The Increasing Importance of Migrant Remittances from the Russian Federation to Central Asia *
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Introduction The flow of funds from migrant workers back to their home countries is an important and fairly stable source of external financing which in many developing economies exceeds official development assistance, portfolio investments, and foreign direct investment. The total value of remittances worldwide has been increasing steadily over the past decades and it is estimated that in 2011 and 2012 reached over US$500 billion and US$550 billion equivalent, respectively1. Remittances involve 215 million migrants, or 3 percent of the world’s population, with around half of the official international migration being South-South rather than to wealthier countries in the North. Out of the total estimated worldwide value of remittances about three quarters goes to developing countries (Ratha and Mohapatra). Notwithstanding these high volumes, the costs of sending remittances can be expensive relative to the low incomes of migrant workers and the rather small amounts sent. In addition there are significant obstacles for migrants to access remittance services such as the inability to speak the local language or lack of the necessary documentation to make these transactions. The existence of relatively undeveloped financial infrastructure in some sending and receiving countries may make it even more difficult for recipients to send or collect funds. Remittances from workers in the Russian Federation play an increasingly important role in Central Asia as the number of migrants from the former Soviet Republics exceed 9 million out of the estimated 11 million foreigners living in Russia2. Should the increasing share of remittances over GDP of the receiving countries reach extremely high levels this will create extenuating vulnerabilities in receiving countries in the event of a rapid decline in this important source of external funding. Remittances to and from the Russian Federation: Trends, Destination, Frequency and Average Transfers The World Bank’s Annual Remittances Data show a fourteen-fold increase in the outflow of remittances from the Russian Federation in the decade ending in 2012. As such outflows rose from US$ 2.2 billion in 2002 to an estimated amount of US$31.6 billion in 2012 (see Table 1). These estimates include remittances flowing from official and unofficial channels, relying primarily on IMF Balance of Payments Statistics and sometimes the countries' Central Banks data - which often does not capture the informal channels. Mention should be made that data on outflows is less reliable and more discrepancies are possible, as governments try harder to record inflows. For these reasons the data from the Central Bank of Russia (CBR) - which reports official inflows, outflows 1
http://www.worldbank.org/en/news/press-release/2013/10/02/developing-countries-remittances-2013world-bank. 2 Most likely the number of illegal migrants is underestimated. Russia has no visa requirements for citizens of the CIS countries, which might enter, stay in Russia and work with or without an official work permit. 12 former Soviet Republics (all save the Baltic States) participate in the CIS.
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and net remittances (col.1, Table 1) - are about 20-30 percent lower than the World Bank’s net remittances estimates. For a number of reasons these two data series are not directly comparable, as CBR data refer to transfers (via so-called "money transfer systems") and represent only a part of total migrants’ transfers. Both data sets show the rapid growth and rising importance of these money transfers. Table 1: Russian Federation – Two Data Sources of Migrants’ Remittances (US$ millions) Year
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013e
CBR Outflows Inflows (col.1) (col.2)
5,189 9,443 13,706 9,966 12,834 17,533 20,892
1,033 1,681 1,977 1,779 1,975 2,766 3,285
Net Flows (col.1-2)
Net Flows (col. 4-5)
4,156 7,762 11,729 8,187 10,859 14,766 17,607 ----
-869 1,436 1,266 1,235 626 119 -176 420 867 1,780 2,693 3,390 8,283 15,215 23,982 16,043 16,204 19,908 25,860 ------
World Bank Outflows
Inflows
3,694 3,938 4,036 3,502 2,551 1,409 1,099 1,823 2,226 3,233 5,188 6,827 12,104 19,881 29,719 21,148 21,454 26,011 31,648 ------
4,563 2,502 2,770 2,267 1,925 1,290 1,275 1,403 1,359 1,453 2,495 3,437 3,821 4,666 5,737 5,105 5,250 6,103 5,788 6,443
Source: CBR Bulletin and Annual Remittances Data, Development Prospects Group, The World Bank.
The impact of the financial crisis led to a reduction of almost 30 percent in remittances outflows in 2009 and 2010 from the 2008 peak in the World Bank series. If one examines the longer-term trend outflows decreased from its peak in 1997 to 2003, recovering the pre-crisis level only until 2004. This may in part reflect the Russian economic crisis that ended in the sovereign debt default of 1998. Remittances inflows are more modest, fluctuating at a level between 20-25 percent of outflows, but they have also increased by a factor of almost 4.5 times over the past decade.
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Chart 1. Russian Federation: Migrant Remittances: Outflows (US$ million), 1994-2012 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19
Source: Table 1.
Monthly statistics of official remittances from the CBR from 2010 to mid-2013 show the same pronounced increase in outgoing transactions and marked seasonal peaks in the summer (August) of each year (Chart 2). This pattern reflects the large concentration of migrant workers in the construction industry and retail distribution of agricultural produce (markets) which are highly seasonal. As a result, remittances in August are about twice as large as those of the winter months (January-February). Experts consider that there are three stylized groups of migrants in Russia who send remittances to their countries of origin those from: (i) old migrations, with individuals fully settled, who are largely assimilated in the host country; (iii) recent, unskilled, migrants largely working in the service sector (food and hotel industries, cleaning jobs, municipal services, among other); and (iii) seasonal marketing of agricultural produce and construction workers whose remittances explain the seasonal peaks. The first two groups send remittances on a regular basis. Chart 2. Russian Federation- Number of Transactions of Outgoing Remittances (In thousands, Monthly over: 2010- 06/2013) 2,500 2,000 1,500 1,000 500 0 1
3
5
7
9
11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41
Source: CBR. Monthly data reflect only official remittances and are not comparable with World Bank data.
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In terms of the recipient countries, between 80 to 90 percent of the outflows of remittances from the Russian Federation go to the CIS countries (Chart 3). Remittances to non-CIS countries are rather small and flat over time. Chart 3. Russian Federation: Outgoing Remittances by Region (in US$ million) 2,500 2,000 1,500
CIS countries
1,000
non-CIS countries
500 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 Source: CBR
Evidence shows that workers’ remittances are small in value but high in frequency. The high frequency of remittances is counterintuitive, as there is usually a fixed-cost for each transfer and it would be expected that larger sums sent might be more efficient and result in lower effective costs, thus prompting higher value payment. This may suggest that migrants may have overriding objectives such as the need to maintain more effective control over the payments made or other constraints due to their lack of or inability to access accumulated savings. Table 2 shows the total flows and the average values transferred to and from Russia through money transfer systems (official money transfer organizations or MTOs) in 2012. With the exception of Kazakhstan the outflows are larger than the inflows, resulting in significant net outflows to Tajikistan and the Kyrgyz Republic. The average values transferred confirm the small amounts of each transaction, with US$354 for Tajikistan, US$337 for the Kyrgyz Republic and US$603 for Kazakhstan. The average inflows are also small and below the average outflows. For all the CIS countries the average value of the remittances fluctuate around US$500 (see Chart 4). Table 2. Cross-Border Transfers to the Two Most Migrant Remittance-Dependent CIS Countries via MTOs in 2012 (Totals in US$ millions and US$ Average Values) To Russia From Russia Turnover Net Countries (col. 2+4) (col. 2-4) Total Average Total Average Value Value Tajikistan Kyrgyz Republic Kazakhstan
318
2,456
3,634
354
3,952
-3,317
231 534
1430 767
1,837 391
337 603
2,069 925
-1,606 143
Source: CBR
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Chart 4. Russian Federation: Average Amount of Outgoing Remittances (in US$) (Monthly data: 2010- 06/2013) 1,200 1,000 800 non-CIS countries
600
CIS countries
400 200 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 Source: CBR
Since 2010 the number of transactions per month almost doubled from around 2 million to more than 4 million, with the majority of transactions going to the CIS countries. This reflects the increasing number of migrants (legal and illegal) to Russia, as well as the transfer of remittances from unofficial to official channels as the latter become cheaper and more widely accessible. Out of the 11 million migrants (out of which 9 million are reported to be citizens of CIS countries), only 2 million have received legal work permits, in Russia, although at least another 2 million are believed to be working without proper documentation (FT). Chart 5. Russian Federation: Number of Outgoing Remittances (Monthly: 2010- 06/2013, in thousands) 4,500 4,000 3,500 3,000 2,500
non-CIS countries
2,000
CIS countries
1,500 1,000 500 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 Source: CBR. Georgia is included in the non-CIS countries.
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Importance of Remittances for the Destination Countries For the recipient countries remittances represent a very significant source of external financing and a large share of their GDP. For Tajikistan, Moldova, Kyrgyzstan and Armenia, remittances over GDP amounted to 35, 23, 15 and 9 percent, respectively, in 2009. More recently (2013), remittances from the Russian Federation to Ukraine reached a not insignificant 4.6 percent of GDP. Possibly, Tajikistan is the most remittancedependent country in the world with a ratio of remittances over GDP (Table 3) for 2008 of almost 46 percent. Such dependence is projected to continue until 2016, with a small declining trend. Expert opinions indicate that such dependence on remittances is underestimated and that the reality might be closer to 60-70 percent of GDP in the case of Tajikistan, as there are significant unreported cash remittances sent through informal person-to-person channels.3 The Kyrgyz Republic also receives very large remittances inflows projected to increase until 2016 reaching at least one-third of GDP. Table 3. Top Recipients of Remittances as Percentage of GDP: Tajikistan and Kyrgyz Republic (Balance of Payments, in US$ millions and ratios) Tajikistan Kyrgyz Republic Year Migrants’ GDP Private GDP Remittances (2) (1/2) Transfers (4) (3/4) (1) (3) 2008 1/ 2,343 5,135 45.6 1,431 5,131 27.9 2009 1/ 1,622 4,982 32.6 1,013 4,683 21.6 2010 2,040 5,642 36.2 1,313 4,615 28.5 2011 2,293 6,830 33.6 1,550 5,187 29.9 2012 2,476 7,762 31.9 1,782 5,695 31.3 2013 2,699 8,773 30.8 1,996 6,187 34.2 2014 2,942 9,785 30.1 2,315 6,766 32.9 2015 3,207 10,965 29.2 2,408 7,319 32.7 2016 3,479 12,289 28.3 2,576 7,870 Source: IMF 1/
Actuals, other years projected.
One of the consequences of this extremely high dependence on migrants’ remittances is a continuous pressure for the domestic currencies to appreciate, in detriment of the new and traditional export sectors. In the case of Tajikistan, the latter seem to be less affected as the exchange rate elasticity of cotton exports and aluminum is low, with a limited impact on competitiveness (IMF, 2011). The Remittances Market: Entry, Competition and the 2013 Pricing War
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Until 2001 remittances through formal channels were discouraged by a 30 percent tax. Since its elimination, remittances through formal channels, mainly through MTOs, increased markedly. It is estimated that 83 percent of remittances to Tajikistan originate from migrants to Russia.
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Following the dissolution of the USSR, the Russia-CIS cross-border remittances’ market4 was dominated by foreign-owned payment companies, notably Western Union, which attracted remittances’ users by making capital investments in equipment and software, entering into exclusivity contractual arrangements with banks, bringing their brand name, know-how and trust. Wide spreads and high profitability, coupled with low entry barriers5, from 2002 onwards - following the legal prohibition of entering into exclusivity arrangements with banks6 resulted in the entry of numerous local players. The increased competition of new local MTOs has been an important factor in drastically eroding the market share of foreignowned payment companies and a source of strong competition to commercial banks and the official postal system7. Box 1. MTOs Business Models 8 MTOs’ business models are differentiated by their degree of vertical integration (collecting, sending, clearing, disbursing payments). Most MTOs can be classified in two “buckets”: a. Agents specialized in clearing (and all it takes to enable the networking between independent agents). Examples of such players In Russia and CIS include: Western Union, MoneyGram, and Golden Crown. Such players have no conflicts of interest between their own infrastructure and that of their agents. They also have more flexible cost structures than the second set of players. Money transfers (MT) is typically their only or core business. b. Players involved in all steps of the payments value chain. Examples of such players in Russia and the CIS countries include: Unistream, Sberbank, Russian Post, Raiffeisen Bank, Contact, and Anelik. Such players typically are conflicted, since they wish to channel a larger volume of transactions through their own infrastructure. Cost structures of such players are higher and less flexible, as they have fixed-costs supporting their branches. Thus the MT business is often not their main or core business. The core function of all MT players involves a central clearing facility (key to all MTOs), where all agents have to open accounts and all money movements take place. This allows the system to reach scale with much less operational hassle. Agents have to maintain sufficient funds in their accounts at the clearing facility (otherwise payments are not processed) and manage the excess funds on their own (define when to add or take funds back). Most systems offer real-time service to their customers (which again is possible because of the central clearing facility, where MTs are guaranteed to happen instantly). Moreover, most systems 4
The largest players in the domestic remittances market are Sberbank and the Postal Service. For other non-CIS countries Western Union and MoneyGram still dominate. 5 With their inexpensive in-house-built internet communications and accounting systems, low fixed costs, flexible pricing policies (including flat fees), and the lack of requirements for senders to open an account, commercial banks and the postal system were no match for the MTOs and win-win cooperative arrangements banks-MTOs emerged. 6 In 2002, Western Union lost a court case with the Russian Antimonopoly Commission. According to the resolution, all contracts with exclusivity clauses signed by banks with Western Union were cancelled and revoked. At that time, Western Union had such contracts with more than 200 banks in Russia. 7
Which often face legal constraints to process foreign exchange payments, in addition to the disadvantages of banks referred in footnote 5. 8 See also Quillin et. al.
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operate in an “address-free mode”. That is, there is no requirement to specify exact city/agent/address where the funds have to be picked up. The only requirement is the destination country. There are exceptions to this when, within the overall system network, there is a subnetwork operating with different prices charged to clients (e.g. cheaper). In such cases, clients are notified that when sending transfers with special tariffs pickup can only be done at locations of specific agents.
Notwithstanding, this period of increased competition and fragmentation, there has been over the past five years a tendency towards consolidation. To date there are over 20 registered money transfer companies in Russia, with the three larger domestic players having a combined market share of about 80 percent, split between Golden Crown (50 percent), Contact and UNIStream (each with a market share of about 15 percent). Foreign companies are at present investing heavily in costly advertising and cutting drastically their fees in an effort to recover market share. Commercial banks also compete in this market, but generally at a disadvantage with the more agile and better-networked MTOs. Russian banks operate with a limited number of “affiliated banks” in other CIS countries, with service restricted to branches that usually offer less convenience for collecting funds 9, while providing poorer and slower service.10 MTOs have developed a wider network of local partners in the destination countries, giving them a wider geographical scope and enhancing accessibility to recipients/senders. In 2013 there was a price war and aggressive competition, following a period of relative price stability. Western Union’s price cuts were followed, with a short lag, by most of its domestic competitors. While competition has benefited users with rapidly declining costs of sending and receiving remittances, the most successful business models require scale and further consolidation and exits are likely to follow. Interestingly, survey results find that cost is not the main driver for migrants’ decisions regarding whether to use formal or informal MT channels. Although the surveys find that costs are important, the convenience of the transfer channel is the top determinant, often giving MTOs an advantage over banks. Selected transfer fees charged by MTOs based in Russia to CIS countries, both in Rubles and US$, for a sample of transaction sizes over a three year period are shown in Table 5. Interestingly, in 2011 and 2012 sizable differences (of 50 percent or more) in the fees charged by different MTOs persisted, for various sizes of transfers in both Rubles and US Dollars. For example, Western Union fees were twice as high as those of Golden Crown for transfers of RUB 5,000 or less and US$200 or less. There were also significant differences for higher value transfers. However, most of these differences were reduced or disappeared in 2013 as price competition intensified and the price leader was quickly followed downwards by the others.
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This is a serious obstacle in countries like Tajikistan where more than 80 percent of migrants are seasonal workers and the receiving households are located mainly in rural areas. 10 Banks collect utility payments and pay in cash pensions and other social benefits, resulting in overcongested branches and slow service.
10
In spite of that general trend, in 2013, Western Union was still twice as expensive as Golden Crown for low value Ruble transfers. Early in 2013 Western Union fees were up to four times more expensive for transfers of RUB 50,000. For the largest transfers the differences were significantly lower (to 25 percent more for Western Union compared with Golden Crown). For US dollar denominated transfers, the differences in fees for transfers of US$200 or less fell significantly to US$3 for Western Union and US$2 for Golden Crown, while for transfers of US$2,000 Western Union were four times more expensive than Golden Crown (US$40 versus US$10) and for the largest transfer quoted (US$5,000), paradoxically Western Union fees were lower (US$25) than those of Golden Crown (US$40). The latter might suggest an increasing degree of specialization of the MTOs by economic segment. More recently in 2013 (as shown in Table 5), the fees charged by Western Union and Golden Crown have reached parity. Fee pricing formulas have also changed as competition became more intense. Usually for small remittance values (up to US$300) MTOs charge a fixed percentage and for larger value transfers a fixed price is usually charged. Price cuts for smaller values face stiff resistance from MTO’s partner agencies/banks, but they are more willing to accept cuts for larger transfers with wider commission fee profit margins. The latter are sufficiently high that, in spite of the fall in their absolute value, they are still profitable. For some MTOs fees differ by destination country, although Western Union sets equal prices for all countries. This pricing varies according to different marketing strategies and capacity of agents in the recipient countries to resist the cuts. A couple of examples from Golden Crown: (i) Georgia: 1 percent fee for remittances up to US$2000, 0.5 percent for amounts above US$2000 and a flat maximum fee of US$40; and (ii) Tajikistan: before the price war, a fixed 1.5 percentage for all transfers, now a flat maximum fee of US$25 has also been set for large values. Transfer fees from the Russian Federation to the CIS countries have declined for all MTOs and continue to do so as price-followers lower their prices, a very welcomed development in terms of welfare gains for migrant workers, for which remittances represent a very large percentage of their income (between 30 and 50 percent) and a share as high as 60 percent of the recipient household’s income in countries like Tajkistan. In 2013 small-remittances’ fees from the Russian Federation are within the lowest in the world, compared to the least costly corridors (see the last table on remittances prices worldwide followed by the World Bank). Table 4. Russian MTOs: Selected Lowest Fees for Russia-CIS Remittances Different Sample Transaction Sizes and Currencies (June 2011-July 2013) Period MTO Russian Rubles US$ 5,000 50,000 250,000 200 2,000 5,000
June 2011
CONTACT UNIStream Western Union Golden Crown MoneyGram Lider
100 100 150 75 -100
1000 900 1000 750 -1000
3500 3250 5000 3750 -2700
4 4 6 3 3 3
40 36 40 30 32 30
99 65 100 75 80 65
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May 2012
July 2013
Migom
90
900
2400
5
40
99
CONTACT UNIStream Western Union Golden Crown MoneyGram Lider Migom
100 100 200 75 -75 90
1000 900 1250 750 -750 900
3500 3250 1500 3750 -2200 2400
4 4 6 3 3 3 5
40 36 55 30 32 30 40
99 65 60 75 80 65 99
CONTACT UNIStream Western Union Golden Crown MoneyGram Lider Migom
100 100 50 50 -75 75
1000 900 250 250 -750 750
3500 2750 1250 1250 -2200 1750
4 4 2 2 3 3 7
40 36 10 10 32 30 40
99 55 25 25 80 90 99
Source: Zolotaya Korona (Golden Crown Money Transfer) and publicly announced fees.
Figure 1. Example for databases
Example for Databases: The Case of remittances
Source: World Bank
Concluding Remarks The Russian Federation is playing a critical role in the economies of the former Soviet 12
Republics through the flow of remittances from migrant workers. Remittances - defined as recurrent, low-value, cross-border person-to-person payments - have risen rapidly over the past decade, reaching a total reported outflow of US$31.6 billion by end 2012, a ten times increase over the past decade. Almost 90 percent of these transfers are directed to the Commonwealth of Independent States’ (CIS) countries. Remittances represent a major source of external financing particularly for the smaller and poorer countries of Central Asia, in particular Tajikistan and the Kyrgyz Republic, which are exporting labor to the Russian Federation. Given the demographic trends in the Russian Federation, migrant workers are likely to continue playing an important role, particularly, in the low skill, agricultural produce distribution, services and construction sectors. It is quite remarkable to witness the rapid fall in the cost of sending remittances to neighboring countries thanks to the increasing competition and accessibility provided by the improvement in the Central Bank of Russia payment systems and the role played by the money transfer organizations, following the recommendation of the Committee on Payments and Securities Settlement (BIS) General Principles (see Box 2). Nonetheless, using commercial banks for remitting funds is complicated by the lack of confidence in the banks of the receiving countries, the requirement to open accounts, and the low educational levels of labor migrants. MTOs, on the other hand, do not provide savings and other banking services, which limits their development impact, but also gives them flexibility to enter into agreements with multiple banks and non-bank financial institutions in the receiving countries, as well as cost advantages over competitors. Box 2. Remittances: The General Principles and related roles The General Principles are aimed at the public policy objectives of achieving safe and efficient international remittance services. To this end, the markets for the services should be contestable, transparent, accessible and sound. Transparency and consumer protection General Principle 1. The market for remittance services should be transparent and have adequate consumer protection. Payment system infrastructure General Principle 2. Improvements to payment system infrastructure that have the potential to increase the efficiency of remittance services should be encouraged. Legal and regulatory environment General Principle 3. Remittance services should be supported by a sound, predictable, nondiscriminatory and proportionate legal and regulatory framework in relevant jurisdictions. Market structure and competition General Principle 4. Competitive market conditions, including appropriate access to domestic payment infrastructures, should be fostered in the remittance industry. Governance and risk management General Principle 5. Remittance services should be supported by appropriate governance and risk management practices. Roles of remittance service providers and public authorities A. Role of remittance service providers. Remittance service providers should participate actively in the implementation of the General Principles. B. Role of public authorities. Public authorities should evaluate what action to take to achieve the public policy objectives through implementation of the General Principles.
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References: B. Quillin, S. Sirtaine, et al., “Remittances in the CIS Countries: A study of selected corridors”, Europe and Central Asia Chief Economist’s Regional Working Paper Series, Finance and Private Sector Development Department, Vol. 2, No. 2, World Bank, July 2007.
BIS, CPSS, General Principles for International Remittance Services, January 2007. R. Brown et. al., “A Study on International Migrants’ Remittances in Central Asia and South CaucasusCountry Report on Remittances of International Migrants in Tajikistan”, Asian Development Bank, 2008.
Central Bank of Russia (CBR), Reports, several issues. D. Yang, “Migrant Remittances”, Journal of Economic Perspectives—Volume 25, Number 3— Summer 2011—Pages 129–152. Russian Federation, Federal Migration Service (FMS), 2013. Financial Times, “Russian nationalism grows amid tension”, November 5, 2013. IMF, Republic of Tajikistan: Article IV Consultation, Fourth Review under the Three-Year Arrangement under the Extended Credit Facility, Staff Report, June, 2011. IMF, Kyrgyz Republic: 2011 Article IV Consultation and Request for a Three-Year Arrangement Under the Extended Credit Facility- Staff Report, June, 2011. Ratha, D., and S. Mohapatra, “Migrant Remittances and Development”, in The Evidence and Impact of Financial Globalization, Chapter 8, 2013, Pages 121–130. World Bank, Annual Remittances Data, Development Prospects Group, 2013. Zolotaya Korona (Golden Crown), Proprietary Money Transfers - System Operational Data, 2013.
F. Montes-Negret, former Director of the Finance and Private Sector Department of the Europe and Central Asia Region of the World Bank and former Sr. Financial Sector Expert of the Monetary and Capital Markets Department of the IMF. The author wants to thank Nicolas Montes, Tatiana Segal and Aida Japarova for their assistance, as well as the help from Money Transfer- Golden Crown, for sharing a rich database and detailed knowledge of the Russian remittances market.
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