Friday, 25 July 2014

Russia and Capital Flight

There's a phrase that got tossed around a good bit in the last week....."capital flight".  It's used on rare occasions.....and some reporters have used it recently to talk up Russia and it's long list of issues that worry the billionaire guys who hang out and run the business side of Russia.

To put capital flight into a localized perspective.....imagine this guy in Bama....who has done well financially.  Small community, you made $250,000 this year off your franchise operation down on highway 4.

Normally, after you pay your'd turn around and invest the remainder into real estate, or expand your business.  You might fix up your house.  You might buy a new big-screen TV from the local guy selling them.  You might buy a new Chevy from the dealer twenty miles away.  You might buy a pontoon-boat for your weekend pleasure from the local dealer.  You might do a number of things, but you are mostly parking that money left into localized things and spending it on the local level.

Other locals are in some way....sharing in your success.

In capital take the funds left after taxes, and quietly shift it completely out of the state.  Other than house renovations or airline tickets for you to continually enjoy luxury in distant don't spend a dime on local items.  No real estate car from a local pontoon-boat from a local guy.

No one in the local region.....shares in your success.  What you are that you are fearful of someone screwing you over, tricking you out of your capital, and don't want the risks associated with any local banking, investing, or purchases.

What Russian oligarchs kinda figured out since 1990 when the Soviet Union that there is no safe place in Russia to park billions.  Every time some idiot gets forced or pushed into banking with Russian banks or investing into Russian real estate or goes into a black hole, and the success rate is marginal.

So, the money moves out of Russia.  The most popular places to park the money?  You can go into Paris, London, or find various upscale homes and condos which have been bought and are currently empty....just sitting there with cash holding it's value.  Go into New York City and you will find the same business going on, with the Russian billionaire folks parking money.

About a decade ago....the Russian billionaire found ways to get residency into Cyprus.  They brought bundles of cash.  The Cypriot banks were falling all over themselves in the beginning. They had people wanting to build new resorts and hotels on the island, and this new fresh money helped to start a trend.  But the billionaires kept coming up with more bundles, expecting the same generous rate to continue.

At some point, the Cypriot banks got to a point of saturation.....too much lucrative way to get a fair return. But they couldn't decline this great funnel of money.

 So, the bankers started to take in risky loans....hoping they'd pay off and making their new Russians friends happy.  Well....perhaps in the first year of this worked to some minor degree, and then risk lead onto more risk, and eventually....the Cypriot banking system fell into a mighty big pit.  They had massive debt owed to regular Cypriot people.....small-business Cypriot business people....and to their rich Russian friends.  That was the issue of 2013 that had to be dealt with.

The Russian billionaires?  Well....they've had a bit of a fallout with Cyprus, but frankly where else are they accepted so easily....with a reasonable amount of transparency?

All of this leads back to capital flight....Russian profits which aren't staying in Russia.  You'd sit there and think about this, and start to ask....well....aren't the locals peeved and kinda upset?  Yeah.

In 1990....Russia hit the top of the population chart.....150-odd million in residents.  Even with the birth-rate drifting downward along general terms....Russia sits at around 143-million residents today.  Based on varying numbers....what the economic experts say is that three million Russians have packed up and left over the last decade.

Who made up the three million that left?  The National Post article cited engineers, scientists, doctors, and entrepreneurs.  The best and brightest....packed and left.  Whatever money that Russian is making off oil and natural gas....these people aren't saying too much in terms of results.  They were disenchanted, and felt betrayed in some ways by capital flight.  If the system of banking and investing in Russia is that screwed up for the billionaires....what does it say for the regular smart guy in the middle of the mess?

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