The end to a three-day siege in a Moscow theatre, where 50 Chechens held more than 750 Russians and foreigners hostage, has done nothing to enhance Russia’s image. It is still widely regarded as a cold, inhospitable and unstable place – a perception reflected in some of the lowest per capita foreign direct investment in eastern Europe. But the latest capital flight figures suggest that for Russians themselves the whole country has moved to the Caribbean.
In a dramatic confirmation that Russians finally think the place to invest their money is Russia, flight capital is returning from offshore havens and the outflow has fallen by 80% over the past six months.
For most of the past 10 years companies have sent upwards of $2 billion a month to offshore havens. A massive $160 billion in Russian flight capital is thought to languish worldwide – more than four times the country’s hard-currency reserves.
“We plan to reduce capital flight this year, and the money will work in Russia,” says Anton Saluanov, the head of the Russian finance ministry’s macroeconomics and banking policies department. The ministry says capital flight has plummeted to just $350 million a month, implying that Russian businessmen perceive a dramatic improvement in the investment climate.
Internal capital flight is also falling: Russians hoard about $75 billion in hard currency. But in the past six months retail deposits have risen by more than a quarter to reach R901.8 billion ($28.6 billion) as of August 1 2002.
The political stability that president Vladimir Putin brought when he came to power in 2000 has bolstered business confidence. During the Yeltsin era companies planned only a few months ahead. Since Putin took over, plan horizons have stretched out to five years and longer.
The pump was primed by the devaluation of the rouble in August 1998. This led to huge profits for raw material exporters that remonetized an economy suffering from a decade-long non-payment crisis. Domestic industry blossomed as local producers filled a $30 billion consumer goods hole created by the rapid disappearance of importers.
A consumer shopping spree
As wage and pension arrears were cleared the consumer has gone on a sustained shopping spree, fuelling more growth. Despite a slowdown in GDP growth from a peak of 8.3% in 2000 to the 4% to 4.9% expected at the end of this year, retail sales and consumption have continued to grow at 8% a year since 1999.
Russia’s leading raw material exporters – the main capital flight culprits – have grown rich since the crisis and have begun pumping cash back into the economy. Capital flight began to fall in 2000 as these companies finally invested heavily in improving efficiency to boost the bottom line.
Capital flight fell from $2 billion a month in 2000 to $1.3 billion in 2001. There is some confusion as to exactly how much money is leaving each month now, but the latest $350 million figure marks a dramatic quickening of the downward trend.
Yevgeny Gavrilenkov, chief economist at Troika Dialog, says the reduction in outflow could in part result from the shaky global market. Having fixed their core assets, cash-rich companies have been snapping up attractive assets in Russia.
“The industrial groups are now buying assets in different sectors – chemicals, pulp, timber or agriculture – and pulling together something that can reach critical mass or take advantage of the economies of scale,” says Alfa Bank chairman Alexander Knaster. “It remains to be proved if these groups will add value or not but they are doing the basic things – putting in decent management and imposing some financial discipline.”
Cashflows were king in Yeltsin’s day but a mergers and acquisition binge that began about 18 months ago has made managers more conscious of the return on capital. Gloom on global markets and lower interest rates abroad have increased the attraction of high-return Russian investments.
“Real M&A started over the past 18 months,” says Vladimir Rashevsky, chairman of MDM Bank. “Russia’s businessmen have seen the example of a few companies like [oil company] Yukos and [dairy products producer] Wimm Bill Dann increase their value by several times and want to do the same.”
Better management and real investment are already leading to gains. Power consumption measured against gross economic product – a measure of firms’ efficiency – has been falling in the past three years as companies try to cut costs. And labour productivity has already surpassed the Soviet-era peak, according to Anton Shruchenevsky, an economist with Troika Dialog.
Foreign investors, though, are still standing on the sidelines. Foreign direct investment has got stuck at about $4 billion a year, less than 10% of what Russia’s eastern European neighbours attract per capita: FDI flows were $3.3 billion in 1999, $4.4 billion in 2000 and $4.2 billion in 2001. Annual FDI in Russia amounted to between 1% and 1.5% of GDP in 2001, whereas in China it reached 4% and in Poland and the Czech Republic some 5% to 8%.
Foreigners are not investing but they are now watching Russia’s progress closely. The government’s healthy finances and improving tax collection, coupled with the first strong growth in three decades, led Standard & Poor’s to upgrade Russia’s rating again in May to BB-. And at the end of October Moody’s suggested that Russia could be upgraded by two notches before the end of the year to Ba1.
