CAPITAL FLIGHT FROM RUSSIA INTENSIFIES

HomeNewsCAPITAL FLIGHT FROM RUSSIA INTENSIFIES

In November, the CBR published data on the net capital outflow from the Russian Federation over the third trimester. According to the first estimates, the volume of transactions grew by 48 times compared to the same period last year and amounted to USD 19.2 billion (against USD 400 million a year earlier).

According to experts, the only thing impressive about this growth is the growth rate by 48 times, while, in fact, the amount of capital flight in the third trimester did not come as a surprise to the financial authorities. “Some portion of it is taken by the foreign investors who withdraw from the Russian stock market. The biggest chunk however falls onto the planned settlement of the foreign loans under the increasingly limited access to the new loans under the current economic sanctions,” one of the the experts explains.

According to the CBR, the loan settlement in the third quarter of 2018 was estimated at USD 18.9 billion, including the USD 4.6 billion by the banking sector, and USD 13.9 billion by all the other sectors of economy, including USD 6.3 billion for the loans and 7.2 billion for the direct investment.

Blame it all on sanctions

Indeed, the data for the first nine months of the year does not look that impressive: the net capital flight increased by 2.3 over the same period compared to 2017 and reached USD 31.9 billion (over USD 13.7 billion a year earlier). Nonetheless, growth is quite obvious. The experts interviewed explain this by the pressure of the sanctions which led to the capital flight from Russia. "Over the past six months, this trend went large-scale, leading to failures in bond placement, a devaluation of the Rouble and an increased volatility on stock markets. Given the increase in the Fed's base rate, investors started avoiding any risky assets from the developing markets, while the tightening of the sanctions speeds up their decision making process in respect of Russia.

Analysts point out a falling attractiveness of the Rouble assets. This happens primarily due to the growth of yields of dollar instruments. An additional factor is the aggravated situation on the emerging markets, mainly in Turkey. The external negative factors combined led to the devaluation of Rouble by more than 10%.

The depreciation of the Rouble was not only the main indicator of the capital flight, but also contributed to this phenomenon. Since the imports are partly responsible for the capital flight, the suppliers do not only buy hard currency for the deliveries underway, but – given the conditions of falling Rouble – also reserve some of it for the future. On top of this, Russians who buy the US dollars or euros either as an investment, for foreign travel or to another end, also contribute to the outward capital flow.

One more indicator is of no less influence on the dynamics of investor involvement on the Russian market – the FDI in Russian companies. In the first nine months of 2018, the direct investments from abroad decreased by 11 times, from USD 25.8 billion to USD 2.4 billion. In fact, the first trimester saw USD 6.2 billion of the investments injected, the second trimester, USD 2.3 billion, while an outflow of USD 6 billion was observed in the third. Whether or not the FDI would keep shrinking is rather difficult to estimate.

Experts remind that after the capital influx observed in 2006–2007, the following years only saw it fly. The average rate of capital flight over the past 10 years (from 2008 to 2017) is USD 67 billion per year.

This year, the expectations were at first optimistic, however in September, the Russian Ministry of Economic Development raised the forecast for the net capital outflow in 2018 from USD 18 to USD 41 billion. According to the First Deputy PM and Finance Minister Anton Siluanov, there is no reason to be concerned: capital flight is mainly related to the repayment of corporate debts and state obligations, and does not bring imbalance into the financial system.