Running From Risks
Perceptions of Political Risk Remains High in Russia Despite the Kremlin's Promises of
Political Stability after the Presidential Elections
file photo
Various private businesses and individuals pulled their money out of Russia last month, in the latest sign that unease about the country's political outlook may have been stoking further capital outflow. Net capital outflow from Russia reached about $17 billion in January, the highest since 2009, Russia's Deputy Economic Development Minister Andrei Klepach said on Monday. The latest acceleration in capital outflow, experts say, appeared to have been triggered by Russian companies' reluctance to repatriate profits earned from exports as they seek to protect themselves from political risk ahead of the March 4 presidential elections.
According to the latest estimates by the Economic Development Ministry, about $17 billion was taken out of the Russian economy last month. The ministry said it based its estimates "on the correlation of changes in foreign reserves and the country's current account balance. If the Economic Ministry's estimates hold firm, last month's capital flight will be the country's largest since January 2009, when $24.3 billion left Russia amid the global economic and financial turmoil. Last year, net capital outflows totaled $84 billion, accelerating toward the end of the year due to the euro zone credit crunch and investor concerns over street protests against alleged ballot fraud in the December 4 parliamentary elections.
But with presidential elections drawing nearer and polls indicating that Prime Minister Vladimir Putin is all but certain to win the presidency, officials have expected the political certainty to lower the perception of political risk that investors face in Russia. Alexei Ulyukayev, a first deputy chairman of the Central Bank, told reporters last month that Russia may have zero net capital outflows this year, despite various analysts suggesting that political risk would remain part of Russia's business narrative for a long time to come.
"Political instability is likely to continue after the March presidential election and growth will slow in the second half of the year," Standard and Poor's said in a report released earlier this month. In contrast to the Central Bank, which said capital inflows could begin this month, S&P said they saw no reason for outflows to abate. "It is difficult in our opinion to see what would slow down capital outflows in 2012," said the report, which was written by the credit agency's chief economist Jean-Michel Six.
A poor investment climate and strong external funding pressure resulting from the euro zone crisis are not sufficient grounds for last month's acceleration in private sector capital outflows, Gazeta.ru wrote on Tuesday. With the Kremlin failing to lure businesses with promises of political stability after next Sunday's presidential elections, investors weary about the country's future have been carting money away, the paper said.
In addition to the poor business climate and the upcoming presidential elections, the massive capital outflows result from volatility in the global financial markets, which to a large extent remain closed to many Russian companies, said HSBC Russia's Chief Economist Alexander Morozov. "With the ruble strengthening, exporters may also be thinking of holding on to their foreign exchange earnings in anticipation of a more attractive rate," Morozov said.
Yet, despite widespread justification for massive capital flight, many economists, including Morozov, have taken issue with the latest estimates by Economic Development Ministry, saying: "it was an overestimation." HSBC's own estimates pegged capital outflows in January at around $11 billion or $12 billion. "That's still huge," Morozov said. "But perhaps it more accurately reflects the situation on the ground."
The main problem with the Economic Ministry's estimates is that Russia's foreign reserves appear to have been growing without the Central Bank intervening to prevent the ruble from appreciating strongly, said Anton Struchenevsky, an economist at Troika Dialog. Russia's foreign reserves  which the ministry said it used for its estimates  grew by $ 6.742 billion to $505.391 billion last month, according to the Central Bank. "It's either that the reported increase in reserves never happened or the Economic Development Ministry's figures don't add up," Struchenevsky said. Vladimir Tikhomirov, the chief economist at Otkritie, echoed the sentiment: "The reported magnitude of the capital outflow is puzzling," Tikhomirov said. "Whichever way you look at it, $17 billion is a huge sum, especially since it was not spent on debt repayment."
Whatever the real figures are, Klepach said the Ministry of Economic Development hopes to see a change in the trend this month with a resumption of foreign capital inflows. "It's hard for me to predict what will happen in February or March, but we believe the situation will tilt toward capital inflows," Klepach said. In contrast, economists said there won't be a let up in domestic-driven outflows until May, when a new government will be formed and policy direction clarified. "Capital outflows will continue in the first quarter against the backdrop of the presidential elections," said UralSib Chief Economist Alexei Devyatov. HSBC economist Morozov agreed: "Political risk in Russia is likely to make investors delay many of their projects until the end of the election and the formation of a new government."
