Russia’s Opposition Capital Movements

Russian stocks, despite low single digit p/e draws, skidded as 2011 capital flight came in at the $85 billion estimate, as the central bank continued to track heavy corporate debt repayment overseas and individual account withdrawal which reached record sums in the final quarters coinciding with parliamentary elections and subsequent unrest. Ratings agencies predict worsening flight through the March presidential contest, where Putin will stand again against   authorized opposition candidates to include previous administration loyalist and billionaire business executive Prokhorov. Former Finance Minister Kudrin has also appeared at public rallies criticizing higher military spending and pre-poll pension and wage hikes that undermine fiscal balance. Oil and gas taxes cover half the budget and another $60 billion will be borrowed domestically this year as officials also reserve the right to tap the remaining $25 billion “rainy day” fund. The per-barrel crude price to keep the budget in line was raised to $115 as the current account surplus may also halve to 2 percent of output. Uncertain commodity values are combining with the Eurozone crisis to cap GDP growth in the 3 percent range. The continent takes the bulk of energy exports and almost half of foreign reserves and the currency regime  “basket” are in euros as the ruble continues to soften separately against the dollar on interest rate easing and political risk. European banks in Moscow despite new WTO opening that will permit a 49 percent ownership share have reduced their presence and transferred assets cross-border to support parents, with the exodus termed a “significant vulnerability” in an IMF system stability assessment. The state-owned behemoths Sberbank and VTB now overwhelmingly control both commercial and investment banking, the latter to be promoted by the just-completed merger of the MICEX and RTS exchanges which will house a long-elusive central securities depositary. It will trade stocks, bonds, currencies and derivatives, and offer a larger platform for repatriation of IPO activity that still gravitates toward London. Consolidation will facilitate non-resident access to local corporate debt, mostly quasi-sovereign, which has attracted both conservative and speculative buyers.

However appetite may be disturbed by the size and frequency of street confrontations last seen in the immediate post-communist era, reinforced by the country’s perennial poor showing in Transparency International rankings and a December OECD report castigating the ‘weak” rule of law and “restrictive” trade and investment practices. Authoritarian drift has been a renewed theme as well in Emerging Europe’s parallel pole in Turkey, where the Council of Europe has strongly criticized human rights and judicial behavior as trials proceed against suspected military coup plotters and independent media. President Erdogan at the same time implicitly challenged central bank autonomy with a denunciation of the “interest rate lobby” advocating tougher anti-inflation steps as mainstream economic observers try to press their case.