Flight to Safety
Russians and Foreigners Continue to Shelter Funds from the Watchful Eye of the Kremlin
Tai Adelaja - Russia Profile - russiaprofile.org - 4.5.12 - JRL 2012-64

Firms and private investors continued to pull their money out of Russia in an ominous sign that many are still scared off by possible threats to their investments ahead of a power change in the Kremlin. The private sector alone accounted for more than thirty billion dollars in net capital outflow during the first quarter, according to revised figures published by the Central Bank on Tuesday. The latest upsurge in capital flight becomes all the more puzzling as it coincides with official reports which showed that Russia's economy is steadily growing stronger.
file photoThe private sector took out approximately $35.1 billion from Russia in the first three months of this year, revised figures from the Central Bank show. That compares unfavorably with the same period last year, when about $19.8 billion was taken out of the country. The regulator has also revised its capital outflow figures for 2011 from $84.2 billion down to $80.5 billion, as well as figures from 2010 from $34.4 billion to $33.6 billion. However, the regulator remains upbeat about a possible slowdown in capital flight this year on the strength of positive economic dynamics. Central Bank First Deputy Chairman Alexei Ulyukayev reiterated Tuesday that the regulator expects capital outflow to be zero at some point this year adding that capital inflows could resume as early as May or June.

"Still, it is clear that capital flight is still taking place and extends the total of $310 billion withdrawn from the country between 2008 and 2011," said Chris Weafer, chief strategist at Moscow-based Troika Dialog. "The view is that the volume of capital flight is more likely to drift lower again in second quarter of 2012, and close to neutral, as the new government adopts a much more proactive program of reforms and real changes ­ such as WTO entry ­ are promoted as evidence of real improvement in the business case."

Earlier, Central Bank Deputy Chairman Sergei Shvetsov assured potential Eurobond investors that the bank expects capital inflows to begin after a new government is formed, Interfax reported. The regulator sees Russia ending 2012 with a net private capital inflow despite outflows estimated at $13.5 billion in January and $9 billion in February. This optimism is shared by UralSib Chief Economist Alexei Devyatov, who predicted in February that there won't be a let up in domestic-driven outflows until May, when a new government will be formed and Russia's policy direction is clarified. "Capital outflows will continue in the first quarter against the backdrop of the presidential elections," Devyatov said.

The Central Bank has said that the revised figures for the first quarter would not necessitate a revision in its forecast for 2012 capital outflow, which currently stands at a modest $10 billion. This contrasts sharply with the Finance Ministry's forecast of $40 billion and even with the Economic Development Ministry's forecast of $20 billion in outflow for 2012.

During and after the March 4 presidential elections, many economists cited political risks as the main trigger for capital flight. However, othe