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As much as $1 trillion is estimated to be held by Russians abroad.

Not even all of Russian President Vladimir Putin’s allies in Moscow understand why he pushes ahead so stubbornly with baiting the U.S. and its European allies, an activity that has started to look grotesque in light of recent intelligence failures. There is, however, one potential upside to the strategy, if one can call it that: It forces Russians who’ve moved their capital overseas to consider repatriating it. That’s one of Putin’s oldest strategy goals.

On Wednesday, Alexei Kudrin, Putin’s former finance minister and currently head of the Audit Chamber, Russia’s budgetary watchdog, described escalating Western sanctions as a major threat to Russia’s growth that could even lead to a recession next year. “That, of course, is a big challenge to all of the president’s goals,” Kudrin said. “We have no such global problems for Russia, no such military and political risks that would require increasing tensions with other countries.”

Until recently, the conflict with the West helped Putin maintain a high popularity rating. Now the euphoria that followed the 2014 Crimea annexation is gone, and confrontation with the U.S. and European nations is no longer helping. According to a September poll by the Levada Center, one of the few remaining independent pollsters in Russia, trust in Putin was down to 39 percent compared with 59 percent in November 2017.

There could be any number of reasons why Putin continues with a policy that does no one, including himself, any good: The Russian leader’s machismo, the lack of face-saving solutions to crises caused by aggression in Ukraine and ham-handed actions of Russian spies, the inertia of escalation, even an erosion of Putin’s control over Moscow’s warring enforcer clans. But only one explanation makes sense from a rational point of view: Putin doesn’t mind pushing Russia toward greater economic isolation if an increasingly toxic climate for Russians in the West leads to repatriation of capital exported from Russia since the early 1990s.

Presumably, that’s quite a lot of money. In a 2017 paper, Filip Novokmet, Thomas Piketty and Gabriel Zucman estimated the offshore wealth held by Russians at about three times Russia’s official foreign reserves, or about $1 trillion at the time of publication.

“There is as much financial wealth held by rich Russians abroad — in the United Kingdom, Switzerland, Cyprus, and similar offshore centers — than held by the entire Russian population in Russia itself,” they wrote. Net private-sector capital outflows tracked by the Russian Central Bank add up to a total of $613 billion. Both estimates sound plausible if one considers that the cash and direct foreign investments attributable to the 24 Russian billionaires tracked by the Bloomberg Billionaires Index add up to about $115 billion.

Bring it home

Trying to get the money back is one of Putin’s oldest and least successful projects. In 2002, he called on Russian businesspeople to repatriate their offshore investments to protect them from Western governments: “Otherwise you’ll be swallowing dust trying to get your property back through the courts.”

No one listened for years: Western economies loved the Russian cash. In 2014, as the U.S. and the European Union began imposing Ukraine-related sanctions on Russia, a record of $160 billion was moved out of Russia by the financial and non-financial sectors combined. The consensus among wealthy Russians was that as the country turned inward, the West would still welcome them and their money.

Putin and the Russian government wouldn’t give up, however. Measures aimed at capital repatriation are arguably one of the most coherent of Russia’s current economic policies, along with fiscal and monetary stabilization. In 2015 and 2016, the government offered a financial amnesty to Russians who declared their foreign assets and allowed them to transfer the cash to Russia tax-free. Again, barely anyone took up the offer. According to First Deputy Prime Minister Anton Siluanov, a mere 7,200 declarations were filed. The government hasn’t reported how much money was repatriated, probably because it was negligible….Read more