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Financial Times (UK)
June 23, 2003
Russia enjoys record level of inward investment
By Arkady Ostrovsky and Andrew Jack in Moscow

There will be more investment into Russia than capital flight this quarter - for the first time in post-Soviet history.

The Central Bank of Russia expects a net inflow of private capital of $2bn (€1.72bn) in the second quarter of this year after a net outflow of $1.2bn in the first quarter and despite a long history of capital flight.

Alexei Kudrin,  (pictured)Russia's finance minister, hailed the trend as a sign of growing confidence in the Russian economy.

"Russia's risks have fallen to historically low levels and dollars are flowing into the country at an unprecedented rate," he said in an interview with the Financial Times on the eve of a state visit to the UK.

The flight of capital has been a drain on the Russian economy since the early 1990s, prompted by political turmoil, high inflation and a lack of confidence in the economy.

In 1996, when Boris Yeltsin was re-elected as Russian president, capital flight from the country had reached $30bn.

The return of capital is welcome news for president Vladimir Putin who is expected to be re-elected as Russian president next year.

However, Mr Kudrin warned that rising energy costs and the strength of the rouble would put pressure on Russian producers. "Russian industry has not yet gone through a process of modernisation and restructuring that would make it competitive in the international markets.

"There are two reasons for this: half of the Russian economy is still in the hands of the government and needs to be privatised. The other reason is the low level of corporate governance in many Russian companies."

He said Russia's weak financial infrastructure also caused concern. "I see a lot of room for bold economic reforms over the next 2-3 years."

Mr Kudrin played down the dependency of the Russian economy on the current favourable oil prices, saying two thirds of growth were was the results of rising consumer spending and domestic investment.

He said one of the main tasks in the next few years will be the integration of the Russian economy into international economic organisations, including the World Trade Organisation and Organisation for Economic Cooperation and Development. Last week Russia entered joined the Financial Action Task Force, the group of advanced countries that has led the fight against money laundering.

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