MOSCOW — Investment money is pouring out of Russia, despite the high price of oil and the strengthening ruble. It’s a combination that hasn’t been seen before, and it threatens to do lasting damage to the economy and to President Dmitry Medvedev’s modernization efforts.
For the first time, business owners across Russia are parking money outside the country, in what economists here take to be signs of uncertainty and deep-seated pessimism.
“It’s a very dangerous trend, because it shows it’s very massive and on a wide scale,” said Yevgeny Gontmakher, deputy director of the Institute of Contemporary Development in Moscow.
The net outflow of private capital, which started to pick up pace last year, amounted to about $30 billion in the first four months of 2011. “That is a very large figure,” Sergei Ignatyev, chairman of the Central Bank of Russia, told a banking conference Thursday.
And that may represent only about half the actual flight, with the rest coming in informal and illegal transfers.
Money can be moved abroad in the form of substantial investments in foreign firms. Or it can happen when a lone buyer shows up at a real estate office in Latvia or Montenegro with a suitcase full of cash and an intent to purchase a second home. Companies that engage in trade can manipulate prices so as to leave the bulk of their profits outside Russia. Others cook their books with “errors and omissions” — that category amounted to $8 billion worth of fraud in 2010, the commission of the Customs Union of Russia, Belarus and Kazakhstan reported this week — or fictitious securities transactions (another $14 billion).
No one knows when it’s going to stop. The Bank of Russia predicted early this year that capital would be coming back into the country by the end of March. That didn’t happen. Then it estimated that $2 billion left the country in March. Now it reports that the outflow was about $6.2 billion that month — and it increased to $7.8 billion in April.
Thanks largely to its income from high-priced oil, Russia is still running a current account surplus. But in the past, increases in oil revenue have always brought proportional increases in funds available for capital investments, said Evsey Gurvich, head of the Economic Expert Group in Moscow. This time, the tide is still running out, and unless the price of oil keeps going up forever, eventually Russia will have to start drawing down its currency reserves.
Two factors appear to be at work.
The first is political uncertainty. Russia has presidential elections next year, and no one knows if Medvedev or Prime Minister Vladimir V. Putin will take the job. They have said they will decide it between themselves. There are, in fact, few policy differences between them. But any big investment here requires the nod from one or the other, and right now businesses don’t want to put their chips on the wrong candidate.
“In our country, personal guarantees, personal relations, are still more important for big businesses than laws and rules and formal regulation,” Gurvich said.
The Kremlin’s chief economic adviser, Arkady Dvorkovich, said Tuesday that the political question mark will keep capital flowing out of the country at least through the rest of this year.
This is uncharted territory. The last time Russia faced political uncertainty — in 1996, when Boris Yeltsin was running for reelection and it appeared he might lose — interest rates went up as a result, and that drew money into the country.
The second factor is what Gurvich delicately terms “weaknesses in the business environment.” That is another way of talking about corruption, bureaucratic capriciousness and courts that take their orders from on high.
The reaffirmation this week of the conviction of Mikhail B. Khodorkovsky, the onetime oil tycoon who lost his company and his freedom after he challenged Putin, probably translates into “several more billion dollars on the run from Russia,” Gontmakher said.
Domodedovo Airport, the only privately owned airport in Moscow, has come under relentless pressure publicly from the authorities, and that, Gontmakher said, sets a very visible and “awful” example.
Corruption reached a critical point about two years ago, he said, and now small enterprises are hard-pressed to make a profit. Putin’s decision to raise business taxes this year to pay for promised pension increases didn’t help. Now many small businesses are registering in Kazakhstan, said Alexander Auzan, an economist and Medvedev adviser. There is no democracy there, but at least everyone understands the rules of the game.
On Thursday, an organization of small businesses held demonstrations across Russia. In Moscow, protesters carried a coffin labeled “middle class.”
“People are disappointed now. They lost their vision of how they’d live,” Gontmakher said.
The problem with pessimistic expectations, in this case, is that they become self-fulfilling. As more money leaves the country in search of a safer haven, the odds of revamping and reforming the economy and its supporting structures grow longer.
Gontmakher even takes a dark view of the sudden growth of Russian billionaires, whose numbers rose from 62 to 101 this year, according to Forbes magazine. He thinks Russia’s richest operators are grabbing what they can, while they can. “Our elites are in a hurry to make some money,” he said, “because they don’t know what to expect next year.”