Capital to keep fleeing from Russia

Net capital outflow from the non-public sector, according to the preliminary estimates of the Ministry of Economic Development of Russia (MED), reached $17bn in January 2014. In Q1 2014 the MED anticipates $35bn of total net capital outflow. While the January capital outflow equals in size to that in the same period of the previous year, the quarterly estimate is much higher than $28bn in Q1 2013.


What is capital fleeing from the Russian economy? A “natural” level of annual investment in foreign assets (7-8% of GDP) has been persisting in the Russian economy over the past decade, net of the crisis-hit period of 2008-2009. Given the fact that since 2012 nominal volume of GDP, as translated into a current exchange rate, exceeds $2 trillion, gross capital outflow amounts to about $150bn annually. This amount is determined by Russian economic agents’ investment preferences based on higher investment attractiveness of foreign assets against their domestic analogues.


To achieve a positive balance of transactions with the non-public sector’s capital, the capital outflow should be compensated with either inflow of external borrowings, or growth in foreign investment.  


Waiving a stable exchange rate of the national currency implies passing currency risks on to borrowers. The Russians have learned from the crisis of 2008-2009 how painful could be servicing loans denominated in foreign currencies at low interest rates after a substantial devaluation of the ruble. This lesson visibly weakens the demand for foreign loans denominated n foreign currencies. Now there is no way for banks, which used to act as net borrower in external markets, to find how to place foreign exchange loans inside the country. Furthermore, both unstable economic growth rates and nowhere near the ideal investment environment impede foreign investment inflow to the Russian economy.


Additionally, the current account balance has been increasingly declining since 2011. For the last three years since global prices of energy resources have stabilized, the average annual price of the Urals crude oil has been ranging within $107–$110 per barrel, the cost volume of oil and gas export remained unchanged. However, import of goods and services keeps growing along with growth in the nominal volume of the economy, being stable 21%–23% of GDP for more than 10 years. Additionally, the negative balance of return on investment keeps growing despite net capital outflow. The cost of the external debt is far beyond the return on investment in foreign assets. In 2013 investment payments on foreign borrowings exceeded $100bn while the negative balance of returns on investment – $66bn.


These factors predetermine further decline in the balance of current accounts amid stable prices of energy resources, which in its turn predetermines the pressure upon the Central Bank’s reserves and its exchange rate dynamics. This creates some kind of a vicious circle which can be coped with either through drastic improvement in foreign economic situation, thereby increasing Russia’s export revenues, or long-lasting and difficult process of economic reforms aimed at creating a wide spectrum of production facilities able to compete internationally and invulnerable to volatility in t he raw materials market. The non-reform option will keep the medium-term development capital outflow at the same levels that have been recorded over the last few years, – some percentage points of GDP or dozens of billions of dollars annually.


Khromov M. Y., a leading expert at Gaidar Institute’s Center for Structural Research