Tag: Capital flows

Capital Flows from Russia — The Bigger Picture Revisited

Posted on October 26, 2026 | Policy Brief

In April 2019, a FREE Network policy brief, “Capital Flows from Russia — The Bigger Picture“, used official data to show that around USD 700 billion had left Russia in the decade after the global financial crisis. This brief updates the picture with data through 2026. The outflows have almost doubled since then: USD 1.3 trillion has left Russia in net private capital since mid-2008, and more than USD 400 billion of it since the full-scale invasion of Ukraine. At the same time, the places where Russian money is visible in international statistics have changed. Deposits in Western banks are now mostly immobilised central bank reserves rather than (unrestricted) private money. Since Russia has stopped publishing where its foreign assets are, the gap between what has left and what can be traced has grown to around USD 1 trillion. Policymakers in the West should take notice; this money can be used for purposes other than investments made on regular market and business considerations.

Why Revisit the Bigger Picture

When the 2019 brief was written, Russian money was in the news because of money laundering scandals, not least the one involving Danske Bank. These individual cases were part of a macro story with large and persistent private capital outflows that hurt investment and growth in Russia. These flows also exposed Western financial institutions to significant risks linked to illicit flows and breaches of money laundering regulations.

Russia’s full-scale invasion of Ukraine in 2022 has changed the context of Russian capital flows. Sanctions have cut most Russian entities off from Western banks; around EUR 210 billion of the Bank of Russia’s reserves have been immobilised in the EU; and the question of what to do with these assets has become central to the discussion on how Europe finances support for Ukraine (see, e.g., Olofsgård, 2025). Russian money abroad is no longer mainly a question of anti-money laundering compliance; it is also a question of war finance and security in Europe.

This brief uses the same public sources as the 2019 brief — the Bank of Russia’s balance of payments, the BIS locational banking statistics, and the IMF’s data on portfolio and direct investment positions — and asks what has changed. Although macro data cannot tell us whether capital flows are illicit from a Western point of view, it is still important to understand the order of magnitude of these flows to evaluate policy options.

Russian Frozen Assets Affect Interpretation

Frozen assets affect how the series used in this brief has developed in recent years, so it helps to start with an account of what we know about frozen assets. Two different kinds of assets are involved. The first is the Central Bank of Russia’s reserves, immobilised by the G7 and the EU in February–March 2022; both the G7 and the Bank of Russia put the total at around USD 300 billion. The second is the assets of sanctioned individuals and companies. The REPO Task Force of G7 countries and the European Commission reported more than USD 58 billion of such assets blocked or frozen by March 2023, its last aggregate figure. The distinction between these two types of assets matters because different legal frameworks govern sovereign versus private assets.

Remarkably little is published on where the Central Bank assets are. Only Belgium discloses details; the UK government has said that any release is a collective G7 decision, and Germany and Japan decline to give figures. Table 1 collects what is in the public domain.

Table 1. Immobilised Bank of Russia assets by jurisdiction (latest available)

Source: Euroclear half-year results 2026; Euronews (Nov 2025); FT; SECO; PISM (2025); Council of the EU; author’s compilation.

Euroclear is by far the largest holder: at the end of June 2026, EUR 202 billion of its EUR 241 billion balance sheet related to sanctioned Russian assets, of which around EUR 185 billion is estimated to belong to the central bank. Most of the remaining EUR 25 billion or so in the EU is reported to be held in commercial banks in France and Belgium.

Frozen private assets are reported nationally; across the EU they exceed EUR 28 billion; the UK reported GBP 28.7 billion by May 2025, without separating out any sovereign holdings; and Switzerland CHF 7.4 billion. Much of this is property, yachts, and company stakes rather than bank deposits.

This matters for interpretation in three ways. First, immobilised reserves remain Russian assets in the statistics. They remain on the Bank of Russia’s balance sheet and in BIS claims on banks in Belgium, France or elsewhere.

Second, private Russian investors also have assets stuck in the West. After the EU sanctioned Russia’s National Settlement Depository (NSD) in June 2022, the Bank of Russia estimated that about RUB 5.7 trillion (over EUR 58 billion) of Russian-held securities were blocked at Euroclear and Clearstream. By late 2025, Governor Nabiullina said about half had been unblocked, partly through asset swaps. Blocking and unblocking of this kind can move recorded portfolio positions without any decision by the holder to move money abroad.

Third, frozen assets are increasingly contested in court, with mirrored exposure in Russia. The Bank of Russia has asked the EU General Court to annul both the indefinite immobilisation adopted in December 2025 and the 2026 framework for the EU loan to Ukraine. In May 2026, the Moscow Arbitration Court awarded the Bank of Russia RUB 18.2 trillion (about EUR 200 billion) against Euroclear, a ruling upheld on appeal in July. More than 100 private Russian claims worth around RUB 200 billion have also been brought against Euroclear in Russian courts, and some have been paid from Euroclear’s blocked type-C accounts at the NSD. Sanctioned investors have brought investment-treaty claims of about USD 62 billion, including Mikhail Fridman’s USD 16 billion claim against Luxembourg, the largest single amount on record. Russian rulings cannot be enforced in the EU, but Western assets still in Russia — the blocked accounts and Russian subsidiaries of European banks, the largest being Raiffeisen with about USD 24 billion in assets — are possible targets.

Composition of Capital Flows

Private capital flows are split into foreign direct investment (FDI) and portfolio, loans and other investment (PLO), with errors and omissions (E&O) capturing what is not recorded. Figure 1 extends the series from the original brief to mid-2026.

The pattern noted in 2019 — inflows and outflows moving together — broke down in 2022. PLO outflows jumped to around USD 30 billion per quarter as Russian residents moved money out after the invasion, while PLO inflows turned sharply negative as foreign lenders and investors were repaid or withdrew. FDI inflows also turned negative in 2022–23 as Western companies exited Russia. Since 2023, inflows have been close to zero while PLO outflows have continued at around USD 10 billion per quarter.

Figure 1. Capital flows to and from Russia (USD bn per quarter, 4-quarter average)

Source: Bank of Russia, balance of payments standard components, and author’s calculations. Private sector = all sectors excluding general government and reserve assets; the Bank of Russia now reports the central bank together with commercial banks, so central bank non-reserve flows are included.

Cumulative Capital Flows

By mid-2026, USD 1.3 trillion in net private capital had left Russia since 1995. Figure 2 accumulates net flows (inflows minus outflows) in each category. PLO accounts for USD 1,013 billion of the total, FDI for USD 121 billion, and unrecorded outflows in errors and omissions for USD 165 billion.

Figure 2. Net private capital flows (USD bn, cumulative since Q1 1995)

Source: Bank of Russia, balance of payments standard components, and author’s calculations.

The 2019 brief reported that USD 700 billion had left Russia between the global financial crisis and mid-2018, while in this update, that figure is now at USD 1.31 trillion. The war marks a second break in the series, comparable to 2008. Since the end of 2021, USD 406 billion has left, and the four quarters to the end of 2022 saw a net outflow of USD 219 billion, the largest on record. The consequences of these outflows for Russia are the same as before (but larger): less investment means lower growth in Russia.

Destinations: Deposits in Western Banks

Russian claims on BIS-reporting banks have more than doubled, from USD 132 billion in September 2018 to USD 296 billion in March 2026 — but the increase is frozen central bank money, not private deposits. Although this is not evident from this data itself (it does not separate central bank and private banks and does not record if assets are frozen), the numbers match what we know from other sources about frozen assets. Belgium alone accounts for USD 225 billion, up from USD 9 billion at the end of 2021 (Figure 3). The timing and size match the Russian assets immobilised at Euroclear, around EUR 200 billion in early 2026.

Excluding Belgium, Russian deposits in BIS reporting banks fell from USD 116 billion to USD 71 billion. Figure 3b shows how this happened country by country. The UK fell by about three-quarters, mostly before 2022. US banks saw a spike to about USD 44 billion around the invasion before dropping to USD 7 billion. Switzerland, Germany and Hong Kong all fell sharply after 2022. Although we cannot say for sure in every case, it was likely a response to fears of further sanctions. In other words, funds were withdrawn from these banks while it was still possible.

Figure 3. Russian claims on BIS reporting banks, by location of the bank (USD bn)

Source: BIS Locational Banking Statistics, and author’s calculations.

Figure 3b. Russian claims on BIS reporting banks, top 10 countries in 2019 (USD bn, each panel has its own scale)

Source: BIS Locational Banking Statistics and author’s calculations. Dashed line: Q1 2022.

Danish data—highlighted in the 2019 brief because of the Danske Bank scandal—tells a different story. Russian deposits in Danish banks fell from USD 8 billion in September 2018 to almost zero, and nearly all of the drop happened between early 2019 and early 2020 — well before the sanctions of 2022. Once the scandal broke, the flows stopped since Danske Bank took actions to prevent flows that could be connected to money laundering schemes.

France is another special case since Russian claims on French banks stayed at USD 20–25 billion throughout. About 98 percent is owed to Russian banks, again, a BIS category that includes the central bank, and the level is very close to the roughly EUR 22 billion of Bank of Russia assets that the French government reported as immobilised in 2022. However, if the frozen assets are not in banks that report to the BIS, the interpretation of what has happened in France would of course be very different.

Frozen assets of sanctioned individuals play only a minor role in these numbers. French banks owe just USD 0.56 billion to Russian non-banks, and Italian banks USD 0.12 billion, both down since 2021. France reported EUR 1.35 billion in frozen private assets in 2022 and Italy about EUR 2 billion in 2026, but much of this is property, yachts and company stakes, and assets held through companies in Cyprus or the British Virgin Islands appear under those countries in the BIS data. Across the EU, frozen private assets of more than EUR 28 billion compare with about EUR 210 billion of immobilised central bank assets.

For Sweden, bilateral data are published only for 2008–13 and then again from 2023. This is most likely due to limits in reporting when aggregate numbers may reveal individual entities’ transactions. Russian claims on Swedish banks were between USD 0.2–0.9 billion in 2008–13, and about USD 5–6 million by early 2026, so banks in Sweden have not been a significant destination of Russian money.

This does not mean that Swedish (or other Nordic and Baltic) banks stayed clear of Russian money before the full-scale invasion. Their exposure ran through subsidiaries and branches in the Baltic states, which the BIS records under the country where the bank is located, not Sweden. An investigation commissioned by Swedbank found around EUR 37 billion of suspicious transactions through its Baltic operations, and Finansinspektionen fined the bank SEK 4 billion in 2020. Nordea was linked to about EUR 700 million of potentially illicit funds in reporting on OCCRP’s Troika Laundromat, a scheme run by the Moscow investment bank Troika Dialog through accounts at Lithuania’s Ukio Bankas that moved about USD 8.8 billion in 2006–13. The largest Nordic case remains Danske Bank’s Estonian branch, through which some EUR 200 billion of mainly non-resident money passed in 2007–15, and which ended with a guilty plea in the United States and USD 2 billion in forfeiture in 2022. Latvia’s Trasta Komercbanka handled nearly USD 13 billion of the USD 21 billion Russian Laundromat in 2011–14. Baltic banks, several of them Nordic-owned, were for years a gateway for Russian money into the EU, but the scrutiny that followed these cases has largely closed this route. As with banks in Denmark itself, the drop in Russian deposits at Nordic-affiliated banks in the Baltics came well before 2022. It likely reflected tighter enforcement after the money-laundering scandals, rather than a rush to withdraw funds ahead of sanctions.

Destinations: Portfolio and Direct Investment

The 2019 brief noted that official portfolio assets of USD 69 billion were far below the cumulative PLO outflows of over USD 500 billion. That gap has widened. Russian portfolio assets peaked at USD 117 billion at the end of 2021, driven by households, whose holdings rose from USD 14 billion to USD 47 billion. Since then, the total has more than halved to USD 55 billion in mid-2026, against cumulative PLO outflows of about USD 1 trillion. Even adding the USD 71 billion in BIS reporting banks outside Belgium leaves most of the money unaccounted for.

The statistics have also become less informative. Since 2022, the Bank of Russia has stopped publishing the geographic breakdown of its direct and portfolio investment, which also affects the IMF data that are based on the official statistics. For portfolio assets (Figure 4), there is no workaround: the countries that issue securities do not know or report to the IMF who holds them.

Figure 4. Russian portfolio assets by destination (USD bn)

Source: IMF Portfolio Investment Positions by Counterpart Economy (PIP); Bank of Russia international investment position; author’s calculations.

For direct investment (Figure 5), destination countries’ own reports (mirror data) offer a partial view. In 2021, they captured about 64 percent of what Russia reported, with a close match for most large destinations such as Cyprus, Austria, the Netherlands and Switzerland, but a poor match for the UK and Germany, and no data at all for Jersey, the Bahamas and the British Virgin Islands. Mirror data show Russian FDI falling from USD 240 billion at the end of 2021 to USD 188 billion at the end of 2024. Adjusting for incomplete coverage puts Russia’s total FDI assets at roughly USD 210–290 billion today, compared with USD 364 billion in the 2019 brief.

Figure 5. Russian FDI assets by destination (USD bn)

Source: IMF Direct Investment Positions by Counterpart Economy (DIP), and author’s calculations.

Cyprus remains by far the largest destination. Russia reported USD 205 billion invested there at the end of 2021, while Cyprus itself reported USD 147 billion in 2021 and USD 89 billion in 2024. In 2019, Russian FDI assets in Cyprus were, according to Russian official statistics, around eight times Cyprus’s GDP. Using data from Cyprus in 2025, Russian FDI was around twice the size of its economy. This is likely underestimating Russian FDI in Cyprus, but nevertheless, Cyprus remains an important entry point of Russian money to the EU.

Policy Conclusions

One conclusion of the 2019 brief still holds: capital leaving Russia is a loss for investment and growth in Russia. Seven years and a war later, the outflow has almost doubled to USD 1.3 trillion since 2008, and it has continued at a steady pace under sanctions.

What has changed is where Russian money is visible in the West. In 2019, the concern was private flows passing through Western banks with weak controls. Today, private Russian deposits in those banks have shrunk; what remains is dominated by the Bank of Russia’s immobilised reserves in Belgium. Western exposure to Russian money in banks is now first and foremost a question about these frozen assets and how they can be used to support Ukraine.

The Danish case shows that scrutiny of banks works: Russian deposits in Denmark disappeared within a year of the Danske Bank scandal, well before any sanctions. The flip side is that the money did not stop leaving Russia; it went elsewhere. With cumulative outflows of around USD 1 trillion that cannot be traced in the official statistics, much of it is likely held in jurisdictions that do not report, or through layers of companies in places not very interested in documenting where the money comes from.

This makes better data a policy issue in itself. Russia has stopped publishing where its foreign assets are, and Western authorities hold back data that would help understand aggregate numbers, such as the BIS split between central bank and commercial bank deposits, or breakdowns of frozen private assets by type. Publishing more of this would make it easier to track the money still leaving Russia and assess the sanctions meant to stop it.

The bigger question is harder to answer: what is the money that leaves Russia used for, and what will it be used for in the future? It is pretty clear that the amounts documented here indicate that it is not (only) regular savings of Russian households that go abroad. Behind the numbers will most certainly be complicated chains of companies and individuals that in many cases are connected to the Kremlin. Even if Putin and his close associates will not appear in any ownership register, it is highly likely that they can influence how the money is used, including to fund Russia’s war against Ukraine as well as different hybrid operations in Europe and elsewhere. Russian money in Western banks has largely been withdrawn or frozen, but as this brief shows, substantial Russian holdings remain in Europe through direct and portfolio investment. It is time that policymakers take these numbers seriously and investigate who owns what, where and why. This knowledge is part of our wider defence of freedom and democracy, and without it we are likely to face unpleasant surprises. It is time that Europe, once and for all, stops acting as a safe haven for the money of criminal states and individuals.

References and Data Sources

Data downloaded 14 October 2026.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes. AI tools may have been used in the preparation of this brief. Where used, they were applied responsibly and in accordance with appropriate scientific and ethical standards. The authors and editor remain fully responsible for their respective contributions to the brief.

Capital Flows from Russia — The Bigger Picture

Posted on April 8, 2019 | Policy Brief

A bunch of dollar bills covering table that represents capital flows in Russia

There is an increasing focus on how Russian capital flows are being channelled through Western banks to various destinations, including offshore havens. There are of course legitimate reasons and legal ways of moving capital across borders, but much of the international focus on capital flows in recent decades is linked to the financing of terrorism, tax evasion, and money laundering in connection with criminal activities. This brief provides the macro view of capital flows between Russia and the rest of the world to paint the bigger picture behind the more specific stories we read about in the news that involve individual businessmen, corrupt officials, criminals, and banks.

International capital movements have a clear role in allocating resources efficiently across countries. However, today’s media coverage instead typically focuses on the role of capital flows in financing terrorists and avoiding taxes. Recently, money laundering has been creating headlines around the world in the Panama papers and other similar stories, illuminating complicated schemes in the global financial system in connection with illegal activities such as tax evasion, corruption, drug dealing and human trafficking.

In the international policy making arena, since 1989, the Financial Action Task Force (FATF) has the objective “to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system”. After the terrorist attacks in 2001, the issues of anti-money laundering (AML) and combatting the financing of terrorism (CFT) also became a central area of the IMF’s work and has since become an increasingly important policy question.

In several of the news stories, money flowing from Russia features prominently. This brief provides the bigger picture of Russian capital flows based on publicly available data as a complement and background to the news stories that are based on inside information, or “leaks”, and that focus on particular individuals and banks.

Composition of capital flows

In the official balance of payments statistics, capital flows are divided into a number of different categories, for example, private vs public or banks vs non-banks. There is also a distinction made between foreign direct investments (FDI) on the one hand and portfolio flows, loans and other types of transactions (PLO) on the other. Since the balance of payments also has to balance (despite the fact that not all international transactions have been recorded) there is also a term called errors and omissions (E&O) that take care of various discrepancies. In environments with poor data collection and a large share of activities that take place “off the books”, this term tends to be large. For Russia, this term has become smaller over time as the economy and data collection has matured.

In terms of volatility and magnitude of flows, the distinction between FDI and PLO is often important and so also in Russia. Figure 1 shows the private sector flows to and from Russia over the last two plus decades.

Figure 1. Capital flows to and from Russia

Source: Central Bank of Russia and author’s calculations

After a rather slow start in the early years of transition, capital flows took off as Russia started to generate growth in 2001, and the flows kept growing until the global financial crisis. As expected, FDI flows have been less volatile than PLO flows but perhaps more surprising, in- and outflows in both categories seem to move closely together (see Becker (2019) on why this is the case). We can also note that there has been a marked downturn in flows at the time of the annexation of Crimea and subsequent sanctions and counter sanctions between the West and Russia.

Cumulative capital flows

By computing net flows from the data in Figure 1 and accumulating this over time, we get a clearer idea in Figure 2 of the massive amounts of capital that have left Russia over the last decades. In the early years, the outflows were in the form of errors and omissions (E&O) and PLO, but the PLO trend was reversed in the early 2000’s and turned total accumulated flows back to zero before the global financial crisis hit. The global financial crisis was a clear turning point for capital flows in general and PLO flows in particular.

Figure 2. Net private capital flows

Source: Central Bank of Russia and author’s calculations

In the year following the global financial crisis, almost USD 300 billion left Russia. Outflows then continued, albeit at a slower pace, only to accelerate again at the time of Russia’s annexation of Crimea. By mid-2018, USD 700 billion had left Russia since 2008, mainly in the form of PLO flows. This is equivalent to twice the amount of fixed capital investments in Russia in 2017.

For a country like Russia that is in need of increased investments both from domestic and foreign sources to generate long-term sustainable growth, these outflows are very costly at the macro level even if they are beneficial to individual entities that are behind the flows.

Destinations of capital flows

Where the money from Russia ultimately ends up should matter less to people in Russia than the fact that they are not invested and generating growth at home. However, it can matter a great deal to people, policy makers and businesses in the destination countries. Not only because it involves business opportunities and employment to some, but also because it generates concerns among regulators, law enforcement and tax authorities regarding the origins and purposes of the investments.

We do not have full coverage of where all the money Russian entities invest or park abroad end up, but official statistics are available for at least part of the investments. First of all, there is data on cross-border assets and liabilities of the banks that report to the Bank of International Settlement (BIS), which shows what foreign residents have deposited in the banks. Russian claims on BIS reporting banks are shown in Figure 3, where we can note that total claims by Russians amount to USD 131 billion. Half of this amount was deposited with French, Swiss, UK, and Belgian banks at the end of September 2018.

Figure 3. Russian claims on BIS reporting banks in different countries (USD bn, Sept. 2018)

Source: BIS and author’s calculations

Given the recent scandal in Danske Bank, we can also note that USD 8 billion was deposited by Russian entities in Danish banks, which may not sound much in this context but amounts to around 2 per cent of Danish GDP.

Again, macro level data does not tell us if the flows behind the numbers are illicit or legitimate, but it provides some sense of the order of magnitude and possible significance for the entities involved in the transactions and their regulators and supervisors.

The next piece of information is due to the IMF’s and others’ efforts to collect and harmonize data on the destination of portfolio and FDI assets, and the data for Russia is presented in Figures 4 and 5.

The prime locations for Russian owned portfolio assets are Ireland and Luxembourg, followed far behind by the Netherlands, UK and US. In total, official portfolio assets are rather modest at USD 69 billion, which is far off the cumulative net PLO flows in Figure 2 of over USD 500 billion even if we add the BIS reporting bank deposits in Figure 3.

Figure 4. Russian portfolio assets by the destination country (USD bn, Sept. 2018)

Source: Central Bank of Russia and author’s calculations

This could have many explanations, including that a significant share of Russian PLO assets is not in BIS reporting banks or in countries that provide transparent reporting of other types of PLO assets. The fact that cumulative flows and stocks reported in international statistics are so different, though, clearly asks the question where the remaining assets are invested.

The last component for which we have data is the location of Russian FDI assets. This turns out to be the most significant asset class available in the official statistics with a total of USD 364 billion invested abroad. Given that the magnitudes of FDI flows in Figures 1 and 2 are much smaller than PLO flows, this is somewhat surprising. Less surprising is the fact that more than half of this is invested in Cyprus, which is a well-known destination for Russian money.

However, it also begs the question on how assets are classified and where; Cyprus annual GDP was USD 24 billion in 2018, or 13 per cent of what is classified as Russian FDI assets in Cyprus. The only reasonable interpretation is that Cyprus is an offshore destination to park Russian money and not the ultimate location of direct investments from Russia. It is not unlikely that similar explanations are also valid for a significant share of the assets recorded as investments in the Netherlands, Austria and Switzerland, not to mention the British Virgin Islands (BVI) or the Bahamas. This problem is not unique for Russian data, but the magnitude of the problem regarding this data is still striking.

Figure 5. Russian FDI assets by the destination country (USD bn, Sept. 2018)

Source: Central Bank of Russia and author’s calculations

Policy conclusions

Capital leaving Russia is mainly a problem for investments and growth in Russia, but, as has become far too clear recently, some of the flows also create problems in other countries. In particular, flows that are associated with money laundering and channelled through financial institutions in the West can create massive problems for banks that do not have sufficient control mechanisms in place or are guided by short-term profit maximization that encourages staff to look the other way when illicit flows are coming in.

Given the massive scale of flows coming from Russia, it can obviously be tempting to be part of this business while at the same time very costly to implement procedures and routines that control all of the flows adequately. However, not understanding the bigger picture of Russian flows can be even costlier.

References

Becker, T, (2019), “Russia’s macroeconomy—a closer look at growth, investment, and uncertainty”, forthcoming SITE Working paper.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Important Policy Lessons from Swedish-Russian Capital Flows Data

Posted on March 21, 2016 | Policy Brief

A recent study of capital flows between Sweden and Russia provides many policy lessons that are highly relevant for the current economic situation in Russia. In line with studies on other countries, bilateral FDI flows were more stable than portfolio flows, which is important for a country looking for predictable external sources of funding. However, much of the FDI flows came with trade and growth of the Russian market. The sharp decline in imports and fall in GDP is therefore bad news also when it comes to attracting FDI. The conclusion is (again) that institutional reforms and reengaging with the West are crucial policies to stimulate both the domestic economy and encourage much-needed FDI.

In a recent paper (Becker 2016), I take a detailed look at the trends and nature of bilateral capital flows between Sweden and Russia over that last 15 years. Although the paper focuses on the capital flows of a relatively small country like Sweden with Russia, it sheds some light on more general theoretical and empirical issues associated with FDI and portfolio flows that are highly relevant for Russia today.

Measuring Bilateral FDI

One general qualifier for studies of bilateral capital flows is however the reliability of data; Not only is a significant share of international capital flows routed through offshore tax havens which makes identifying the true country of origin and investment difficult, but also many investing companies are multinationals (MNEs) with operations and shareholders in many countries so it is hard to have a clear definition of what is a “Swedish” or a “Russian” company. In addition, when different official data providers, in this case Statistics Sweden (SCB) and the Central Bank of Russia (CBR), report capital flows on the macro level, there are large discrepancies.

Private companies also gather company level data on FDI that can be aggregated and compared with the macro level FDI data. This data is on gross FDI flows and should not be expected to be the same as the net macro level FDI flows data but is a bit of a “reality check” of the macro data.

Figure 1. Average annual FDI flows

Sources: SCB, CBR, fDi Market, MergerMarkets

The reported annual average flow of FDI from Sweden to Russia varies from around USD500 million to USD1.2 billion depending on the data source. Russian flows to Sweden are rather insignificant regardless of the source but the different sources do not agree on the sign of the net flows (Figure 1).

The differences between data sources suggest that some caution is warranted when analyzing bilateral FDI flows. With this caveat in mind, there are still some clear patterns in the capital flows data from Sweden to Russia that emerge and carries important policy lessons in the current Russian economic environment.

FDI vs. Portfolio Investments

There is a large literature discussing the distinguishing features of FDI and portfolio flows (see Becker 2016 for a summary). Some of the key macro economic questions include which type of flows provides most international risk sharing; are most stable over time; or most likely to contribute to balance of payments crises when the flows go in reverse. In addition, there are potential differences in terms of the amount of international knowledge transfers and how different types of capital flows respond to institutional factors.

Figure 2. FDI and portfolio investments

Source: SCB

Figure 2 shows that FDI has been much more stable than portfolio flows in the years prior to and after the global financial crisis as well as in more recent years. Although all types of capital flows respond negatively to poor macroeconomic performance, and the stock of portfolio investments swing around much faster than FDI investments, i.e., portfolio flows go in reverse more easily and can contribute to external crises. This makes FDI a more preferable type of capital flow for Russia.

FDI and Trade Go Together

Since FDI is a desired type of capital flow, it is important to understand its driving forces. The first question to address is whether FDI and trade are substitutes or complements. Since the bulk of FDI comes from MNEs that operate in many countries, we can imagine cases both when FDI supports existing trade and cases when it is aimed at replacing trade by moving production to the country where the demand for the goods is high.

In the case of Sweden and Russia, the macro picture is clear; FDI has increased very much in line with Swedish exports to Russia (Figure 3). Both of these variables are of course closely correlated with the general economic development in Russia, but even so, the very close correlation between FDI and trade over the last 15 years suggests that they are compliments rather than substitutes.

Figure 3. Swedish Exports and FDI to Russia

Source: SCB

Most FDI is Horizontal

FDI flows are often categorized in terms of the main motivating force for MNEs to engage in cross-border investment: vertical (basically looking for cheaper inputs), horizontal (expanding the customer base), export-platform (producing abroad for export to third countries) or complex (a mix of the other reasons) FDI.

Looking at the sectoral composition of FDI from Sweden to Russia (Figure 4), most investments have come in sectors where it is clear that MNEs are looking to expand their customer base. Even in the case of real estate investments, a large share is IKEA developing new shopping centers that host their own outlets together with other shops. Communication and financial services are also mostly related to service providers looking for new customer. Only a small share is in natural resource sectors that would be more in line with vertical FDI, while there are very few (if any) examples of MNEs moving production to Russia to export to third countries.

Figure 4. Sectors of Swedish FDI to Russia

Source: SCB

Policy conclusions

The above figures on bilateral capital flows from Sweden to Russia carry three important policy messages: 1) FDI is more stable than portfolio flows; 2) Trade goes hand in hand with FDI; and 3) FDI to Russia has mostly been horizontal and driven by an expanding customer base.

In the current situation where Russia should focus on policies to attract private capital inflows, the goal should be to attract FDI. Instead, the government is now looking for portfolio inflows in the form of a USD3 billion bond issue. But FDI is a more stable type of international capital than portfolio flows and also come with the potential of important knowledge transfers both in terms of new technologies and management practices.

However, as we have seen above, FDI inflows have in the past been correlated with increased trade and an expanding Russian market. In the current environment, where imports with the West declined by 30-40 percent in the last year, GDP fell by around 4 percent, and the drop in consumers’ real incomes have reached double digits in recent months, it is hard to see any macro factors that will drive FDI inflows.

Instead, attracting FDI in this macro environment requires policy changes that remove political and institutional barriers to investments. The first step is to fulfill the Minsk agreement and contribute to a peaceful solution in Ukraine that is consistent with international laws. This would not only remove official sanctions but also provide a very serious signal to foreign investors that Russia plays by the international rulebook and is a safe place for investments from any country.

The second part of an FDI-friendly reform package should address the institutional weaknesses that in the past have reduced both foreign and domestic investments. It is telling that many papers that look at the determinants of FDI flows to transition countries include a ‘Russia dummy’ that is estimated to be negative and both statistically and economically significant (see e.g. Bevan, Estrin and Meyer, 2004 and Frenkel, Funke, and Stadtmann, 2004). One factor that reduces the significance of the ‘Russia dummy’ is related to how laws are implemented. Other studies point to the negative effect corruption has on FDI.

Reducing corruption and improving the rule of law are some of the key reforms that would have benefits far beyond attracting FDI and has been part of the Russian reform discussion for a very long time. It was also part of the reform program that then-President Medvedev presented to deal with the situation in 2009 together with a long list of other structural reforms that would help modernize the Russian economy and society more generally.

As the saying goes, don’t waste a good crisis! It is time that Russia implements these long-overdue reforms and creates the prospering economy that the people of Russia would benefit from for many generations.

References

Becker, T, 2016, “The Nature of Swedish-Russian Capital Flows”, SITE Working paper 35, March.
Bevan, A, Estrin, S & Meyer, K 2004, “Foreign investment location and institutional development in transition economies”, International Business Review, vol. 13, no. 1, pp.43-64.
Frenkel, M, Funke, K & Stadtmann, G 2004, “A panel analysis of bilateral FDI flows to emerging economies”, Economic Systems, vol. 28, no. 3, pp. 281-300.