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Banknote Exodus
Promises of Stability Will Mean Little for Russia's High Capital Outflow
Andrew Roth - Russia Profile Experts Panel - russiaprofile.org - 3.15.12 - JRL 2012-50

Following a charged elections season, the Russian economy has become a scale to evaluate how investors are reacting to Prime Minister Vladimir Putin's return to the presidency in May. One of the factors ­ capital flight ­ has remained at levels close to the 2008 financial crisis, posting numbers close to $10 billion per month. Analysts believe that the recent trends show that political turmoil or the relative stability expected under Vladimir Putin's return to the presidency would actually have little effect on what is essentially a "systemic" lack of investment opportunities in Russia. Russia's Central Bank announced Wednesday that more than $9 billion in capital had fled Russia in February, and close to $13.5 billion left Russia in January, a considerable increase from a previous estimate of $11.5 billion. The numbers are some of Russia's highest since the financial crisis of 2008, and if capital outflows of close to $10 billion per month hold, Russia could surpass last year's total of $84.2 billion in capital flight.

Moreover, the money leaving Russia is not being pulled by foreign investors retrieving their capital, which makes the trend "particularly worrisome," said Trust National Bank Chief Economist Yevgeny Nadorshin. "The biggest problem is that these are not foreigners who are taking their money out of Russia. These are residents who are taking money they earned here and moving it abroad. That makes the situation particularly uncomfortable," he added.

Just how much of the capital flight is a response to Russia's business climate and how much of it is a response to recent political events remains a question. In December, shortly after parliamentary elections marred by accusations of massive vote fraud in favor of the ruling party, United Russia, Fitch Ratings announced that Russia's "poor business climate and political uncertainty" had pushed capital outflow higher than government estimates for the year. Political events, like the December elections and the euro zone crisis, further fueled capital outflow due to "heightened global risk aversion."

With Vladimir Putin's victory in an uninspiring presidential election and dwindling enthusiasm for political protests, the trend should theoretically be reversing itself. The New York Times reported that growing stock prices on the Russian market the week before the elections reflected increased investor confidence due to Putin's anticipated return. "We had a bit of overshooting in the perception of political risk in December," said Deustsche Bank's Chief Economist in Moscow Yaroslav Lissovolik, the paper reported. "We've seen a change in the perception of this movement in the short to medium term."

Yet Nadorshin argued that politics played an important but limited part in determining levels of capital flight. "In my opinion, capital outflow doesn't depend that much on the man in power," he said. Rhetoric about economic stability under a Putin administration would not have a strong effect on capital outflows, he continued. "Stability is probably not the most important word for the economy right now," he said. "Stability is needed not in the general economic situation, but in terms of economic infrastructure. For proper economic development, you need the economic structure to be stable, institutions to be stable, and not the case like now, where the government proposes different taxes every year."

"My sense is that this capital outflow is a structural trend, so it has increased with political unrest and the European banking crisis over the last year, but it still remains close to ten billion dollars. I think this is reflecting the overall lack of investment opportunities in Russia," said Natalia Orlova, the chief economist at Alfa Bank.

Russian capital flight eclipses that of other BRIC countries. In 2011, China didn't see any net capital outflows until the fourth quarter, and ultimately experienced $186.7 billion in capital inflows for the year. Meanwhile, India's capital outflow was measured in the millions, and not billions, of dollars in 2011.

Uncertainty remains a key issue for both foreign and domestic investors in Russia, said Nadorshin. Competition with international businesses and an uncertain regulation climate significantly sour the Russian investment climate. Meanwhile, the fact that households are increasing their investments in foreign real estate is also an "alarming" indicator that many Russians may be moving their financial assets and themselves abroad permanently, he added.

Keywords: Russia, Government, Politics - Russian News - Russia

 

Following a charged elections season, the Russian economy has become a scale to evaluate how investors are reacting to Prime Minister Vladimir Putin's return to the presidency in May. One of the factors ­ capital flight ­ has remained at levels close to the 2008 financial crisis, posting numbers close to $10 billion per month. Analysts believe that the recent trends show that political turmoil or the relative stability expected under Vladimir Putin's return to the presidency would actually have little effect on what is essentially a "systemic" lack of investment opportunities in Russia.

Russia's Central Bank announced Wednesday that more than $9 billion in capital had fled Russia in February, and close to $13.5 billion left Russia in January, a considerable increase from a previous estimate of $11.5 billion. The numbers are some of Russia's highest since the financial crisis of 2008, and if capital outflows of close to $10 billion per month hold, Russia could surpass last year's total of $84.2 billion in capital flight.

Moreover, the money leaving Russia is not being pulled by foreign investors retrieving their capital, which makes the trend "particularly worrisome," said Trust National Bank Chief Economist Yevgeny Nadorshin. "The biggest problem is that these are not foreigners who are taking their money out of Russia. These are residents who are taking money they earned here and moving it abroad. That makes the situation particularly uncomfortable," he added.

Just how much of the capital flight is a response to Russia's business climate and how much of it is a response to recent political events remains a question. In December, shortly after parliamentary elections marred by accusations of massive vote fraud in favor of the ruling party, United Russia, Fitch Ratings announced that Russia's "poor business climate and political uncertainty" had pushed capital outflow higher than government estimates for the year. Political events, like the December elections and the euro zone crisis, further fueled capital outflow due to "heightened global risk aversion."

With Vladimir Putin's victory in an uninspiring presidential election and dwindling enthusiasm for political protests, the trend should theoretically be reversing itself. The New York Times reported that growing stock prices on the Russian market the week before the elections reflected increased investor confidence due to Putin's anticipated return. "We had a bit of overshooting in the perception of political risk in December," said Deustsche Bank's Chief Economist in Moscow Yaroslav Lissovolik, the paper reported. "We've seen a change in the perception of this movement in the short to medium term."

Yet Nadorshin argued that politics played an important but limited part in determining levels of capital flight. "In my opinion, capital outflow doesn't depend that much on the man in power," he said. Rhetoric about economic stability under a Putin administration would not have a strong effect on capital outflows, he continued. "Stability is probably not the most important word for the economy right now," he said. "Stability is needed not in the general economic situation, but in terms of economic infrastructure. For proper economic development, you need the economic structure to be stable, institutions to be stable, and not the case like now, where the government proposes different taxes every year."

"My sense is that this capital outflow is a structural trend, so it has increased with political unrest and the European banking crisis over the last year, but it still remains close to ten billion dollars. I think this is reflecting the overall lack of investment opportunities in Russia," said Natalia Orlova, the chief economist at Alfa Bank.

Russian capital flight eclipses that of other BRIC countries. In 2011, China didn't see any net capital outflows until the fourth quarter, and ultimately experienced $186.7 billion in capital inflows for the year. Meanwhile, India's capital outflow was measured in the millions, and not billions, of dollars in 2011.

Uncertainty remains a key issue for both foreign and domestic investors in Russia, said Nadorshin. Competition with international businesses and an uncertain regulation climate significantly sour the Russian investment climate. Meanwhile, the fact that households are increasing their investments in foreign real estate is also an "alarming" indicator that many Russians may be moving their financial assets and themselves abroad permanently, he added.