Published 5-01-2013, 04:26
Mark Adomanis
Contributor, FORBES
A
few weeks ago I wrote about a new study on Russian capital flight which argued
that the problem had been seriously overstated and that actual capital outflows
were quite modest. I had a chance to ask one of the study's authors, Alexander
Ivlev, Ernst & Young's Country Managing Partner for Russia, some follow-up
questions. My questions are in bold and Mr. Ivlev's responses follow. I still
am not totally convinced that Russian capital flight isn't a big deal (it might
not be as catastrophic as is often reported, but I still think it's very
serious) but his perspective is an interesting one that isn't always heard and
that seemed worth airing.
I read about your report
and found its conclusions to be reasonable. Do you have any indication as to
why the Russian central bank persists in using its (apparently outdated)
methodology? Is there any good reason to keep using the old formula?
The "Net Inflows/Outflows of Capital by Private Sector" indicator
calculated by the Central Bank of Russia seems to be reasonable at first sight.
It calculates the change of net foreign financial assets for banks and
other sectors plus "net errors and omissions". Thus, it indeed shows
by how much outflow of capital is more or less than inflow. This is simple to
understand for a man in the street. But this man also implicitly assumes that
outflow is "bad" and inflow is "good". The methodology
omits the economic sense of operations. For example, international M&A
activity of Russian companies or repayment of debt to foreign bank are capital
outflows, but these are not "bad" flows. The methodology used by CBR
is simple, but this simplicity leads to rather "accounting" measure
than "economic". To construct more reasonable indicator
"bad" operations should be separated from good or neutral ones and
this can be hard to do. Another approach is to use widely accepted measure, for
example FDI flows.
Assuming that your
report is accurate and capital flows have, in fact, been overstated doesn't
Russia still export far too much capital? Shouldn't a country at its stage of
development be able to attract sizable capital inflows?
The new diversified economy of the country is being constructed now, but the
export of natural resources is still the main driver of the Russian economy,
primarily oil and gas. In our report we show that Russia compared to other
export-oriented economies does not seem to be outlier. Looking narrowly at
foreign direct investments we can find out that its amount grows for the fourth
consecutive years (since crisis) to about $60 bln in 2012 (estimates of
Ministry of Economic Development).
To what extent do
Russia's capital flows distinguish it from its peer competitors? Is the country
exceptional or normal in regards to its capital flows?
To be honest, Russia is not as bad as many people think it's doing quite
well, actually. In fact, taking into account such indicators as capital outflow
and FDI Russia appears to be in standard shape of an export-oriented country.
Looking narrowly at foreign direct investments we can find out that its amount
grows for the fourth consecutive years (since crisis) to about $60 bln in 2012
(estimates of Ministry of Economic Development).
The sharp increase in
capital outflows in 2008 was clearly a result of the financial crisis, but I
was wondering if you could go into the reasons for the uptick in capital
outflows in 2011 and, to a certain extent , in 2012. Does this reflect domestic
political risk? Or is it a broader reflection of weakness in the global
economy?
There are several reasons for the capital outflow in 2011-2012. First of all
the Eurozone debt crisis had a high influence on the situation. We've seen the
decrease in capital inflows to emerging markets, e.g. Brazil, India, China and
South Africa during this period. Another side of the crisis is that Russian
subsidiaries of European banks supported a lot their parent companies to help
them to avoid problems with liquidity. Next reason is presidential and
parliament elections at this time. These uncertainties also affected the
situation. But mostly the shape of capital movement curve was influenced by
global macroeconomic factors.
What do you think is
going to happen to Russian capital flows over the next 3-5 years? And to what
extent can Russia actually influence these developments?
Russian government pursues a policy aiming at the improvement of investment
climate. In the recent Doing Business rating Russia grew by sixth positions and
the goal is to be in the first twenty countries by 2018. Adoption of new
policies enforcing private property rights, facilitating the start of new
business, decreasing the number and time of bureaucratic procedures, all this
can lead to reversal in capital flow figures. According to global Russia
Attractiveness Survey conducted by Ernst & Young, companies that invest in
Russia are highly satisfied. They feel the investment climate has significantly
improved since 2007. Investors recognize the challenges of bureaucracy, red
tape and corruption, but they remain keen on continuing to investment. Current
investors are highly satisfied and keen to expand their investments in Russia
as one-third (34%) of the respondents surveyed invested more in Russia in 2011
than in 2010. Current investors feel increasingly confident that they
understand the market and are able to leverage consumer demand, availability of
natural resources, skilled labor, convenient geographic location and the
variety of opportunities that are expected to come with Russia's accession to
the WTO. This is also an indication of the government's right direction.
What realistic,
practical, steps can the Russian government take to combat capital flight? What
should the government be doing that it's not already?
One of most successful instruments for Russia investment climate improvement is
The Foreign Investment Advisory Council (FIAC) which was established in 1994 as
a result of the combined efforts of the Russian government and foreign
businesses. FIAC prepared dozens of policies, recommendations and legislative
projects for the government, which were reviewed and many of them were applied
which led to significant investment climate improvement.
Among the economic policies implemented by the Russian government to encourage
foreign investment include the creation of the Russian Direct Investment Fund
(RDIF). The fact that supported by the Russian government fund will investment
in projects inside Russia in cooperation with foreign companies has created a
major impulse for the market players who were not sure whether to invest in
Russia.
Russian government has established Agency for Strategic initiatives to promote
new projects, including in business, and to support young professionals and
social welfare projects in 2011. ASI prepared National Entrepreneurial
Initiative which appeared to be a complex road map for improving Russian
investment and entrepreneurial climate and increase the transparency and speed
of private-public cooperation.
Russia's accession to the World Trade Organization is a contributing factor to
the sharp increase in investors' perceptions that Russia is more globally
integrated
Adoption of new policies enforcing private property rights, facilitating the
start of new business, decreasing the number and time of bureaucratic
procedures, all this can lead to reversal in capital flow figures. According to
global Ernst & Young investment attractiveness survey the satisfaction of
investors with having a business in Russia is growing. This is also an
indication of the government's right direction.
Capital flight features
pretty prominently in the "bear" analysis of Russia: is it really
something that should be towards the top of the list for Russia's economic
policy makers, or are there other, more urgent priorities?
Capital flows figures (according to current methodology) are not the priority
by itself. It's a derivative factor. The main priority at the moment is
improvement of an investment climate and enhancing favorable conditions to
conduct business. With changes in the Government and the Kremlin this year,
there is a strong opportunity to enact policies that clearly and credibly
address investors' concerns about bureaucracy and corruption and reinforce
their positive impressions about smart macroeconomic policies.
An important problem which lies in the capital outflow figures is capital flight, i.e. illicit capital outflow. This problem also attracts attention of the government, ministries and customs service.
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