01:03 GMT +311 December 2018
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    Russia: Capital outflow or inflow?

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    MOSCOW (RIA Novosti economic commentator Nina Kulikova) - Recent Central Bank data shows that direct foreign investments into Russia in the first six months of this year reached a record $9.3 billion.

    Other Central Bank data show net export of private capital over the same period at $5.7 billion, a drop on the figure for 2004. By various estimates, capital outflow from Russia may reach $5-9 billion this year.

    Capital flight and capital outflow are far from the same thing, but both are connected with the market's investment attractiveness. In a recent study, the international rating agency Fitch said that, despite increasing macroeconomic stability, the high level of capital outflow from Russia testifies to a complex business climate and a lack of confidence in state institutions and observance of property rights.

    Capital outflow is also promoted by a constantly changing taxation system that makes it rather difficult to pay taxes correctly. For this reason, capital looks for opportunities to pay taxes elsewhere.

    What can be said about the Central Bank's figure of $9.3 billion in direct foreign investments over the first half of this year? First, it means investments doubled over a year. Second, according to Ernst & Young data, in 2005 Russia will continue to rank second among European countries (after Poland) in terms of new direct foreign investment. E&Y analysts say that, considering Russia's huge potential and the rising level of stability in the country, it could well overtake Poland soon.

    This is largely connected with Russia's investment grade rating, gained over the past winter from all rating agencies - Fitch, Moody's and Standard & Poor's. From the point of view of macroeconomic stability, Russia looks much more attractive for investors than many other countries. The increasing Stabilization Fund and gold and foreign exchange reserves serve to protect the country from external shocks. According to Fitch, because of the current surplus and foreign exchange reserves, capital flight from Russia will not involve any external financial risks in the near future.

    Meanwhile, Central Bank Chairman Sergei Ignatyev said that the recent increase in capital outflow is connected with the strengthening of the ruble rather than a worsening investment climate. At present, speculative capital flows out of the country, in expectation of a rise in the ruble/dollar exchange rate. In recent months, the official ruble exchange rate has been falling, with the dollar gaining, so some capital has begun to flee to other markets.

    Capital migration in conditions of growing globalization is an involved process. It is quite possible that some direct investments made into Russia is nothing but capital being taken out of the country, or funds transferred to offshore zones before. This capital is now being brought into as foreign companies' investments. It is no accident that the offshore zone of Cyprus remains a big investor into Russia.

    At the same time, Yevgeny Yasin, academic director of the Higher School of Economics, underlines the benevolent attitude toward Russia of European investors, especially French and German, as a result of unfavorable European financial markets.

    "The Germans are well-disposed towards Russia and intend to invest more funds into the country, with the investors of mostly medium-sized companies, not the bigger ones," he said.

    Mikhail Fridman, chairman of the Alfa Group's board of directors, said that the volume of direct foreign investments into Russia would be maintained at the level of 1.6% of GDP, but that it had all the prerequisites to increase to 4-5% of GDP, in line with levels in central Europe.

    "I am convinced that we shall have lucrative western investments within the next few years," he said.

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