The External Sector of the Russian Economy: Low Investment Yields and Capital Flight

ABSTRACT According to the Bank of Russia (BR), Russia has been a large net creditor to the rest of the world for the last two decades. In this period, however, the rest of the world’s net indebtedness to Russia has seen almost no increase. This article provides an explanation for this paradox: The net lending in Russia’s official balance of payments (BP) was to a large degree ephemeral, and several provisions in the methodology of these balances are debatable. The article also studies questions connected to the extremely low yields of Russia’s external investments, and it pays special attention to the divergence between the Bank of Russia’s and Eurostat’s statistics for direct investments between Russia and the European Union (EU). Based on the latest statistics constructed on the directional principle, it is shown that as compared to Eurostat, the Bank of Russia greatly inflates the volume of Russian direct investment into the EU and understates the scale of illegal capital flight from Russia. Finally, the article comes to the conclusion that some of the funds that the BR includes in Russia’s foreign direct investment (FDI) into the EU are considered by Eurostat to be capital irreversibly withdrawn from Russia. It also assesses the amount of Russian investment that makes round trips from “Russia EU special-purpose entities Russia.”