Russians still Russia-averse

Following a charged elections season, the Russian economy has become a scale to evaluate how investors are reacting to Prime Minister Vladimir Putin’s return to the presidency in May.

One factor, capital flight, has remained at levels close to the 2008 financial crisis, running at close to $10 billion a month. Analysts believe recent trends show that political turmoil or the relative stability expected under Putin would actually have little effect on what is essentially a “systemic” lack of investment opportunities in Russia.

The Central Bank announced last week that more than $9 billion in capital fled Russia in February, and close to $13.5 billion left in January, a considerable increase from a previous estimate of $11.5 billion.

If capital outflows continue at similar levels, Russia could surpass last year’s total of $84.2 billion.

Moreover, the money leaving Russia is not being pulled by foreign investors retrieving their capital, which makes the trend “particularly worrisome,” said Yevgeny Nadorshin, chief economist at Trust bank. “The biggest problem is that these are not foreigners taking their money out of Russia. These are residents who are taking money they earned here and moving it abroad. That makes the situation particularly uncomfortable.”

Just how much capital flight is a response to Russia’s business climate, and how much is down to politics, isn’t clear.

After December’s parliamentary elections, Fitch Ratings announced that Russia’s “poor business climate and political uncertainty” had pushed capital outflow higher than government estimates for the year. Other events, like the eurozone crisis, fueled capital outflow due to “heightened global risk aversion.”

With Putin’s victory in an uninspiring presidential election and dwindling enthusiasm for political protests, the trend should theoretically be reversing itself.

But Nadorshin argues that politics plays a limited part in determining levels of capital flight.

“In my opinion, capital outflow doesn’t depend that much on the man in power,” he said. Rhetoric about economic stability under Putin would not have a strong effect on capital outflows, he added.

“Stability is probably not the most important word for the economy right now,” he said. “Stability is needed not in the general economic situation, but in terms of economic infrastructure. For proper economic development, you need the economic structure and institutions to be stable, not like they are now.”

“My sense is that this capital outflow is a structural trend, so it has increased with political unrest and the European banking crisis over the last year, but it still remains close to ten billion dollars,” said Natalya Orlova, chief economist at Alfa Bank.

“I think this is reflecting the overall lack of investment opportunities in Russia.”

Russian capital flight eclipses that of other BRIC countries. In 2011, China didn’t see any net capital outflows until the fourth quarter, and saw a total of $186.7 billion in capital inflows for the year. Meanwhile, India’s capital outflow was in the millions, not billions, of dollars in 2011.

Uncertainty remains a key issue for both foreign and domestic investors, Nadorshin said. Competition with international businesses and uncertain regulation significantly sour the Russian investment climate. Meanwhile, the fact that households are increasing their investments in foreign real estate is an “alarming” indicator that many Russians may be moving their financial assets and themselves abroad permanently, he said.