The White Bear Has Gone

Capital outflow from Russia broke historical record of 19 % of GDP - almost as high as during 1998 crisis. Portfolio investors hurry to leave the country and international refinancing of our corporations and banks has been seized, causing the drain

Central Bank estimates the overall outflow in the third quarter of 2008 at $ 16.7 bn. In July, there was a net inflow of 13 bn., a net outflow of 5 bn., and as much as 25 bn. in September. This is a record high, about 19 % of Russia's GDP, which can only be compared to 1998 crisis, when the loss was 20 % GDP.

Looking at the causes of such radical change of capital flow direction, we can name three processes that constituted the "physical" basis of the current crisis. Firstly, it is the departure of international investors from Russia as well as from all developing markets. Although this trend is often somewhat overestimated, withdrawal of portfolio investment comprised $ 9.5 bn. within three months (with a peak in September). It is rather dramatic development when about one third of all investment made in the last eight years leave the country, but the other two thirds are still left, or were still left as for the end of September.

The other direction in which the money flows out it repayment of earlier loans by banks. For instance, in September, banks spent 7.6 bn. to repay their foreign loans.

The third and most significant channel is the move by banks that are transferring funds to foreign accounts in order to hedge monetary risks in times when ruble is weakening, and to reserve their funds to settle with creditors.

Unlike banking, non-finance economy sector shows far smaller capital outflow. Direct international investment in the real economy sector was still in surplus at $ 12.2 bn. (although less than the year's first half which showed 39 bn.).

Net credit gain by non-finance companies remained stable at $ 15 bn. Total corporate debt (exempt that of banks) grew by 57.6 bn., meaning that gross gaining of credit in the first nine months of the year surpassed 100 bn., about as much Russia's debt in the times of both Gorbachev and Eltsin.

In September, international payment of Russia's real sector comprised about 7 to 8 bn., which must have been to heavy a burden for many companies. And as the real sector is vastly relying on loans, it is logical to expect that it will soon be stricken by capital outflow that now affects mainly finance sector. It is just a question of time. Some estimates show that banks will have to pay $ 15.4 bn. in this year's fourth quarter, while other companies' payment will comprise as much as 24 bn.