Debt and Foreign Capital Fluctuations Highlight Changing Investor Sentiment in Russia

CEIC Russia Data Talk - December 6, 2013 The net incurrence of liabilities for different types of investments recorded in the Balance of Payments Financial Account released by the Central Bank of the Russian Federation provides an estimation of incoming foreign capital to Russia. Foreign investor sentiment is subject to short-term changes, and currently reflects market reaction to the US Federal Reserve's announcements with respect to quantitative easing (QE) tapering, and changing investment conditions in the country. Portfolio investment net incurrence of liabilities reached USD 243 million in the second quarter of 2013 (Q2 2013), the lowest amount since Q4 2011 and the third consecutive quarterly fall since Q3 2012. This affected total portfolio investment, which turned negative in Q1 2013 and further declined to USD 1.74 billion in Q2 2013, partly due to an increase in direct investment abroad. Portfolio investment imbalances are quick to react to deteriorating investment conditions in the local market due to the short-term speculative nature of this type of investment. The declining trend might be attributable to the QE tapering announcements in the US earlier in 2013. The situation, however, is not as dramatic as it was in Q3 2011 and Q4 2008 when portfolio investment drained out from Russia with outflows reaching as much as USD 8.44 billion and USD 16.17 billion respectively, causing sudden shocks to the financial system. Foreign direct investment net incurrence of liabilities reached USD 16.60 billion in Q2 2013, which is close to the average value for the past two years. Total direct investment amounted to USD 9.66 billion in Q2 2013, which is the highest value in the past six years due to a smaller net acquisition of financial assets value (USD 6.94 billion) in Q2 2013 compared to previous years. The dynamics of direct investment inflows are driven more by the long-term investment potential in Russia, not too much affected by short-term volatility in investment sentiment. The value of net errors and omissions of the Balance of Payments was positive at USD 1.38 billion in Q2 2013. This measurement defines the statistical discrepancy when reconciling the Balance of Payment accounts. It is also one of the key variables to proxy capital flight through suspicious transactions. Capital flight has been a constant problem and is mostly attributable to unconducive investment conditions, such as unstable currency, corruption, unfriendly investment related legislation, shadow financial transactions and unstable political and judicial systems, rather than any external global influence. Russia has been running a current account surplus for 15 consecutive years, driven by high oil and gas prices, which have made the economy self-sufficient in many ways and obviate the need for significant external borrowings. However, the Q2 2013 current account value of only USD 3.41 billion, compared to USD 25.03 billion in Q1 2013, is alarming since it is the smallest value recorded in recent years. The preliminary estimate for Q3 2013 (USD 1.1 billion) shows further decline in the current account surplus and consequently a deteriorating balance of payments position. The potential decline of short-term external investment due to changing global investor sentiment, coupled with the waning current account surplus and slowdown of exports, might have negative consequences for the Russian economy. By Alexander Dembitski - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
6th December 2013 Debt and Foreign Capital Fluctuations Highlight Changing Investor Sentiment in Russia

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