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IntelliNews described in the feature “Capital flight figures to make your eyes water” Russia lost $53bn in capital flight during the first six years of Putin’s rule. All in all, $156.4bn left between 1994, when the Central Bank of Russia (CBR) started tracking capital flight, and the end of 2005.
And then something changed in 2006. That was the year that capital flight reversed and $43.7bn returned home, almost as much as had left in the previous six years. The next year in 2007 another $87.8bn came back, bringing the total for those two years alone to almost as much as had left the country since 1994.
Many factors went into the change of mentality but probably the most signifi- cant was the stability of the currency. Russia’s most famous DJ at the time, Ivan Salmaksov, told this correspondent that he had just been offered to host and produce a youth TV segment called “7-Ya” (a play on words in Russia that means both “seven times me” and “fam- ily”) on ORT (now the First Channel, Russia’s biggest TV station, but was also toying with the idea of going to New York for a year to see another market
at work. “What’s changed is things are starting to look better,” Salmaksov said. “The ruble has been at RUB6 to the dol- lar for two years.”
People were starting to build careers. There was opportunity in nearly every walk of life. Money was abundant for projects and incomes were rising by 10% a year as the Kremlin had adopted a poli- cy of using the petrodollars to close the gap between public and private sector wages. The future looked increasingly predictable.
The change is also visible in the business confidence survey. It had been negative for most of the six years of the boom, and started January 2006 at -2, but by February it rose, like this April, to zero before rising again in the summer to 3. There was the traditional seasonal fall that winter but the following year it climbed again even further to a high of 7 – its highest level ever – in July 2007. And it remained elevated throughout most of 2008 as well until September
2008, when Bear Sterns collapsed.
By January 2009 confidence slumped to -20 – its lowest level ever – and all of the $156bn that had come home in the last two years left again in a matter of months.
And there is the problem. It took six years of rapidly improving prosperity for Russian business people to start believing their country had a future and it was worth investing into growing their businesses, so they started to bring money stashed abroad in offshore havens like Cyprus.
Those hopes were cruelly and spec- tacularly crushed yet again. The entire population remains to this day trauma- tised and mistrustful. It was not just the oligarchs that were hurt in the collapse of 2008. The Cypriot banking crisis in 2012-2013 showed that most of the money held in Nicosia was Russian mid- dle-class money, not oligarchs’. Regular Russians simply didn't trust their own banks and currency and kept what they could elsewhere.
The government was also in shock. Another factor fuelling the boom in 2007 was the fact that inflation fell into single digits for the first time since the collapse of the Soviet Union. Putin immedi-
ately announced a $1 trillion investment programme into infrastructure – more than twice as much as the RUB27 trillion national projects programme currently in place. The Kremlin intended to use its petrodollar windfall to totally transform the country with economic multiplying infrastructure investments.
Those plans were quickly ditched. The Ministry of Finance had built up a war chest of almost $600bn, but a little less than half of that was spent in the follow-
ing years to bail out the economy. Putin has just completed building his fiscal fortress and the Central Bank of Russia (CBR) has obtained its “comfort level” of $500bn in foreign exchange reserves last year, which have more recently risen to just under $600bn again.
While the fiscal fortress is mostly seen as a strategic financial weapon as it makes Russia largely impervious to the Western sanctions imposed on it since the 2014 annexation of Crimea, the
idea for the need for a fiscal fortress
was born in the aftermath of the 2008 crisis. The government’s policy-making since then has been pervaded by “never again” thinking. It is the reason that CBR governor Elvira Nabiullina is hailed as the “most conservative central banker
in the world”, as she was already work- ing in the former Finance Minister and Audit Chamber head Alexei Kudrin team and had a ringside seat to the shocking aftermath of the 2008 crisis.
The return of confidence in the future by Russian business people is more than welcome but with their history it will take several years of stable growth and fading geopolitical tensions before they start to bring their money home again. In the meantime, the onus will be on the government to make the necessary investments to transform the economy. And that will make a big difference, but investment rates continue to run below the 25% increase called for in the plan and it won’t exceed them until the domestic businesspeople start to participate. The government is fully aware of this and the investment plans explicitly calls for measures to improve the domestic investment climate; it's going to take a lot to convince sceptical business people that “this time it’s different.”
Find more Eastern Europe content at www.bne.eu/eastern-europe
Selected headlines from past month:
· Ukraine’s security council lists 13 oligarchs
· DATACRUNCH: the bne car ownership/age index
· Ukraine signs off on €1.3bn worth of French investment deals
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