…BUT CAPITAL OUTFLOWS SLOW.

The CBR data also indicate that the amount of capital flowing out of Russia slowed sharply after 1996-1997. Outflows reported on Russia’s capital and financial account–which shows the balance of capital inflows and outflows–fell to US$18.2 billion last year, down from US$19.7 billion in 1998, and well below US$32-33 billion during 1996-1997. The biggest change occurred in Russia’s “other investment” balance, where the value of Russian assets (chiefly loans) held abroad fell from US$27-29 billion during 1996-1997 to US$15.1 billion in 1999. This change reflected the fact that Russian lenders responded to the August 1998 financial crisis by dramatically cutting back on credits provided to borrowers in other (mostly CIS) countries.

But if Russian lending to other countries has dropped since 1997, Russian borrowing from abroad has dropped even more quickly. Only US$2.1 billion in inflows on Russia’s capital and financial accounts were recorded last year, compared to US$21.9 billion in 1998 and US$39.3 billion in 1997. Their creditworthiness decimated by the August 1998 financial crisis, Russian government agencies and companies were able to attract only crumbs from international investors. By contrast Hungary attracted US$5.3 billion in capital inflows last year, more than double Russia’s amount.

Because of these small inflows, Russia in 1999 registered a US$17.9 billion net outflow on its capital and financial account. This was the largest net outflow recorded since the CBR began keeping comprehensive records in 1993. This net outflow is a serious problem for Russia, since most of the US$25.0 billion earned via Russia’s current account surplus last year left the country as net capital outflows. However, these figures suggest that Russia’s problem is not capital flight per se: Russia’s capital outflows last year were sharply down on their 1996-1997 highs. The problem instead lies with the collapse in Russia’s capital inflows. To be sure, these measly inflows reflect Russia’s poor environment for foreign investors. Many of its causes, such as corruption and the lack of protection for minority shareholder rights, are unlikely to change quickly. However, other causes of Russia’s poor investment environment during 1998-1999–including uncertainty about the post-Yeltsin presidential succession and Russia’s quasi-default on its Soviet-era foreign debt–are now changing for the better. Vladimir Putin’s victory in the March 26 presidential elections ended uncertainty about the succession, and the rescheduling of the commercial portion of Russia’s Soviet-era debt in February removed an important obstacle to improving Russian creditworthiness. If these trends continue, capital inflows are likely to pick up this year. And if outflows remain at their (relatively) low 1998-1999 levels, Russia’s external balance–which is already benefiting from high oil prices and large trade surpluses–could improve dramatically.

KREMLIN RARING TO GO IN REINING IN RUSSIA’S REGIONS.