Almost £100 billion of “hidden” capital has flooded into Britain in less than a decade, much of it laundered by Russian investors, according to analysis by Deutsche Bank.
In research that raises big questions about how capital is tracked across borders, two of the bank’s strategists have established links between anomalies in the UK’s balance of payments and a surge in capital flight out of Russia.
The pair said in a note published yesterday that the flow of “hot” money into the British markets, mainly from Russians seeking havens to keep, or wash, their money outside their own country, has accelerated dramatically in recent years.
Almost £93 billion has flowed into the UK since 2006, with funds coming in at a rate of about £1 billion a month since 2010, they said, adding that a sizeable chunk of the money was finding its way into the property market. Since the mid-1970s, deep in the “cold war” of tensions in Anglo-Russian relations, almost £133 billion of untracked capital has been moved into Britain, equivalent to 8 per cent of GDP at its present rate, the strategists said. While some of this capital movement is legitimate, a proportion represents funds moved illicitly into Britain and laundered through investments, often in the property or equity markets.
Anecdotal evidence suggests that Britain, particularly the central London property market, is a favoured target for well-heeled Russians.
Advertisement
However, the Deutsche Bank strategists claim that this is the first time that firm evidence about the unrecorded inflow of Russian capital has been established.
Oliver Harvey, a strategist at Deutsche Bank’s market research division, and a co-author of the report, said: “The statistics don’t capture the systematic flows of capital across borders. There is a lot that you can’t see.
“Some of the anomalies in the data will be technical, but we have identified a correlation between unrecorded inflows into the UK and capital outflows out of Russia. It is reasonable to conclude that a sizeable proportion of that will be illicit activity.”
Mr Harvey, who carried out the research with Robin Winkler, said that their findings raised questions about how exchange rates are predicted, in that overseas investors have to translate cash from their domestic currency when they move into overseas markets.
“They also raise major questions over the UK’s role as a refuge for international capital flight and the need for better data and more rigorous oversight on foreign property transactions,” he said.
Advertisement
The size of the unrecorded inflows could help to explain Britain’s large current account deficit, a record 5.5 per cent of GDP, as some of the hidden money is used to buy goods and services overseas, Mr Harvey said.
Q&A
What did they look at? Deutsche Bank’s strategists analysed the UK’s official balance of payments, which, among other things, records export orders and payments received to cover them. In theory, the two should balance, with payments in matching orders received. In practice, they don’t.
What did they find? Economists tend to think that the mismatch is random and the result of technical statistical errors, missed orders and currency fluctuations. However, the analysts found a strong correlation between the fluctuations in the net errors and omissions and official figures from the Russian Central Bank about the level of capital fleeing the country. As well as matching figures on equity inflows into Britain, they found that they moved in line with property prices here.
Advertisement
What does this mean? It means that a large amount of money has come into Britain that has not been officially tracked by the Office for National Statistics. There is a lack of detail about the source of these fund inflows, which have implications for the current account deficit and expected changes in future exchange rates.
Is all of it really dodgy Russian money? No, it’s not, although this is the first analysis to establish such a firm link. Some of the discrepancy will be technical and the result of missed or misreported orders and payments. It is not only wealthy Russians who have moved in on the property and investment markets over here. Investors from Greece, Israel, China and the Middle East have all made a beeline for these shores in recent years.