Russian capital outflows up, reserves down

Moscow, Aug 30 | Updated: Aug 31 2007, 05:29am hrs
Russia's net private capital outflows will hit $10 billion in August as foreign investors cut their exposure to risky assets, a senior government source told Reuters on Thursday.

"The outflows were caused above all by the subprime crisis in the United States. Non-residents are pulling their money out of emerging markets," the source said.

The source said virtually all of the outflows took place between August 10 and August 24. Russia saw major capital inflows earlier this year but the trend reversed in July amid global financial jitters.

The source said capital inflows between January 1 and August 24 this year were $56.3 billion. The central bank has forecast full-year net inflows at $70 billion. The source said August outflows were "not critical for the Russian economy". Analysts estimate the amount of the remaining speculative capital, which came to Russia on expectations of the rouble appreciation, at only $5 billion, suggesting there was not much left to pull out.

Russia's gold and foreign exchange reserves, the world's third largest, fell by a modest $900 million to $413.8 billion in the third week of August, helped by the strong euro, which added value to the dollar-denominated reserves.

Dollars make up about 50 % in the reserves currency structure. Euros makes up about 40% and sterling about 10%. The Russian central bank won thumbs up from economists this month for its management of the money market volatility with its refinancing tools. It also adjusted the rouble's managed float policy this month, allowing some exchange rate fluctuations. Russian banks, whose total foreign borrowing stands at 15% of their combined liabilities, are vulnerable to a change in global liquidity conditions and some may face problems refinancing their debt, say analysts.

Several mid-sized private banks have stopped issuing home loans, evoking memories of a mini banking crisis in 2004, which brought the money market to a standstill, but analysts said there were few reasons to worry this time.

"We believe market worries about the general state of the banking system are exaggerated, in our opinion the largest banks can painlessly go through the liquidity squeeze," said Renaissance Capital analyst Maxim Raskosnov.