No subject in my experience causes more misunderstanding in discussions of economies – and of the Russian economy in particular – than capital outflow.
There seems to be a well-nigh universal belief that capital inflow is a “good” and that capital outflow is “bad”, and when the subject is Russia this is taken to an extreme.
Specifically whenever the subject of capital outflow from Russia arises commentators – including Russian commentators – invariably to fall into the trap of talking of how this reflects a “loss of confidence” in the Russian economy, with images of Russian businessmen bailing out of the country with suitcases filled with money.
Such things do happen, and they have happened to Russia in the past. Russia experienced precisely that sort of capital outflow – or more properly capital flight – in the two crisis years of 1998 and 2008, when it appeared in both cases that the economy was going to crash (it didn’t quite do so in either case).
However as a general rule capital outflow most often simply reflects the fact that a country is running a trade surplus and cannot absorb all the money it is earning obliging it to invest some of this money abroad, or – as has been the case in Russia in recent years – is paying off its foreign debt.
Certainly the $13 billion of capital outflow that Russia has experienced so far this year is economically speaking inconsequential.
In my opinion most of it is a correction to the excessively high capital inflow that took place in the last quarter of last year and at the very start of this year, though some of it may also reflect the 40% rise in Russia’s balance of payments surplus to $21.7 billion, which has taken place this year over the same period.
Here is what I previously wrote about the high capital inflow into Russia at the end of last year and at the beginning of this year, and why it was causing me concern
…..the current rapid inflow of funds into Russia – with foreigners buying $727 million of Russian stocks in 2016, of which the bulk came in the last two months of the year – is a mixed blessing.
One effect of this sudden inflow of funds is that it is causing the rouble to strengthen (it fell below $60 today for the first time since July 2015), which is bad both for the budget and for the economy’s overall competitiveness.
Whilst this flood of money is a vote of confidence by the international investment community in Russia and its economy, reflecting optimism about the fall in inflation and the ongoing recovery, much of it also looks like hot money, attracted to Russia as much by the high real interest rates there as by optimism about the economy and the still very limited rise in oil prices, as well as by the election of Donald Trump.
Hot money is notoriously foot-loose, and is capable of leaving Russia as quickly as it comes in, causing significant problems in its wake. Suffice to say that the fact that there has been this sudden rush of money into Russia is in my opinion a further good reason to cut interest rates now.
Since I wrote those words oil prices have softened, Russian interest rates have marginally fallen, it has become clear that Donald Trump’s election will not cause the sanctions the West has imposed on Russia to be lifted any time soon, and some or most of the “hot money” that was being attracted to Russia at the end of last year and at the start of this year has as a result thankfully left.
The result is that the excessive strengthening of the rouble which was taking place – and which it is now known was causing the Central Bank real concern – has ended, with the rouble still trading at $59, which is the level it reached when I wrote those words.
The $13 billion of capital outflow Russia has experienced since January in my opinion almost entirely reflects this development, and significantly in July – when the correction appears to have completed – it appears to have ended, with capital outflow that month being replaced by capital inflow.
$13 billion is hardly a significant amount for an economy the size of Russia’s, and as a macroeconomic indicator capital outflow of that size tells us little.
The economic indicators which matter in Russia are those which generally matter in other economies: the rates of inflation, unemployment and of GDP and manufacturing growth.
We do not usually worry excessively about rates of capital outflow from other advanced economies, and in the absence of a crisis we should not worry about it in Russia’s case either.