…AND A CONTINUING DEARTH OF FOREIGN INVESTMENT.

Presidential advisor Andrei Illarionov made headlines on May 30 by claiming that Russia had attracted US$10 billion in foreign investment during the first quarter of the year (AP, May 30). The CBR’s balance of payments data, however, show Illarionov’s claim to have been wide of the mark. These figures instead suggest that foreigner investors continue to avoid Russia like a plague.

The capital and financial accounts–which measure changes in the value of Russian assets and liabilities held by foreigners, as well as foreign assets and liabilities held by Russians–reported a net outflow of US$8.9 billion during the first quarter. Only a paltry US$189 million net inflow of foreign direct investment (FDI) was recorded, while net portfolio investment was only US$140 million. (By contrast, in 1997 Russia reported nearly US$50 billion in net FDI and portfolio investment.) These small inflows were overwhelmed by a US$6.2 billion net outflow on “other investment,” which–along with “errors and omissions”–is one of the primary ways in which the balance of payments data capture capital flight. US$2.3 billion in errors and omissions were recorded in the first quarter–the second largest quarterly total since the August 1998 financial crash.

These trends suggest that, in contrast to Illarionov’s remark, foreign investors continue to reduce their Russian “exposure.” In light of recent financial developments in Russia, this should hardly come as a surprise. The G-7 on June 22 included Russia on a blacklist of countries whose banks engage in significant amounts of international money laundering (Reuters, June 23). In early July the final terms were announced for the restructuring of US$1 billion in debts owed to Western creditors by Russian oligarch Vladimir Potanin’s moribund Oneksimbank. Potanin is widely believed to have transferred Oneksimbank’s assets to other parts of his Interros financial empire in the wake of the August 1998 financial crisis. If approved, the Oneksimbank restructuring is expected to leave creditors with 20 cents on their dollar (Reuters, July 7). While President Vladimir Putin’s recent attacks on Potanin and other oligarchs may play to foreign investors’ schaudenfreude, few observers expect this campaign to quickly improve Russia’s investment environment. And Russia’s shaky standing with its creditors was underscored by a Bastille Day ruling in France, where a court impounded a Russian merchant ship docked in Brest at the request of a Swiss creditor (Reuters, July 14). These developments suggest that prospects for the return of capital inflows a la 1997 remain elusive at best.

BELARUS

STAGE HURRIEDLY SET FOR ELECTIONS IN BELARUS.