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Higher capital outflow keeps lid on inflation in Russia

Russia has announced $42 billion in net capital outflow between January and April, just two months after Vladimir Putin was re-elected as president in March. This is equivalent to half of the $84.2 billion recorded in the whole of 2011.

Russian central bank chairman Sergey Ignatiev put forward several reasons for the capital flight. Amid debt worries in the eurozone, foreign investors are fleeing emerging markets and Russia is no exception. Secondly, Russian banks are boosting their foreign assets, and foreign direct investment by Russian companies has increased threefold since the start of 2011, reaching $63 billion. Most of the funds fleeing Russia are invested in the UK, US, Germany and Austria. Earlier this week the deputy economic minister, Andrey Klepach, forecast that capital was likely to continue its flight.This comes as the stock market and the ruble dropped to their lowest levels in more than a year. Just over a week after Vladimir Putin's inauguration, the Micex index has slipped almost 20% from its March highs and the ruble is down more than 6% against the US dollar since the elections.Another ambitious goal by Russia's central bank is to keep its inflation target at between 5-6% this year, according to Sergey Ignatiev. “It will be an extremely challenging task to keep inflation in this range. Fuel prices have risen 0.7% in Russia this month, with the government not taking measures to curb the speedy growth in prices as it did in the beginning of the year. So the current pace of fuel price growth is likely to continue adding to the overall inflation pressure”, says Anton Safonov from Investcafe.However, Alexey Moiseev from VTB Capital does not consider capital flight a problem. On the contrary, he thinks it’s pretty good for the Russian economy. “Higher capital outflow decreases inflation risks and allows the monetary authorities to limit the purchase of foreign currency on the open market,” he said.