While Russian President Vladimir Putin plots his next move into Ukraine, capital is fleeing Russia.
Russia's central bank this week confirmed that some $64 billion in assets held by Russians headed for the exits in the first three months of this year—roughly matching the total for all of 2013. The estimate of the capital exodus amounts to roughly 12 percent of Russia's gross domestic product.
That hemorrhaging is expected to continue if the turmoil in the Ukraine continues. Officials at the World Bank have warned that Russia could watch another $150 billion in capital leave the country if the crisis deepens. Since 2008, nearly half a trillion dollars has fled the country.
As the money flowing out of Russia is surging, the upheaval in Ukraine has put a damper on investment coming into the country. The cash squeeze comes as Russia's economy is barely growing, inflation is rising fast and the central bank has been forced to raise interest rates to prop up a sagging ruble.
The U.S. and Western countries seeking to thwart Putin's Ukrainian ambitions have threatened economic sanctions if the Russian aggression continues. So far those have been limited to freezing the holdings of a handful of Putin's political allies.
"The Achilles' heel of the Russian economy remains the flow abroad of Russian capital following any shock," Goldman Sachs analysts Clemens Grafe and Andrew Matheny said in a recent note. "We would also think that any sanctions or even the threat of sanctions will be ultimately targeted at these flows."
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Expanding a freeze on Russian assets held outside the country could involve the cooperation of relatively few governments—including Cyprus and the British Virgin Islands—that have become tax havens for Russian oligarchs and other wealthy Russians. This list of assets stashed abroad includes real estate, stocks, bonds, bank deposits and private companies.
"These locations are relatively independent of Russian influence, keeping private capital out of the reach of Russian prosecution in case of legal investigations or seizure of assets at home," according to CEIC analyst Alexander Dembitski.