A New Home For Russian Capital Russia

The flight of cash seems to be abating as faith builds in Putin

It sounds like the last chapter of a legal potboiler. Lucy Edwards, a former Bank of New York Co. executive, pleads guilty to a scheme to help spirit $7 billion out of Russia through accounts set up at the bank. Her husband, a Russian businessman, admits to participating in the scam, which U.S. prosecutors say included the laundering of a $300,000 kidnapper's ransom. In post-Soviet Russia, it's an all-too-common story. Everyone from grandmothers selling knit hats on the street to moguls use any means available, from suitcases to wire transfers, to whisk their dough to safe havens.

But behind the news is a trend at odds with this picture: Less money is fleeing Russia. A growing number of investors, both foreign and Russian, see more reasons to keep their money inside the country now that the unpredictable Boris N. Yeltsin is out and acting President Vladimir V. Putin, 47, is virtually certain to win his own four-year term in presidential elections on Mar. 26. "There is more stability" these days, says Peter Boone, chief of research at the Moscow-based investment bank Brunswick Warburg. It's all relative, of course: Boone estimates that capital flight from Russia will slow from $20 billion in 1999 to $15 billion this year. Far from ideal. But if $5 billion stays put, it can do plenty of good for this capital-starved economy.

Whether capital flight continues to slow depends on Putin. He is vowing to crack down on corruption, strengthen Russia's legal system, and cut taxes. In a step welcomed by entrepreneurs, Putin's tax minister recently proposed to slash the top rate for personal income taxes from 30% to 20%. Foreign investors are cheered by Putin's pledges to protect property rights and make Russian companies adopt international accounting standards.

Such signals are spurring investment in Russia. Money that might otherwise leave the country is staying home. Surgutneftegaz, Russia's second-largest oil producer, expects to more than double capital investment in 2000 over the 1999 level of $500 million. Even Russia's infamous tycoons, well-known for their preferences for Swiss bank accounts and Riviera real estate, seem to be bringing their money--some of it, anyway--home. An investment group linked to Boris A. Berezovsky recently plunked down some $500 million on Russian aluminum factories. "Berezovsky has exposed a lot of that [offshore] money to Russian risk again, and I think that's a reasonably good sign," says Roland Nash, an economist at Moscow-based Renaissance Capital. Siberian giant Norilsk Nickel, controlled by tycoon Vladimir O. Potanin, also plans to boost capital investment.

BOOMERANG CASH. Taking their cue from the locals and refocusing on the long-term allure of the huge Russian market, foreigners are giving the country a second look, too. Total foreign investment grew from $411 million in the third quarter of 1998 to $613 million in the third quarter of 1999. The St. Petersburg region is especially hot, expecting to snag $500 million in foreign investment this year, more than twice 1999's level. Telia, the Swedish national phone operator, recently put $81 million into a 15% stake in St. Petersburg-based Telecom Invest.

Some new "foreign investors" are not actually foreigners. "There is a significant inflow of money of Russian origin under the umbrella of foreign investment," says Troika Dialog Asset Management President Pavel Teplukhin. Resident Russians who've stashed their money in foreign banks are creating offshore companies expressly for the purpose of reinvesting funds into Russia. The goal is to avoid taxes that apply to domestic, not foreign, investors. If Putin lightens the tax load, Russians won't need to resort to such shenanigans.

Make no mistake. The Russian economy continues to have structural ailments, such as inadequate shareholder protections, that will keep capital flight a problem for years. Still, the Bank of New York scandal shouldn't obscure the larger picture. For a growing number of investors, today's Russia looks to be a good gamble.

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