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Capital flowing into Russia at last


In the context of worsening economic recession in Europe, investors are showing a growing interest in the Russian market. According to Deputy Minister of Economic Development and Trade Andrei Klepach, the 2012 capital outflow may total approximately 50 billion dollars. ‘It may be slightly more, may be slightly less. It will all depend on how the situation with oil prices will develop”, he said.

That is to say, the Russian Ministry of Economic Trade and Development had forecast for this year a capital outflow to the tune of 25 billion dollars. The Central Bank of Russia appears to be more optimistic: its analysts believe that the outflow will total a mere 10.5 billion dollars. The Central Bank so far maintains its annual capital outflow forecast. Usually the regulatory authority adjusts its forecasts in its Draft Key Monetary Policy Strands for the coming year, and this document will be submitted to the State Duma of the Russian Federation in late September.

However, all of these indicators – whether provided by the Ministry of Economic Development, or by the Central Bank – can be considered as positive: last year investors had taken a far larger amount – 84.2 billion dollars – out of the country.

In actual fact, according to the Central Bank estimates, the outflow in the first six months of the year totalled 43.4 billion dollars: 33.9 billion left the country in the first quarter, 9.5 more billion – in the second.

Net capital outflow did not only perceptibly slow last spring – indeed it was succeeded by partial inflow

It is notable that net capital outflow did not only perceptibly slow last spring, indeed it was succeeded by partial inflow. “According to our estimates, the net capital inflow in June totalled 3.5 billion dollars”, said Ivan Chakarov, analyst with Renaissance Capital. Chairman of the Central Bank Sergey Ignatyev confirms the capital inflow but is cautious to state that “on the whole the forecast will depend on the situation on the international markets”.

Why has the outflow slowed down?

What was the triple reduction of the capital outflow in the second quarter in comparison to the third quarter due to?

The reasons for this are numerous. “Before the March 2012 presidential elections people feared uncertainty and took their money out of the country just in case, while the second quarter brought certainty and clarity whatever its context was”, muses Professor of the Russian School of Economy Tatyana Mikhailova. That is why January-February saw an outflow of capital, while in the spring, once the elections were behind, and investors saw clarity in the situation, the outflow decreased.

What is surprising is that capital was flowing out of the country the fastest precisely when the oil prices were growing, that is, in the winter, and once the oil prices began to drop, the outflow did likewise. “Such dynamic of capital flow was due to the fact that top managers of large companies, primarily, mineral companies, received bonuses precisely in the first quarter”, says Anton Struchenevsky, senior economist with Troika Dialog Investment Company. “If such are not spent inside the country or invested into foreign assets, the statistical reports reflected this as capital outflow”. In the second quarter top managers simply stopped receiving bonuses and the statistical outflow showed a triple reduction. Here is another confirmation of the expert’s opinion: during the bonus payment period by large companies savings did not grow, and the consumption rates remained the same. This means that realised profit was taken out of Russia.

It is notable that the capital export by companies remains at a stably high rate. Its reduction in June was largely due to the need to redeem large external debts – according to the Central Bank estimates, such total 16.3 billion dollars, and another 2.5 billion dollars are interest on those debts. “This money had to be saved in advance, and thus May witnessed a certain capital outflow” says Dmitry Miroshnichenko, research assistant with the Development Centre Institute of the National Research Institute at the Higher School of Economics. “Furthermore, payment of this interest is not accounted for in the financial reports under capital flow but under current operations, i.e. interest money is not considered to be capital outflow, even though in actual fact they leave the country’s economy.

Good news for investors

The capital inflow is attributed by the experts, among other factors, to the stabilised domestic political situation in the country. Thus, First Deputy Chairman of the Central Bank Alexei Ulyukayev claimed that the cause of the investment growth in Russia is the formation of a new government and, as a result, reassessment of political risks by investors.

Ivan Chakarov also says that “in the context of reduction of political risks investments are again seeking their way into Russia”. Another factor stimulating the inflow is repatriation of earnings by exporters. “This money was kept by exporters in banks abroad, and this was reflected on the balance sheet as capital outflow. Following the appointment of the new government these funds began to return”, he said. Seasonal factors also have their usual role to play here. For example, in the first quarter companies usually set their budgets, whereas in the second quarter they begin project financing in Russia.

In the context of reduction of political risks investments are again seeking their way into Russia

Experts claim that the capital outflow reduction will persist until the end of this year. “Last year’s total capital outflow was not due to stabilising oil prices but rather to the growing import”, Anton Struchenevsky believes. Ivan Chakarov expects the positive trend to persist in the second half of the year forecasting a net inflow of capital in July-December and a net outflow of 20 billion dollars based on the results of the year.

Maria Selivanova
Economic Observer with RIA Novosti
Exclusively for Russian Survey RS