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Investors on the Run: Russia's Central Bank Figures Show That Russian and Foreign Investors Are Pulling Their Money Out of the Russian Economy

Cash, Coins, Jagged Line GraphAs the revolutionary spirit swept through some oil-producing countries in the Middle East, the price of crude oil has continued its upward trend. Russia's Ministry of Economic Development was quick to revise macroeconomic forecasts for 2011 on Wednesday, underscoring an eagerness to use windfall oil revenues to plug gaps in the budget and improve the country's investment climate. However, figures released by the Central Bank on Tuesday show that money continues to flee the Russian economy, raising fresh concerns about the country's poor investment climate.

Russia's net capital outflow reached $21.3 billion in the first quarter of 2011, a small change from the $21.5 billion in the fourth quarter of last year, Central Bank First Deputy Chairman Alexei Ulyukayev said on Tuesday. Russia's current account surplus fell 4.5 percent year-on-year to $31.8 billion in January to March 2011, while the trade surplus increased 3.7 percent to $48.2 billion, Central Bank figures released on Tuesday show. The capital and financial account deficit amounted to $15.9 billion in the first quarter of 2011, compared to $11.1 billion in 2010. Russia's net outflow of capital reached $38.3 billion in 2010, more than the official $22 billion forecast, Bloomberg reported. That compared with $56.9 billion a year earlier, Central Bank's data published on January 13 showed. The country last had a net inflow in 2007, when it reached $81.7 billion.

Russia's Economic Development Ministry had expected a capital inflow in March, after a net capital outflow of $17 billion in January and February, Deputy Economic Development Minister Andrei Klepach told reporters on Friday. The capital inflow in Russia is stimulated by increasing oil prices, and consequently by the growth of optimism with respect to Russian securities, Klepach said. "Moreover, we are a reliable supplier. In that sense of thinking, our upside is increasing against the backdrop of what is happening in Arab countries. Meanwhile, the prospective economic developments of our country are not bad at all," Klepach said. Russia had a net capital outflow of $11 billion in January, and a preliminary outflow of $6 billion in February, according to Central Bank of Russia's (CBR) estimates.

Policymakers have offered contradictory assessments of when and how Russia could achieve positive capital inflow. Central Bank Chairman Sergei Ignatyev said capital inflow might resume in the remaining nine months of this year. "I'm hoping the inflow will resume, but this doesn't look very likely, and it'll either be positive or close to zero in the months that remain," Ignatyev told reporters Tuesday. He added that he was not sure whether the inflow would resume. "You can't have such strong capital outflow for so long," he said, adding that significant outflow had persisted for about half a year at least.

However, Finance Minister Alexei Kudrin painted a different picture. The high oil price is likely to trigger a net capital inflow by the year-end, Kudrin said on Wednesday, without providing an concrete figure for the anticipated inflow. He warned, however, that speculative capital is heading for Russia. "We may, shall we say, see an influx at the end of the year, but not of the quality we require," Kudrin said. "It will be an inflow of speculative capital spurred by high oil prices and the strengthened ruble."

Kudrin has also predicted that high oil prices would offset the political uncertainty before national elections that fueled an outflow since last year. "Higher risks remain ahead of elections in a country like ours, in which so much depends on leadership," Kudrin told reporters last week. "Many investors decided to hedge their risks." The disappearance of "revolutionary expectations" means that they will no longer be a factor because "high oil prices will create the opposite movement," Kudrin said. The impact of Russia's political climate on investors' mood has been a recurrent theme going into next year's presidential elections. Arkady Dvorkovich, President Dmitry Medvedev's top economic adviser, said in a January 19 interview with Gazeta.ru that uncertainty about the outcome of the presidential election in 2012 could be contributing to capital outflows. Corruption and the "non-improving situation in specific regions" play a greater role in driving outflows, according to Dvorkovich.

Lack of fixed asset investment, caused by the outflows, has been a major drag on the nation's economic growth, Klepach said on Tuesday. The growth rate for fixed assets investment declined from the initial forecast of nine percent to six percent, as the country's still-poor investment climate held back investment activity in January and February, Klepach said. He said the Economic Ministry expects recovery in investment activity in the near future. Deutsche Bank chief economist Yaroslav Lissovolik said the huge capital outflow, which stands at $21.3 billion in the first quarter, played a role in reducing investment. "An accelerated growth of investment in fixed assets will occur in 2012 to 2013, when the situation in the construction sector will improve and a number of large-scale infrastructure projects will be implemented," Lissovolik said.

Other analysts offered a mixed bag of economic and political reasons to explain the behavior of investors. Some economists, including Vladimir Tikhomirov, the chief economist at Otkritie Bank, have argued that the investment climate remains bleak because Russia's economic recovery is "on a weak footing," with the nation's real estate sector still depressed. Tikhomirov said investments took off to a slow start after the crisis as evidenced by the dynamics of lending to the real sector. "Businesses are not confident yet of a stable pace of economic recovery and therefore are reluctant to invest in expanding production," Tikhomirov said. "Banks are equally reluctant to increase their risk portfolios."

Other experts tend to link the recent capital flight from Russia to President Dmitry Medvedev's anti-corruption campaign. Outflows from Russia intensified after the September 28 firing of Yury Luzhkov, Moscow's mayor for 18 years, according to Alexei Moiseyev, chief economist at VTB Capital. Officials who were concerned that his ouster might prompt more dismissals or a crackdown on corruption sent their money out of Russia, Moiseyev told Bloomberg in an interview. Vladimir Mau, the rector of the Russian Academy of National Economy, who also advises the government's anti-crisis commission, said that more than just money is leaving Russia en masse. "Not just money, but top managers themselves are fleeing with their children, who are sent to study abroad," Mau said. "Faith in the future of the Russian economy has been reduced to zero, and this is exemplified in the behavior of the rich."

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