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Has Russia's Capital Flight Been Seriously Exaggerated?


By Mark Adomanis

Russia‘s problems with capital flight have been well documented, and have served as one of the primary data points for those arguing that the country is coming undone at the seams. Since, according to the central bank data that everyone uses as a reference point, Russia’s capital flight abruptly accelerated during the worst part of the global financial crisis,  I’ve long thought that it can’t fully serve as an accurate proxy for the country’s overall economic and political climate (unless someone is seriously prepared to argue that Russia in 2006 and 2007 was substantially more democratic, accountable, and transparent than Russia in 2008 or 2011). Nonetheless, capital flight clearly isn’t good, particularly for a capital-hungry country like Russia, and it was clear that something was eventually going to have to change: either Russia would begin to attract capital again or its economy would suffer.

Well a new study argues that Russia’s capital flight has been significantly overstated:

    Russian capital outflows were half the amount reported by the central bank last year, according to a study by Ernst & Young, the Russian Direct Investment Fund and Moscow State University’s Intelligent Reserve Center.

    Only $40.5 billion of the $80.5 billion of net outflows recorded in 2011 was genuine, according to a report e-mailed today…

    The researchers said their findings were comparable to World Bank data, which put 2011 outflows at $32.3 billion, based on private capital flows from direct and portfolio investment. Outflows were $10.9 billion in 2010, compared with the official $34.4 billion estimate, $9.3 billion instead of $56.1 billion in 2009 and $16 billion rather than $133.7 billion in 2008, according to the World Bank.

To place the article in somewhat better context, I thought I would show the difference between the two different datasets since 1994*

Needless to say, as was also noted in the Bloomberg article, those are some pretty big differences. The differences in 2008 are particularly striking and vast. The World Bank says that Russia had a modest outflow of about $16 billion that year, while the Russian central bank says that the figure was an eye-popping $133 billion. Since Russia’s economy grew by about 5% in 2008 (remember, the financial crisis hit Russia later than most countries) I would hesitate to say that the World Bank’s more modest figure (about .09% of 2008 GDP) is probably closer to the truth than the central bank’s (which amounts to a full 8% of GDP). This is doubly true if, as the study’s authors allege, the central bank’s data captures money flowing from Russian banking subsidiaries to their “parent” companies overseas. It doesn’t take an active imagination to come up with reasons why Western banks would have been under just the slightest bit of pressure during 2008. It certainly seems plausible that a good chunk of the money that left Russia in 2008 wasn’t really “Russian” at all, and was being used by foreign banks to help patch up their badly damaged balance sheets.**

All of that being said, while acknowledging that it is always good to have more precise and accurate sources of data, on a deeper level I’m not sure that the Ernst and Young study really says all that much. Although its headline figures for capital flight are not nearly as frightening as the central bank’s, even the World Bank data shows that capital outflows accelerated substantially during 2011. Now 2011 was a year of otherwise rude health for the Russian economy, a year in which the price of oil was high, unemployment and inflation fell, and the economy chugged along at around 4% growth. If Russian capital fight accelerated sharply  in such an otherwise benevolent atmosphere, it’s pretty clear that something is seriously amiss. S

By all means let’s come up with more accurate figures for the precise level of Russian capital flight. If the World Bank’s estimate really is better and more reliable than the Russian central bank’s, I don’t have any problem making the switch. But even by World Bank estimates, Russia had a very large capital outflow in 2011 when, based on previous experience and considering the country’s sustained economic recovery, you would have expected things to be broadly in balance. While the problem of Russian capital flight might not be quite as awful as has previously been reported, it’s still a very, very serious one that appears to be heading in the wrong direction.

* This is the first year for which both are available. Remember that as late as 1991 there essentially was no private capital in Russia

** I’m sure a few will interject “but if the Western banks were confident in their ability to earn future profits in Russia, they’d have kept the money there!” Fair enough, I suppose, but if Western banks were acting responsibly they wouldn’t have given mortgages to people without steady sources of income, would they?

Source: Forbes

Post-Crisis World Institute