Russia Faces Capital Flight

Capital flight from Russia, already at $64 billion this year, is likely to intensify in coming months as a weak showing by Prime Minister Vladimir Putin's United Russia party in parliamentary elections heightens political uncertainty, economists said.

The net capital outflow, blamed on European banks and wealthy Russians concerned about a government shake-up, is now expected to exceed $85 billion in 2011, acting Finance Minister Anton Siluanov said late Tuesday.

The bearish forecast came as Fitch Ratings warned about political uncertainty in Russia, a day after voting ended in the Duma election, with Putin's United Russia getting less than 50% of the vote. Mr. Putin on Tuesday said he sees "serious and substantial renewals" in government personnel after presidential elections set for March of next year--which he is still expected to win handily.

Russia's leadership "needs to have vision, and Russia needs more than stability or the status quo," said Tim Ash, head of emerging markets at Royal Bank of Scotland. "Unless we see real, meaningful change, outflows will continue, even if we see no drop in oil prices."

Market watchers, however, have questioned whether Mr. Putin will respond to dipping poll numbers by initiating new reforms—or more tightly controlling the economic and political process.

Russia Readies for Economic Deterioration

The Russian government is preparing itself for a worsening global economic environment that could dent high oil prices, upsetting the country's fiscal balance and further weakening the ruble.

With crude oil expected to end the year at the highest average price ever, tax receipts more than cover Russia's record spending levels ahead of 2012 presidential election. Politically-sensitive inflation levels have fallen, and consumer-price growth will probably end the year under 7%, a low figure for Russia, amid an improved harvest following the severe drought of 2010.

Still, capital outflows are growing as the Russian financial system, unbound by any significant capital controls, sends billions abroad to repay corporate foreign debt and shore up European lenders.

Russia requires a consistent, annual increase in the oil price of 30% to compete with the economic growth of the fastest-growing emerging markets, Credit Suisse said Wednesday in a report. "The country's ability to maintain its purely commodity-related growth model is now approaching exhaustion," economist Alexander Redman said.

If the Italian financial system "goes down" or a major European bank collapses, then no Russian companies or banks will be able to borrow abroad and the Bank of Russia will have to inject even more liquidity to prop up the local market, said Sergei Guriev, rector at Moscow's New Economic School and a member of a commission advising the president on national projects.

Still, with its low debt levels and fiscal balance today, Russia is better off than many other countries in Europe so far, according to Jacob Nell, economist at Morgan Stanley in Moscow.