…BUT FOREIGN INVESTORS CONTINUE TO AVOID RUSSIA LIKE THE PLAGUE.

The dramatic improvement in Russia’s external position is not the only good economic news coming out of Moscow these days. President Vladimir Putin and various government officials have announced that GDP grew by 7 percent during the first three quarters of 2000. Investment was reported up nearly 18 percent during the first nine months of the year, and the federal budget is in surplus. President Putin has rapidly consolidated his position at the top of Russia’s political system and has articulated an ambitious market reform agenda.

These factors suggest that the capital outflows which plagued Russia throughout the 1990s should be moderating. Instead, the CBR data show that they are accelerating. A net outflow of US$18.4 billion was reported on Russia’s financial account–which shows changes in Russian assets held by foreigners and foreign assets held by Russians–at mid-year. This is nearly double mid-1999’s US$6.8 billion outflow, and constituted about 18 percent of GDP. Meager net inflows of foreign direct investment (US$504 million) during the first half of 2000 were offset by a larger (US$1.0 billion) net outflow on the portfolio investment balance. By contrast, Russia in 1997 reported US$48 billion in net inflows of FDI and portfolio investment.

Foreign investors continue to avoid Russia like the plague. Gross inflows of foreign capital (measured as the change in gross liabilities on Russia’s capital and financial accounts) were actually negative in the first half of 2000. By contrast, Russia received gross capital inflows to the tune of 8-9 percent of GDP during 1997-1998. The financial account deficit also reflects large gross outflows (changes in gross assets on the capital and financial accounts, plus net errors and omissions). These were US$13.1 billion in the first half of 2000, which at 13 percent of GDP were roughly on par with the 14 percent of GDP represented by net outflows last year. By contrast, gross capital outflows represented only 3 percent of GDP in 1995. These trends are not a surprise for Russian policymakers: On October 24 Economic Development and Trade Minister German Gref described capital flight is “one of the negative factors in Russia’s economy and an indication of its poor health” (Reuters, October 24).

PROSPECTS FOR RESCHEDULING RUSSIA’S PARIS CLUB DEBT REMAIN UNCERTAIN.