There was a big drop in capital flight from Russia during the second quarter of this year, according to the latest central bank figures. At first glance, that could be read as a sign that confidence in the investment climate is returning after huge capital flight over the last year.

But economists say the drop may have more to do with seasonal factors and the falling price of oil – leaving exporters with less cash to stash abroad – than with any belief that Russia is on track for institutional reforms that would combat corruption and better protect property rights.

Outflows in the second quarter were $9.5bn, down from $33.9bn in the first quarter. The reduction coincides with the return to the presidency of Vladimir Putin and a relative fall-off in the fervour of anti Putin protests that had threatened to shake the regime last winter.

Nevertheless, most of the reduction is explained by the fact that Russian banks returned to international financial markets in the second quarter to raise funding while they could; and by exchange rate weakness that saw many of the banks and their clients transfer funds out of hard currency into roubles, says Alexander Morozov, chief economist at HSBC in Moscow.

Capital outflows in the corporate sector and among the general population remained high at $20bn, he said, a figure little different from the previous quarter.

Increasing uncertainty over the investment climate and fears of a new carve-up of power ahead of March’s presidential election stoked a big jump in capital flight last year, to $80.5bn from $34.3bn in 2010.

“The main reason for the outflows is because of the weakness of Russian institutions, the lack of protection of property rights, and corruption. Because of all this, investments abroad still look much more attractive. Besides, moving capital overseas from Russia is a way to hedge yourself and your family from your business being seized,” Morozov says.

These problems of course did not suddenly appear last year. But jitters increased amid mounting jockeying between people close to Dmitry Medvedev, the outgoing president and current prime minister, and Putin, who announced his planned return to the presidency in September.

“When it became clear there was going to be a change of power, this, for the political and business elite, meant a regrouping of forces and a carve up of power and possibly of property. In these conditions, it is usual behaviour to try to better protect your assets,” Morozov adds. “Some may have also feared the street protests would escalate and destabilise political life in the country.”

Such risks clearly aren’t going away, as the power carve-up continues in the form of infighting between conservatives led by Igor Sechin, the former deputy prime minister who may now get to lead a consolidation of public assets in the energy sector, and those positioning themselves as liberals in the Medvedev government.

Indeed, most economists believe capital flight will continue unabated this year at $80bn to $90bn after the slight falloff in the second quarter, even though the economy ministry forecasts it will fall to $25bn. The recent liberalisation of the market for government bonds could help bring in an additional inflow of about $10bn, economists say. But this will scarcely alter the overall trend – unless real progress is made on structural and institutional reform to better the investment climate.

Related reading:
Russia’s capital flight: not an urgent issue yet but looking bad, beyondbrics
Rouble sinks to three-year low, FT
Russia: oil price down, capitalism up? FT Alphaville

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