Politics, capital flight eclipse "Russia's Davos"

Sun Jun 19, 2011 10:30am GMT
 

By Guy Faulconbridge

ST PETERSBURG, Russia (Reuters) - The Kremlin's annual investment pitch to the world was overshadowed by one uncomfortable fact: Tens of billions of dollars are fleeing Russian assets ahead of the March 2012 election.

Russia may be one of the few places where foreigners can buy into both swift growth and vast mineral resources, but some local investors have been hedging against the country's tumultuous political history by buying dollars.

Behind the spin of the St Petersburg International Economic Forum, which ended on Saturday, investors grappled with two questions: Who will rule Russia after the election, and why have there been net capital outflows of $55.6 billion (34.3 billion pounds) over the past eight months?

President Dmitry Medvedev gave an answer of sorts.

He laid down his credentials for a potential re-election bid by warning that unless "my choice" of modernization is implemented, Russia faces stagnation two decades after the fall of the Soviet Union.

"The notorious stability could hide another period of stagnation," Medvedev told investors, impressing many but also prompting some to ask whether he would finally start acting on the many promises he has made but often failed to keep.

Prime Minister Vladimir Putin, who is viewed by most Russians as the paramount leader, was silent in Moscow.

In previous years, Putin has upstaged Medvedev during the forum by berating oligarchs or sealing big energy deals. This year, the 58-year-old former KGB spy met the health minister and the head of Russia's national archives in the capital.

Putin and Medvedev, 45, have not said which of them will run but the two -- allies who have worked together for two decades -- have occasionally appeared to differ in recent months, prompting speculation about a split between Russia's leaders.

At the forum, Russia's answer to Davos, Medvedev brushed off a question on whether he would run but said there remained "very little time to wait" for a formal announcement.

"The two potential candidates are not 100 percent the same. It is visible not only in their political statements but also in their ages," said Anatoly Chubais, who headed late President Boris Yeltsin's campaign in the 1996 election.

"But at the same time, it would be wrong to consider these two candidates as opposite to each other."

BANK ON A BOOM?

Russian officials played down political risks to the $1.5 trillion economy, telling investors they could miss out on profits if they waited for the election.

These officials point to growth rates which the International Monetary Fund forecast will make Russia a $3.2 trillion economy by the end of 2016, or the fifth-largest economy after the United States, China, Japan and Germany.

"There are certainly clients of ours who think there could be dramatic change depending on the outcome of the elections, but our advice to them is usually not to wait," said Christopher Barter, head of Goldman Sachs in Russia.

Capital flight has been draining Russia's economy. Since the Soviet Union's collapse in 1991, Russia has had only two years of net capital inflows -- in 2006 and 2007.

But with oil, the lifeblood of the Russian economy, trading at more than $100 a barrel, investors have been puzzled by a return to such sharp net capital outflows, which the central bank forecasts will reach $30 billion-$35 billion this year.

"With international clients, the elections are having a small impact," Stephen Jennings, CEO of Renaissance Capital, told a breakfast discussion.

But Jennings, who has worked in Russia for two decades, said Russian investors were moving assets abroad because of perceptions of heightened political risk.

"You see that in the capital flight numbers," he said.

First Deputy Prime Minister Igor Shuvalov called the widely quoted capital outflow figures "dodgy" and said much of that money was not fleeing Russia, but merely being changed into U.S. dollars and kept in accounts in Russia.

"Russia continues to be out of fashion -- we are very late with reforms. We need to make a lot of swift movements to satisfy the foreign investor," said Sberbank Deputy CEO Bella Zlatkis, a former deputy financial minister.

"If we do not do this, then the capital outflows will continue despite the high oil prices," she told Reuters.

(Additional reporting by Kyril Sukhotski, Oksana Kobzeva and Katya Golubkova; Editing by Dan Williams)

<p>Russia's President Dmitry Medvedev (L) and Prime Minister Vladimir Putin are pictured outside Moscow's Kremlin in this February 23, 2011 file photo. REUTERS/Ivan Sekretarev/Pool</p>
 
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