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Posted on April 15, 2011
By Andrey Ostroukh and Lidia Kelly
MOSCOW (Reuters) – High oil prices have sent foreign investors piling into Russia, yet the country is still hemorrhaging billions of dollars in net capital outflows each month — because, it seems, more Russians are exporting cash.
Uncertainty over who will be in favor after the 2012 presidential election seems to be prompting some businessmen to shift cash out, companies are looking to expand abroad, while households prefer to keep savings in euros.
For the authorities, who have sworn not to introduce capital controls, such flows are harder to pin down and stop than the hot foreign money that flooded in and out of Russia in the past decade. But monetary tightening may be an option.
While prices for oil have soared to pre-crisis levels of $120 per barrel, the world’s top crude producer saw net capital outflows of over $21 billion in each of the last two quarters.
“This is very surprising,” said Sergei Guriev, dean of the New Economics School in Moscow and a member of President Dmitry Medvedev’s council on modernization.
“It could be related to the general political risk and uncertainty about the forthcoming elections. The risk that the new government will be even more anti-business scares Russian businesses and professionals.”
Ahead of next spring’s presidential elections, there are signs that Medvedev may be seeking to eclipse Prime Minister Vladimir Putin as Russia’s paramount leader.
Analysts say businesses are afraid of shifts in the ruling elite and its implications after the dismissal of Moscow’s mayor Yuri Luzhkov coincided with the start of outflows in 2010.
Data appears to support that it is the Russians who are responsible for the capital flight, while short-term foreign investors are showing consistent interest.
Russia-dedicated equity funds accumulated $3.6 billion in the first quarter, up from $1.4 billion a year ago and compared with outflows from Brazil, India and China, according to EPFR, which monitors investment fund flows.
POOR INVESTMENT CLIMATE
Capital outflows are also driven by Russia’s poor business climate, with Sweden’s retailer IKEA IKEA.UL among those complaining openly about corruption and excessive red tape.
“The general growth of corruption and deterioration of the investment climate crossed a threshold where the Russian business opportunities are no longer attractive,” Guriev said.
The Economy Ministry has cut its 2011 investment growth forecast to 6 percent from 9 percent, while the World Bank reckons that improving the investment climate should be the “top priority” for Russia.
“If there were demand for investments in Russia, the money would have been staying. Moreover, free funds are now being invested (by Russians) into securities around the globe,” said Oleg Vyugin, board chairman at MDM bank, a top-15 lender.