FOREIGN INVESTORS CONTINUE TO SHUN RUSSIA…

The Russian Central Bank (RCB) on December 31 released data on Russia’s balance of payments during the first three quarters of 1999 (Bank of Russia, December 31, 1999). It also released revised BOP data for the 1994-1998 period. Contrary to the up-beat rhetoric of some government officials, these data show that foreign investors continue to shun the Russian economy, and that foreign investment in Russia during 1999 ran at a fraction of its 1997 levels.

The best news in Russia’s 1999 balance of payments was perhaps the US$21.3 billion trade surplus recorded during the first three quarters. This is nearly triple the US$7.3 billion trade surplus posted during the first nine months of 1998. Despite the boost provided by higher oil prices, 1999’s higher trade surplus did not result from export growth: the US$50.6 billion in exports recorded during the first three quarters of 1999 were 9 percent below exports during the comparable period in 1998. Instead, imports collapsed: the US$29.3 billion in foreign goods purchased during the first three quarters of last year were 39 percent down from 1998. This sharp drop in imports boosted the production of import substitutes and helped Russia’s industrial output grow by some 8 percent in 1999. But it also shows that Russia’s industrial growth in 1999 stems from the inability of many Russian businesses and consumers to purchase goods from abroad.

Russia’s international economy isolation is even more apparent in the data on investment flows. In 1997, Russia attracted US$45.6 billion in new portfolio investment, much of which went to feed the Russian stock market boom of that year. Since the August 1998 financial crisis, however, the value of Russian stocks held by foreign investors has actually declined. And while Russia attracted US$6.6 billion in foreign direct investment in 1997, these inflows dropped to US$2.8 billion in 1998, and stood at only US$2.0 billion during the first nine months of 1999. These numbers go against the up-beat economic rhetoric of Russian Economics Minister Andrei Shapovalyants, who in November announced that foreign investment in Russian industry grew 30 percent during the first ten months of 1999 (Reuters, November 17, 1999). While this may be true, a broader perspective on foreign investment in Russia yields a much less rosy picture.

…AND CAPITAL CONTINUES TO FLEE.