A model of Russia’s Central Bank building in Moscow’s Central Bank Museum. Source: RIA-Novosti
The Nov. 1 announcement by Russia’s Central Bank that capital flight will double to $70 billion this year is a stark reality check for the Kremlin, which has been making frantic efforts in recent months to improve the country’s investment climate. The regulator said it arrived at the new figures after it firmed up a new draft of the country’s monetary lending policy for 2012 through 2014. The original draft, which was prepared in early October, predicted an increase in capital outflow of just $36 billion.
The revised estimates indicate a change in foreign investor sentiment “in favor of buying less vulnerable foreign assets” amid increased volatility in global financial markets, the Central Bank document said. However, the statement added that Russians are not investing money in their country either, scared off like their foreign colleagues by the country’s “unfavorable investment climate.”
Between January and September, Russia’s
net private capital outflow hit an estimated $49.3 billion, according to
Central Bank Chairman Sergei Ignatyev. Capital flight surged in the third
quarter, especially in September, when $13 billion — or 70 percent — of the
third-quarter outflow left the country. The 2011 total has now exceeded that of
2010, when $35.3 billion left the country, but still less than the $133.7
billion that left at the height of the financial crisis in 2008.
Researchers from the Higher School of Economics’ Center for Development warned
in a report released last week that capital flight cannot be reversed without
fundamental changes in the Russian economy. “Capital is fleeing Russia not
because things are better elsewhere, but because things are bad here and are
probably going to get worse,” according to the researchers. “Things that need
to be done are not new: fostering competition, establishing the rule of law,
fighting corruption and state racket,” the report said.
Despite the resolution of the Kremlin’s succession problem in September,
various experts claim that political uncertainty continues to plague Russia’s
investment environment. The sudden dismissal of former Finance Minister Alexei
Kudrin, whom many investors associate with fiscal prudence, has not helped
matters either. Emerging Portfolio Fund Research said some $443 million had
been pulled out of funds that were invested in Russia a week after Kudrin’s
resignation, compared to just $164 million that left the week before his exit.
“One should not underestimate the political situation in the country, as well
as the expectations of a fairly negative election campaign,” said Anton
Safonov, an analyst at the Investkafe agency. Safonov, who correctly predicted
back in October that capital outflow could reach $70 billion this year, said
“the political situation is almost always associated with large capital
Kudrin has attributed capital flight to “the high oil price and the
impossibility of investing this revenue on the domestic market.” In a speech at
a financial conference last month, he told business people that capital
outflows from Russia
could continue if the budget isn’t brought under control. He said Russia’s
dependence on ever-higher oil prices to balance the budget was primarily due to
the country’s military spending, his main point of contention with the Kremlin.
Since all speculative movements in the Russian market are correlated with the
commodities market, the widely expected dip in global oil prices will adversely
affect the Russian economy and trigger even more capital outflows according to
Yevgeny Pischulin, a trader at the Region Broker Company. Pischulin said that Russia is particularly vulnerable to the ongoing
global financial turmoil as investors try to avoid emerging markets in favor of
safe havens in Europe and the United
States. “European banks with assets abroad,
including in Russia, are
repatriating capital for reinvestment in their home countries as well as in
treasury bonds of sturdy countries like the United
States or Germany,”
Pischulin said. “The speculative demand for foreign currencies by public and
private companies is only aggravating the tendency and spurring even bigger
The Central Bank, meanwhile, has also lowered its outlook for the country’s international reserves, slashing it to $495 billion from the $515 billion projected earlier. Russia’s reserves, the world’s third largest, stood at $469.4 billion last year, but rose to $493.6 as of Oct. 1, on the back of higher energy prices. Despite the fact that oil prices remain at a consistently high level, the regulator predicted that foreign reserves will stagnate.
Russian Capital Outflow. Source: Niyaz Karimov
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