War in Georgia Helped Trigger Capital Flight from Russia

In a comment yesterday now being reported by the Independent Information Agency - Khakasiya and other outlets, Kudrin said that six billion dollars of hard currency left Russia on August 8 and another billion left on August 11, the first two working days during Russian military operations in Georgia (http://www.19rus.ru/more.php?UID=9087). The finance minister stressed that these figures were gross rather than net, an indication that their impact on the Russian economy may be less than might otherwise be the case, and he suggested that the total amount of capital exported from Russia this year is likely to be less than the 30 to 30 billion US dollars the Central Bank has projected. Such a rate of outflow not only lends credence to reports that George Soros and other Western investors have reduced their stakes in the Russian markets (www.point.ru/business-news/2008/08/15/17456) but also adds support to suggestions by opposition figures that the impact of the war on Russia's wealthiest may have led the Kremlin to end the fighting sooner. At the very least, Russia's invasion of Georgia will compound Russia's economic problems, themselves reflected not only in capital outflows but also in declines in the ruble exchange rate, the Russian commercial markets which had already been in some difficulty, and Russia's access to Western capital markets. According to an article in today's "Novyye izvestiya," "the extent of foreign investment in the Russian economy was 22.9 percent less in the first half of 2008 than for the first half of last year," with declines in both foreign direct investment and credit lines from foreign banks and investment houses (www.newizv.ru/news/2008-08-18/96170/ ). The paper adds that "in the opinion of specialists, the latest geopolitical and economic shocks have only increased the negative attitudes of investors." Indeed, even one of the few bright spots for Russia in this picture - a 4.4 percent increase in portfolio investment year on year - reflects the movement of speculative capital, money that can move away quickly. Yevgeny Nadorshin, an expert at the International Institute of Economics and Finance, told the paper that "as a result of the conflict in South Ossetia, the Mechel affair, and the scandal around TNK-BP, we have lowered our prediction on the inflow of foreign investment from 40 to 30 billion US dollars." He added that "after the beginning of the armed conflict, Western creditors cut and then closed credit limits for Western companies. Thus, it is possible to expect a reduction of the inflow of credit from abroad and an increase in their cost," both of which will reduce the wealth of many Russians and make further economic expansion in some sectors more difficult. At the same time, however, Nadorshin said that "it is early to speak about a serious blow to the economy of Russia." The Russian government has reserves in its state funds that can be used to soften the blow. But investors are nonetheless likely to remain cautious about Russia for "another three to six months and perhaps further." Other experts, however, dismissed the impact of the war in Georgia on these flows. Yevgeny Yasin, a specialist at the Higher School of Economics, said that it was not the war in South Ossetia but rather actions by the Russian authorities, as in the Mechel case, and the weakening of the international economy that are to blame. But both Kudrin's remarks and the "Novyye izvestiya" article strongly suggest that Moscow's war in Georgia will have an impact on the Russian economy and consequently on Russia's behavior, especially if Western governments make it clear that they no longer view Moscow as a reliable member of the international community.