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#8 - JRL 7234
Rossiiskaya Gazeta
No. 117
June 18, 2003
[translation from RIA Novosti for personal use only]

Capital was flowing out of Russia in December and January. But now it is coming back, and the reason for this is not easy to understand. In January the remainder on correspondent accounts of commercial banks in the Central Bank of Russia dropped down to an extremely low level of 55 billion rubles, but now a sum of under or even over 200 billion is in the bank system.

The growth of the euro that started late in the fall of last year made the Russian owners of dollar assets somehow respond to the emergence of a new promising asset which was going up in value. People began to exchange into euros all their free savings, even those in rubles. Precisely this caused the winter outflow of capital. In mid-February the process was stabilized, and in April the pressure on the ruble, which had been nominally growing stronger in relation to the dollar, was building up. As a result, the outflow of capital was succeeded by the far greater inflow.

What is the reason behind all this? One of the reasons is obvious enough. It is political stability, the absence of uncertainty before the parliamentary and presidential elections and a reasonable economic policy. Reasonable primarily because there are no upheavals, no extraordinary decisions and no unexpected backdated taxation. Both the political and economic policies of the president and the government are predictable and evolutionary, which is quite attractive for business.

But there must also be economic reasons behind the capital's comeback. The speculative reason may be cast aside right away. There has been no overheating either on the stock market or on the market of state liabilities. And there are practically no real speculative instruments in the country.

Perhaps our capitalists begin to feel uncomfortable on the world markets? The drop in refunding rates in the U.S. and Europe is followed by a decline in the profitableness of financial instruments expressed in dollars or euro. The reason, on the whole, is understandable, but it does not explain everything.

As we all know, security and reliability are far more important for the capital of tens of billions of dollars than extra 2 or 3 percent of annual interest with unpredictable risks. But if the money flows to Russia, it means, in the opinion of their owners, that the risks have become predictable. In these conditions, profitableness of 12 to 14 percent a year in rubles, considering that the ruble is growing stronger, is becoming quite attractive.

Won't this money run back abroad? How will the possible decline in oil prices affect Russia's trade balance?

Let's begin from the end. Even if we forget about all oil and gas profit in our balance of foreign trade, the balance will still be positive. And not just positive, but big enough for paying back our foreign debts (14 to 17 billion dollars annually). And this means that we'll have a zero balance of payment, that is, foreign expenditures, including imports, do not call for borrowing money abroad. It is an absolutely normal situation for the economy of a country that has found its place in the international division of labor.

But this scenario will not come true, and there is no need to get rid of the "oil money," because oil prices are not going to fall drastically. Let the idle reasoning about a cost price of a barrel of oil in Iraq being five dollars be on the conscience of those who do the reasoning. As the practice of recent months has shown, oil prices remain high, despite the summer season and the completion of the Iraqi events.

When in 1997-1998 oil prices dropped down to 17-12 (and sometimes even 8) dollars per barrel, the first to play for the price increase were U.S. and British companies. For them the lowest price level already at that time was 18 dollar per barrel, which is the prime cost of oil production in the Gulf of Mexico, the North Sea and South China Sea and on the shelf of Brunei. Today it is 20 or 21 dollars and it will not be allowed to go further down. Meanwhile, in the opinion of the chief of a big Russian oil company, his company will keep on gaining profit even if the price is 12 to 14 dollars.

So, oil and gas profits will not run low in the coming future. One shouldn't worry about that. But not always there should be macroeconomic causes for the outflow of capital. Sometimes subjective causes are quite enough.

When a presidential adviser repeatedly states that Russia needs no excessive capital, that our economy cannot adapt it and that capital inflow sends inflation soaring, because the Central Bank is printing rubles to purchase dollars, then he is formally right. But in this case two common truths remain - there is no such thing as excessive money and capital always tend to flow where conditions are better. It would be much more logical to think how we should use this capital and how we are to make it work for the benefit of the Russian economy.

The arriving capital will not flee Russia for political reasons, and no one is going to take it away, to nationalize it, or "de-privatize" it. Nor will it flee for macroeconomic reasons. But if it becomes uncomfortable for the money, if it is not adapted to the situation, if no suitable investment projects appear for it, and if the rates in the U.S. and EU begin to climb, the money will run away. It will do this the way it did in 1997 and 1998. And here lies a great amount of work for the government and the presidential adviser.

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