CORRECTED: Russia capital flight reaches $50 bn

Russia on Tuesday reported $18.7 billion in capital outflows in the third quarter, far more than state estimates and underscoring the uncertainty that has gripped the country in recent months.

The Central Bank said the poor quarter came on top of the $30.6 billion that had left Russia between January and June. The nine-month total has now reached $49.3 billion — three times the $16 billion seen one year ago.

Government officials have blamed the capital flight on a fragile business climate in which investors complain of red tape and the inability to defend their rights in court.

But some economists said that even more money headed for safer harbours in the second half of the year because investors could not tell whether Prime Minister Vladimir Putin planned to run again for the presidency which he held in 2000-2008.

Putin last month ultimately disclosed plans to return in March polls that will almost certainly see him replace his hand-picked successor Dmitry Medvedev as president.

But the market’s relief over that announcement was followed by the shock resignation days later of Russia’s respected finance minister Alexei Kudrin.

The veteran fiscal conservative’s brief has since been handed to First Deputy Finance Minister Igor Shuvalov — another Putin ally who previously oversaw Russia’s industrial policies.

The English-speaking Shuvalov has a reputation for being a consummate political insider who is responsible for restoring Russia’s image at international forums such as the G8.

Yet he is also seen as a more pliable figure who may be more willing to fit the country’s tight budget in line with Russia’s plans to boost expenditure on the military and other pricey projects.

Shuvalov told a US investment forum on Tuesday that his government was open for business despite Russia’s reputation for corruption and graft.

But he also urged patience and stressed the importance of social stability — a mantra of Putin’s rule that worries some investors.

“Improving the country’s business climate is a long-term process,” Dow Jones Newswires quoted Shuvalov as telling a US-Russian Business Council in Chicago on Tuesday.

“It’s impossible to change the country very quickly,” said Shuvalov. “It’s very hard work that will need time. In order to have that time we need social stability.”

The Central Bank figures were reported only moments after Shuvalov spoke and no Russian official has yet referred to them directly or tried to explain the enormous jump.

Officials had earlier predicted $36 billion in total capital outflows for 2011.

The Central Bank meanwhile also gave estimates for the capital position dependent on the price of oil, a key export earner for Russia and crucial for the public finances.

It said that if oil prices averaged $75 per barrel in 2012, the export income generated would still leave the country posting capital outflows of $15 billion as money continues to leave.

At $100 per barrel, oil income would balance the capital outflows while a price of $125 would result in a capital gain for the year of $10 billion — still a very small figure compared with actual oil earnings.

The estimates highlight the importance of energy exports even as Putin and Medvedev have stressed the need to wean Russia off them and modernise its economy.

VTB Group Chief Financial Officer Herbert Moos said oil price shocks now posed one of the biggest risks to foreign investors in Russia.

“There is no large manufacturing, banking or financial sector (in Russia) that could absorb the shock” of plunging oil prices, Moos told the RIA Novosti news agency.

“And in addition, now we have a new risk … I think that with Alexei Leonidovich Kudrin’s departure, there is a new risk of the budget facing a structural deficit,” Moos warned.