Vladimir Shlyomin

I

n recent years the flight of capital from Russia was declining fast: in 2000 it equaled $25 billion and in 2002 the amount came to $8 billion. Finance minister Alexei Kudrin believes that in 2004 the trend will change in the opposite direction and the inflow of capital to Russia will equal $3 to $4 billion. He regards it as an obvious proof of the accuracy of reforms being conducted by the government, including those in the tax sphere. In the minister’s opinion, investors have grown confident that “benefits from capital in Russia are higher than abroad”.
Head of the strategic analysis department at the company FBK Igor Nikolaev agrees with the finance minister’s prediction of net inflow of capital for 2004. "The appointment of Mikhail Fradkov, who for a long time represented Russia in the EU and who is well known in the West, has sent a signal to foreign investors to bring their money to Russia", explains Nikolaev. The readiness to place money in a country with higher rates of economic growth is quite understandable. However, Igor Nikolaev points out that Russian companies and private persons do not stop investing in assets abroad. By the way, Russia is the only country among those with economies in transition, which invests abroad about as much as non-residents invest in it. In Nikolaev’s opinion, in 2004 both the inflow and flight of capital will be approximately the same, from $20 billion to $30 billion, and the debit balance in favor of Russia will not be too evident for the time being.
Vice president of the company Russian Funds Alexander Baranov makes more optimistic predictions. He thinks that by results of even the first six months the net inflow of capital will turn out much higher than the level referred to by Kudrin and Nikolaev. By Baranov’s estimates, a number of major deals will be made with foreign companies to buy assets in Russia. The case in point is a probable acquisition of the controlling stake in Moscow’s company MTS by Britain’s Vodafone. This deal might ‘weigh’ more than $5. 5 billion. Much will also depend on dynamics of world prices for principal commodities of the Russian export shipments, above all, oil. If their high level remains, then, Russia can again expect an inflow of portfolio investments.
Manager at the Bank of Moscow Baishen Isaev is convinced that the key role has been played by the low-to-the-limit interest rates in world markets and high prices for oil and metals: "Precisely these factors have ensured a strong inflow of capital to Russia while everything else – the growth of the economy and of financial markets – has become just a consequence of the extremely favorable external conditions".

After Russia was given an investment rating in the fall of 2003, the volume of short-term investments went down: money was transferred to more profitable and risky markets. It is expected now that minor investors will be replaced by the large ones having long-term plans.
At the same time, the increasing inflow of foreign capital worries some state bureaucrats as well as independent analysts. First, a considerable share of this inflow belongs to the "hot" or speculative money that can change direction any moment. And this can not only lead to a collapse of the Russian stock market, which, as compared with those in countries of the West, is small and weak, but also require massive currency interventions by the Central Bank. Second, the inflow of foreign currency contributes to strengthening the Russian ruble and, thus, to the decrease of competitiveness of Russian commodities as well as to the reduction of exporters’ profits. Besides, the Central Bank is forced to buy enormous amounts of currency from exporters and that is fraught with inflation growth.
Oleg Vyugin, the deputy chairman of the Central Bank, believes that there are about $15 billion that came to Russia for a short stay. He explains: "This is evident from the significant reduction of foreign net assets of commercial banks last year. This money is very short, from one to nine months, and we have it on accounts at the Central Bank. We sterilized it. If this money were used for investment projects, i.e. for investing in construction, purchasing of equipment, or payments of wages, then, inflation might have splashed around. Or, to be more exact, there might have been an overheating of the economy, which, as a rule, is accompanied by inflation. But so far we have been keeping this money and it has no influence on inflation".
It is expected that in the nearest future Russia will get new rules concerning the repatriation of currency earnings. The law will keep the repatriation requirement in order to stimulate it by ‘burdening’ export/import operations: if after 180 days an exporter has not returned earnings, then, he should get an interest-free deposit at a proxy bank. In other words, it will be as though he starts paying a kind of tax.
Prospects for investments in Russia are sufficiently attractive. Russia’s share of the gross industrial product of all new markets amounts to over 25%. By the most modest estimates, Russia has more natural resources ($10.2 trillion) than Brazil ($3.3 trillion), South Africa ($1.1 trillion), China ($0.6 trillion) and India ($0.4 trillion) taken together. With a favorable investment climate Russia will be able in the nearest 10 to 15 years to absorb from $200 billion to 300 billion of capital investments in reconstruction and modernization of production capacities according to requirements of world and domestic markets.
In spite of this, Russia accounts for only 0.5% of international investments in emerging markets. The remaining 99.5% fall on Mexico, Brazil, Argentina, Turkey, Chile, other developing and new industrial countries.
Hubert Pandza, the director of the Russia & Central Asia Business Group at the European Bank for Reconstruction and Development, believes that Russia’s three major problems remain the same: the insufficient level of corporate governance, noncompetitiveness of foreign companies because of the overestimated ruble and low prices for energy in Russia as well as intervention of the State in the economy. "State participation in property is always negative, even if it is a minority shareholder. Russia should improve access to information on companies and establish more loan offices as well as introduce the international accounting standards".
"So far banks use Russian accounting standards and, then, through reassessment and their own assessments do accounts according to the international standards", explains Vyugin. In his words, the existing plans call for starting to apply oversight measures based on the international standards only at the beginning of 2006. "This will be an important step to upgrade transparency of the banking system and tighten requirements with respect to banks", Vyugin stresses.