Things are looking up?

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Putin's Fake Good News on the Economy

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website
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President Vladimir Putin is eager for good news about the economy. So when he learned that Russia had its first capital inflow in five years in the quarter from July through September, he proudly shared the information at an investment forum in Moscow, saying "on the whole, the peak of the crisis has been reached." The inflow, though, is nothing to celebrate: It's a sign of a grim, reluctant adjustment to ugly circumstances.

QuickTake Vladimir Putin

Russia is a habitual capital exporter. There have been only 17 quarters with positive capital inflow since 2000. In tough times, private business hastened to get money out of the country -- most spectacularly during the 2008 financial crisis and after the 2014 Crimea annexation:

This doesn't mean Russia lacks investment opportunities. Rather, business executives have never considered the country sufficiently safe for their capital. Money flowed in only when opportunities for profit appeared to outweigh the risks of confiscation, corrupt courts and unpredictable government interference.

At the Russia Calling! conference sponsored by the state bank VTB Capital on Tuesday, Putin seemed to imply that the third-quarter influx of $5.3 billion meant that investors are positive about Russia's economic prospects. "As our economy adjusts to lower commodity prices," he said, "opportunities are opening up in other sectors: for engineering, agriculture, processing and so on."

That's probably not the case. 

Cash fled the country in 2014. Last year, net purchases of foreign financial assets by Russian banks and companies reached $122.4 billion, driving total capital outflow to a staggering $153 billion. This is no longer happening: In the first nine months of the year, Russians were net sellers of foreign financial assets. Almost all of the capital outflow this year -- $45 billion for the first nine months -- has been from debt repayment. 

Part of this is attributable to state-controlled but technically private companies that have been hit by Western sanctions since last year and are replacing foreign debt with domestic borrowing. Private banks and companies, though they are not subject to sanctions, also have found it more difficult to borrow overseas. That's because Russia's economy doesn't inspire optimism, given the collapse of oil prices and the deep ruble devaluation that followed. 

Some money is coming in, but in the third quarter, most of it, $7.1 billion, was marked by the central bank as "net errors and omissions." That means illicit flows -- largely from the manipulation of customs declarations -- that the government cannot locate or tax. The third quarter "net errors and omissions" are almost twice the $3.7 billion in direct foreign investment to Russia in the last five quarters. 

In the absence of foreign money, Russian businesses appear to be bringing back some of the cash they have stashed overseas. "Net errors and omissions" between 2000 and 2013 reached a total of $85 billion. The money, however, is coming in as it left, unaccounted for by the government, providing further evidence businesses remain wary of the Putin system that allows bureaucrats to treat all property in the nation as their own.

Official statistics don't necessarily register how that money is invested. The Bloomberg consensus forecast shows investment going down 8.5 percent this year, and Putin, who called this steep fall "a certain reduction" in his speech Tuesday, should know that government investment cannot quite replace drastically reduced private sector activity. Otherwise, the government's National Welfare Fund wouldn't have rejected a request for loans from the state oil company Rosneft, which is run by Putin's friend Igor Sechin. 

Sechin was at Tuesday's conference, too. He complained about the 82 percent tax rate affecting the oil industry, but he didn't get much sympathy: Finance Minister Anton Siluanov said Russia needed to develop other sectors rather than help its oil companies.

The economic team that Putin praised in his speech for its "high level of responsibility, consistency and ability to get results" knows that only diversification and a leap in private sector activity can bring a return to growth. "What worries me most in the pace of reforms that we need to stimulate investment from the private sector," central bank Governor Elvira Nabiullina told Bloomberg TV in an interview.  

She was being diplomatic: No reforms are in sight. At the forum, VTB Chief Executive Andrei Kostin even said there was no use in providing loans to small and medium-sized firms. "If there is no demand for small and medium business in the land, if there's no space for it, what's the use of providing credit to it?" he said. "These will just be non-performing loans. If there's consumption, if there's demand, there will be money; if there's no consumption or demand, why pour cheap money into the economy?"

Putin, however, is not inclined to let his government to do anything but wait for companies to adjust to diminished demand caused by devaluation by themselves. "Liberalization" is not a word he's willing to say or hear. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Leonid Bershidsky at

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Max Berley at