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    $10BN OF SPECULATIVE CAPITAL FLEW OUT OF RUSSIA IN SPRING 2004

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    MOSCOW, September 5 (RIA Novosti) - $10 billion of speculative capital flew out of Russia in March-April 2004, Mikhail Zadornov, a State Duma deputy and former Finance Minister, told RIA Novosti.

    He primarily referred to the money brought into Russia in November-December 2003 with the view of capitalizing on the dramatic strengthening of the ruble by way of depositing the funds in question on ruble bank accounts. Yet, the Central Bank's exchange rate policy in March-April 2004 curbed further strengthening of the ruble and, as a result, the capital swiftly rushed out of the country, Zadornov explained.

    He believes this accounts for a substantial capital outflow registered in Russia this year. In the first six months of 2004 the net capital outflow amounted to $6 billion. It is expected to exceed $8 billion by the end of the year.

    According to Zadornov, high world oil prices were also a factor encouraging capital flight. Companies tend to leave part of their profit margin (the differential between cost and price) abroad. The bigger the exports the larger share of capital remains overseas, he pointed out.

    In addition, Zadornov believes that the Yukos situation has also been instrumental in boosting the capital outflow.

    In his opinion, a drop in world oil prices will not bring about a crisis in Russian economy but may result in stagnation.

    "Even if the oil price falls to $18-$20 per barrel, the balance of payments will be either at zero level or slightly below, showing a modest deficit. There's no tragedy in that," Mikhail Zadornov said in his interview with RIA Novosti. "It does not spell out a crisis, it is what we call stagnation," he added.

    He estimates that with the world oil price falling to $18 per barrel, the budget deficit is unlikely to be more than 1.5 percent of GDP.

    At the same time, the former finance minister believes that a drop in world oil prices may result in slower rate of the country's economic growth.

    On his part, vice president of the Russian Union of Entrepreneurs and Industrialists (RSPP) Igor Yurgens is convinced that the economic stagnation in the above case would be of temporary nature and that Russia could briefly refocus on other exports.

    "We possess 40 percent of the world's natural gas, metals and timber resources. What's more, our people are known for their high adaptability potential," he pointed out.

    Even if the world oil prices fall as low as $18 per barrel, there will be no crisis, Igor Yurgens concluded.

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