Addressing Russia's Capital Flight: Everything Must Change

 |  Includes: ERUS, FXRU, RBL, RSX, RSXJ
by: Craig Pirrong

Igor Yurgens discusses what Russia needs to do to address its capital flight:

Although the Russian economy is the 10th largest in the world, it is regulated in a way that does not suit investors’ preferences. That is why the regulation issue outweighs the potential advantages that a speculative portfolio investor could have given the high oil prices we’re seeing. In addition, in order to attract short-term direct investment, the country needs investors to be confident in their future, property rights, simple relations with the state, as well as a number of investment factors. We lack some of them, like a predictable tax burden. The absence of quality human capital and skilled labor has also depressed investment.

Investors seek more politically stable havens and financial markets in periods of panic or plain old anxiety. Nor do investors enter a market until they completely understand the country’s foreign investment strategy.

Do you think that the capital outflow we’ve seen since the beginning of the year can give way to capital inflow?

Yes, once all the factors I mentioned change, once Russia becomes investment-friendly for both domestic and foreign investors, once we carry out a sort of regulatory revolution, and neither small or medium-sized businesses are assaulted by law enforcement and raiders.

In other words, pretty much everything must change. Things that have remained largely unchanged for 20 years. The prospects for a “regulatory revolution” that protected property rights and stamped out raiding were dim enough under Medvedev’s presidency. And while there was a chance that he might actually proceed with something resembling modernization, the return of Putin–who has never shown the slightest interest in any of these things, and who has actually worked against them in crucial instances–means that the prospects are now non-existent.

So if Yurgens has in fact identified the necessary conditions for vibrant foreign and domestic investment in Russia–and his list is a reasonable one–the only conclusion is that the prospects for vibrant foreign and domestic investment in Russia are pretty much non-existent.