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. Last Updated: 07/27/2016

$2.9Bln A Month Flows Out Of Russia




Russia's economy is bleeding some $2.9 billion a month in capital flight, an alarming level of disinvestment that rivals the cash hemorrhage of last fall, a new report from the Finance Ministry's Economic Expert Group says.


Rocketing world oil prices have swelled Russian corporate revenues and large numbers of businesses are investing those profits in foreign assets - to the tune of $8.6 billion in the period from July to September - Oksana Dynnikova of the Economic Expert Group, the author of the report, said Monday.


That was an alarming leap from the just over $800 million a month that left in the second quarter of this year, she said.


Dynnikova's figures won broad acceptance from several economists who track Russia, as did her conclusion that the latest surge in capital flight was precipitated by the combined effects of high oil prices, the lifting of foreign currency regulations in July and fears of political instability as election time nears.


"The more money there is up for grabs, the more money Russian financiers funnel abroad," said Peter Westin, an economist at the Russian European Center for Economic Policy.


The current outflow of capital is almost as high as the flood of funds that left the market in the third quarter last year, when economic collapse sent foreign and domestic investors hightailing it out of Russia. Capital flight for that three-month period was some $3.67 billion per month, according to Economic Expert Group figures.


Economists say the level of cash leaving Russia this year is just as dangerous for the nation's economy.


"Russia does not have a debt problem, it has a capital flight problem, which then creates problems for paying off external debt," said Charles Blitzer, an economist at Donaldson, Lufkin and Jenrette.


"Russia is being choked by capital flight," he said.


Until Russia can reverse this trend, it is difficult to see it achieving actual economic growth, said an economist at the World Bank's Moscow office who declined to be identified.


"This rate of capital outflow is going to put a serious brake on economic growth. A continued increase in industrial output is unsustainable," he said.


"This means that Russia is crediting the rest of the world. It is helping growth in other world economies while hindering itself," he said.


Central Bank Deputy Chairman Viktor Melnikov put a different spin on the situation Monday, telling a news conference that the flow of capital from Russia had dropped by over 50 percent this year compared with 1998.


The average flow of capital into off-shore zones in the first half of 1999 amounted to "billions," but it had fallen to between $530 million and $550 million for the past four months, Melnikov said in remarks reported by Interfax.


However, economists at the Expert Group disputed the Central Bank's figures. Even though official figures for funds leaving for off-shore zones may have seen a reduction, the amount of funds invested in foreign assets and not the Russian economy was still soaring, Dynnikova said.


Some economists even accused the Central Bank of facilitating the hike in outflows by acceding to International Monetary Fund demands that it lift foreign currency exchange restrictions. Those demands were part of the IMF conditions attached to the $640 million loan tranche released in July as part of a $4.5 billion Fund loan package.


The Central Bank had imposed a ban to stop foreign institutions buying dollars with rubles held in correspondent accounts at domestic banks. But the IMF said the measure was in breach of Article 8 of its charter - on free convertibility - and the Central Bank lifted the ban to speed along the loan talks.


Dynnikova of the Expert Group said the move opened the floodgates for capital flight.


"Lifting the regulation opened the opportunity for increased capital flight and made it possible for it to reach previous levels again," Dynnikova said.


"Banks may have wanted to transfer assets abroad before then, but once the ban was lifted they were actually able to," she said.


Other economists said the ultimate effectiveness of capital restrictions was a moot point.


"Attempting to limit the flow of funds can only be a short term measure. Determined financiers will always find loopholes," said the World Bank economist.


Economists said it would be difficult to stop the damaging outflow without root and branch restructuring of the Russian economy.


Government officials have trumpeted figures showing industrial growth up 7 percent in the first nine months of this year, crowing that the economy will grow slightly this year instead of contracting as had been widely predicted.


However, even as they accepted Russia's nascent industrial resurgence, economists have warned that further growth cannot be attained without economic restructuring.


And as long as increased output leads to increased capital flight Russia is doomed to marginal growth at best.


"Outflows in these proportions lower the resources Russia has at its disposal to invest in the economy and defend the ruble from speculative attack," the World Bank economist said.


"A prerequisite for money to come back to Russia and stay there is greater political stability," said Philip Poole, the head of emerging market research at ING Barings in London.


"For funds to be invested in the Russian economy there has to be a better legal structure to protect property rights. This applies for both Russian and foreign investors," he said.


Finance Ministry officials - who also accepted Dynnikova's figures - were nonplused by the amount of money leaving the country.


"Of course we're concerned by capital flight, but some of these funds could include funds being held in reserve for the purchase of new imported equipment," said Anton Siluanov, head of the ministry's macroeconomics department.