998 crisis (along with other developments such as the large depreciation of the ruble and some improvement in the fiscal balance). This paper argues that capital flight can only be curbed in a lasting manner through a medium-term reform strategy aimed at improving governance and macroeconomic performance, and strengthening the banking system; that capital controls result in costly distortions and should be gradually phased out as part of that medium-term strategy; and that, in the near term, the structure of controls ought to be simplified and rendered less distortionary.