ii. Behavior of Equations in Dynamic Simulation Simultaneous equation modeling shows that total illicit flows both drive and are driven by the size of the underground economy. We select the specification presented in Table 9 as our model inputs for total illicit financial flows and the underground economy. These regressions yield a high adjusted R-squared, a Durbin-Watson statistic that rejects the presence of serial correlation both of which are subject to the maximum degrees of freedom. Results of the dynamic simulation are presented in Chart 2 and simulation estimates are presented in Appendix Table 8. Unlike licit capital, illicit flows both in and out of Russia are harmful to the economy. Under the 15
circumstances, the question of netting out illicit flows to arrive at a net position does not arise. It is clear that the harmful effect of illicit flows on an economy can best be measured by the sum of 14 inflows plus outflows.
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Perhaps the most interesting aspect of our simulation results is the finding that oil prices affect 12
total illicit flows through the Russian underground economy. Box 2 explores this link a bit further, and finds that oil prices have a small, significant, direct influence on financial outflows from Russia, 11 whether licit or illicit. They do so because increasing oil prices affect oil exports, which drive the
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Chart 8. Results of Dynamic Simulation: 1994-2011
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Russia: Illicit Financial Flows and the Role of the Underground Economy 14
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