RS Brief news Capital intensifying flight abroad

Capital intensifying flight abroad

March 2012

The capital is fleeing Russia. This is the conclusion made on the basis of the financial statistical data of the Bank of Russia. In 2011 the capital outflows from the country had reached a total of 84.5 billion dollars or about 5% GDP. This is double the total of the previous year 2010 when the exodus of capital from the country had reached 33.6 billion dollars. That is to say, however, that the record of the crisis year 2008 when investors had taken approximately 133.7 billion dollars abroad remains unbeaten.

The reasons for the capital outflow from Russia are hardly a secret to anyone: the second wave of crisis is cumulating momentum. European banks desperately need money to patch up their financial holes, and they are selling their assets in Russia. What’s more, the Russian business is actively taking money onto offshore accounts, while individuals are actively buying currency and real estate abroad, which is also reflected by the Central Bank’s statistic.

Where is the money going?

The principal channels for outflow of companies’ funds are direct and portfolio investments abroad: this is how 70 billion dollars were taken out of Russia over the last year.

“The intensifying capital outflow may be due to the active acquisition by Russian companies of assets abroad, as this is also written down as an outflow of capital”, this is the analysis of the Bank of Russia reports provided by Vladimir Bragin, Director for Market Analysis and Microeconomics at the Alfa Capital Management Company.

VTB Capital analysts claim, however, that only 25% of the sharp growth of such investments observed in 2011 is accounted for by real foreign companies merger and takeover transactions. The rest of the funds were spent on offshore transactions. Among offshore zones Russian companies traditionally opt for Cyprus, the Netherlands and the British Virgin islands, claims the bank’s report. In 2011 the number of transactions between Russian companies and firms in these countries had grown manifold as compared to 2010. The bulk of the capital lost will, however, later return to Russia, VTB Capital analysts say.

© RIA Novosti, Aleksandr Natruskin
Sergey Storchak
Deputy Minister of Finance Sergey Storchak
“Half of that 70 billion dollar amount are interest payments under the accumulated debt. This is not really flight of capital, is it? We cannot, after all, say this about our companies fulfilling their obligations before creditors.”

“The banks also contributed to the capital outflow: they either redeemed loans, or were themselves lending to someone abroad,” Bragin added.

According to the Russian research organisation “Centre for macro-economic analysis and short-term planning”, the bulk of the capital outflow from the banks was on account of lending to foreign legal entities. The banks also increased their lending to Russian companies via off-shores (formally such loans are reflected in accountability as outflow and registered as an increase of the banks’ foreign assets). Non-resident banks have also significantly increased the credit and deposit volumes contributing to the negative statistic.

How much has come in?

The influx of direct foreign investment was, according to the Bank of Russia data, 48.5 billion US dollars. This influx has shown its considerable impact on the Russian economy. “2011 saw a boost in the production of motorcars, lorries, household appliances,” Anton Struchenevsky, senior economist with Troika Dialog investment company, says. – “This is the result of foreign manufacturers’ coming to the Russian market, constructing and manufacturing goods here.”

What do investors really fear?

© RIA Novosti, Aleksandr Natruskin
Arkady Dvorkovich
Assistant to the President of the Russian Federation Arkady Dvorkovich
“Investments into the Russian economy are expected to grow by more than 5% this year. But this can only happen once the presidential elections are behind, since there is nothing that investor value above predictability and stability.”

Assistant to the President of the Russian Federation Arkady Dvorkovich claims that the main reasons underlying the capital outflow are corruption and the poor investment climate. “Political instability does have its impact on capital movement but is never the key factor in this respect,” he remarked.

Anton Struchenevsky believes that the key factor behind the capital flight is not even so much any apprehension about Russia as such, but rather of a general atmosphere of certain nervousness, as the global economic prospects seem to be rather unclear. The scary stories of 2011 have contributed to the outflow of capital from Russia, Struchenevsky says. Investors were afraid of decline in oil prices, and that is why they refrained from investing, opting to stick to foreign currency to avoid possible ruble devaluation, should the oil prices drop from 100 to 70 US dollars per barrel, as many forecasts claim”, he says.

The US credit rating downgrade by rating agencies in August 2011 caused panic among investors. Money flowed out of Russia into euro, since it was deemed that if things look rotten for the US, the developing markets will be in far direr straits,” this is Struchenevsky’s explanation. The deterioration on the situation in Greece has compelled businessmen to revert to the dollar, but not to the developing markets.

The political risks of 2011 have had little impact on the investor behaviour (the protests, as we all know, only began in December 2011). “The political factor is not paramount now that the situation in the developed markets, particularly in Europe, is far more important”, Struchenevsky says.

Spare money?

Experts, however, claim that Russia in reality benefits from the capital outflow. “The point of the matter is that the ruble is fairly strong at the moment, and failing an outflow of capital, foreign currency will consolidate in Russia. This will, in turn, result in strengthening of the ruble, inflationary pressure will grow,” Vladimir Bragin explains. “The outflow of capital turns out to be a kind of steam-dump valve, releasing excessive currency liquidity out of the country”, the expert says. The capital outflow in 2011 has allowed the ruble to maintain its rate against US dollar and euro as of the end of last year.

A moderately weak ruble is a blessing in disguise for Russia’s economy, says Bragin. It boosts the competitiveness of commodities manufactured in Russia. Moreover, some taxes, including royalties and taxes are calculated in dollars, and a weak ruble will thus facilitate the filling of the budget.

“Admittedly, the capital outflow was the reason why the autumn of 2011 was marred by trouble with liquidity, but in those cases where the outflow was due to long-term lending the money will return: this “loss” is quite recoverable,” Bragin adds. “Moreover, foreign assets will bring a certain interest which will return to Russia.”

2012 forecast

Russian officials are optimistic about Russia’s investment prospects in the current year. Sergey Storchak, for example, forecasts an influx of investments in the current year, unless Russia follows Europe’s lead in term of recession.

The Bank of Russia forecasts that in 2012 the flight of capital from the country will total 10.5 billion US dollars. Anton Struchevsky also believes that 2012 has premises of the capital outflow slowdown. Troika Dialog investment company forecasts that the capital outflow in 2012 will total 70 billion US dollars. But the outflow may be more moderate, Struchevsky says. It is again not so much about Russia itself, whose macroeconomic indicators raise no concern of the experts, the point lies in the investors’ fear. “They are afraid and prefer to stick with the dollar,” Struchevsky explains. “Or else they flee to developed markets, to Europe, for example, where the interest rates are more attractive.”

Ksenia Yudayeva, Senior Economist with Sberbank, believes that in the event of exacerbation of the recession in the global markets the outflow of capital from Russia will intensify. Money will outflow in anticipation of devaluation of the ruble. The flight of investors will, however, be deterred by rather high interest rates.

Maria Selivanova,
Economic Columnist, RIA Novosti
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