Russia was able to save abroad about a third of the $227 billion it earned last year from its commodity exports, creating a potential new flashpoint as the U.S. and its allies seek to tighten their sanctions for the invasion of Ukraine.
About $80 billion is spread between cash funds, real estate and investments in overseas subsidiaries, according to an estimate by Bloomberg Economics. The storage amounts to shadow reserves, a byproduct of a record current account surplus, roughly the difference between exports and imports, that has helped prop up the Kremlin’s finances since its February 2022 attack on Ukraine.
“Because of Europe’s delay in targeting Russia’s energy sector, the Kremlin was able to run one of the largest current account surpluses in its history,” said Maria Shagina, an economist at the Institute International of Strategic Studies of the United Kingdom. “This has de facto negated the effect of the central bank’s asset freeze in March 2022, as Russia could recover what it lost.”
Any new revenue accumulated abroad could make them an attractive target for Russia’s adversaries, particularly if the funds are state-controlled. The government is a shareholder in many of Russia’s biggest exporters that contributed to last year’s windfall, although the question of where the money ended up and who controls it has taken on more mystery.
By accumulating international assets last year, Russia added the equivalent of about 5% of gross domestic product. This is close to the 2009-2013 average, another period of high oil prices and limited central bank foreign exchange interventions.
What Bloomberg Economics Says…
“The accumulation of international assets was forced rather than deliberate. Sanctions pushed the Russians to cut imports, while commodity prices boosted exports. If anything, instead of encouraging companies to accumulate foreign assets, the Russian government eased regulations to help boost the imports it needed to stabilize domestic inflation.”
The fate of Russian funds abroad is increasingly in focus as backers of Ukraine, including Canada and Germany, float the idea of using billions in frozen Russian assets to compensate and aid the country to rebuild it.
For the government, assets accumulated abroad are a resource that can be tapped through extraordinary levies on exporters, according to Alexander Knobel of the Russian Academy of Foreign Trade.
“These ‘shadow reserves’ can be formally converted to benefit the state in a number of ways,” Knobel said.
As the European Union becomes less dependent on Russian energy supplies, funds abroad are likely to draw more attention as a possible target for sanctions, he said.
Financial suffocation
Last year, unprecedented restrictions on the central bank already froze about $300 billion of its reserves, leaving it with few investment options outside of the yuan and gold. Assets held by sanctioned Russian businessmen have also been frozen in some Western jurisdictions, leaving them in limbo.
With lower commodity prices and new restrictions on oil exports recently taking effect, the current account surplus has fallen sharply. The Bank of Russia projects it at $66 billion this year, rising to $48 billion in 2024 and $41 billion in 2025.
Even if foreign governments are able to determine the ownership of new Russian funds abroad and tie them to the state, the total will likely be lower than official estimates.
While Russia’s net acquisition of foreign assets last year reached $107 billion, according to the central bank, Bloomberg Economics estimates the figure is likely overstated by about $21 billion.
To arrive at the figure, Bloomberg Economics adjusted the total for tourism spending, purchases in a fleet of shadow oil tankers and outflows related to Russians opening foreign bank accounts. These bank transfers distort the data because they appear as an increase in foreign assets, but instead represent a redirection of imports.
“The accumulation of hidden reserves by Russia is very possible,” said Sergei Guriev, an economist who once advised the Russian government but later fled to Paris, where he is now president of Sciences Po.
“The main question is, to what extent these reserves would be sufficient to finance the budget deficit in 2023,” Guriev said.
To contact the editors responsible for this story:
Rosalind Mathieson at rmathieson3@bloomberg.net
