Russia to Get Tough on Shadow Economy; Central Bank Cracking Down on Institutions That Engage in ‘Dubious Financial Operations’

Russia to Get Tough on Shadow Economy

Central Bank Cracking Down on Institutions That Engage in ‘Dubious Financial Operations’

ANDREY OSTROUKH

Dec. 18, 2013 9:26 a.m. ET

MOSCOW—The Bank of Russia will seek to rein in the county’s shadow economy by purging “illegitimate” banks in an effort to reduce billions of dollars in capital outflows, central bank chairwoman Elvira Nabiullina said Wednesday.Economic growth in Russia is slowing due to lack of institutional reforms and evaporating investment activity after years of oil-boosted expansion. This year, the economy is on track to grow by only 1.4%, its weakest pace since President Vladimir Putin came to power in 2000.

In an attempt to find new drivers to bring annual economic growth up to Mr. Putin’s ambitious target of 5%, Russia is trying to limit capital outflows and also make shadow sector funds work for the economy.

Ms. Nabiullina said that, to develop the economy and the financial sector, the central bank should terminate “illegitimate financial operations” carried out by the banking sector, which incorporates more than 900 lenders across Russia.

Among the activities Ms. Nabiullina has in her sights are the moving of wealth abroad and the conversion of bank deposits to cash to finance off-the-books transactions.

“Banks have to be transparent, financially stable, law-abiding and reliable for citizens,” Ms. Nabiullina said.

Speaking at a banking conference, Ms. Nabiullina said that $39 billion left Russia in 2012 and some $22 billion followed it in the first nine months of this year in what she called “dubious financial operations.”

Some $47 billion, the major part of outflows over the past two years have been moved via Belarus and Kazakhstan, its neighbors and partners in the Customs Union.

Since Ms. Nabiullina, ex-economy minister and presidential economic aide, took over the chair at the Bank of Russia in June, the bank has already shut down more than two dozen lenders, making currency and money markets increasingly nervous amid speculation that the central bank will revoke more licences.

Ms. Nabiullina said that revoking a licence was always a measure of last resort but sometimes it helped; more than 50 banks have already stopped carrying out “dubious transactions” after realizing that they may also lose their licence, she said.

“Our activity is focused on preventive care, not on harsh repressive measures,” Ms. Nabiullina said, adding that the central bank has no predetermined “black list” of banks that are at risk of losing their licences.

Earlier this year, a banking lobby group warned that Russia’s increased efforts to stamp out illegal banking activities could cause the country’s financial system to collapse.

Ms. Nabiullina said Wednesday that any concerns about the stability of the banking system were unjustified as the assets of banks that had lost their licences this year accounted for less than 1% of the assets and deposits of the whole banking system. “The central bank is carrying out a policy of beefing up the banking sector,” she said.

Ms. Nabiullina said that the central bank is also putting efforts to combat cash-out operations, which involves taking money off their books and converting it into cash. Such cash is often then used for off-books and illicit transactions.

Earlier this year, the government suggested introducing a limit on cash transactions, with the cap at 600,000 rubles ($18,210) in 2014 and halved to 300,000 rubles in 2015 in order to scale down the shadow sector.