Russia: Capital Controls?

Pivotfarm's picture

The markets are speculating that Vladimir Putin will have to set up some form of capital control in order to stem the flight of capital from his country. It was already happening before the crisis in Ukraine and the annexation of Crimea. But, now it is set to get worse and an estimated $70 billion is the figure that is being mentioned. That is far higher than had previously been expected.

The G7 suspended Russia from the G8 and is considering complete expulsion (on the say-so of the UK’s David Cameron) from the group of nations (Canada, France, Germany, Italy, Japan, UK, USA), during aMarch 24th 2014 special summit in The Hague. That’s all despite the fact that Russian media is now reporting that the G7 suspended themselves and Russia is left in the G8 on its own. It’s a little like the British that had headlines running that shock, horror, the ‘Continent was cut off from the British Isles by thick fog’. All depends where you believe you are. The Russians are at the center of their universe, obviously. Russia was part of the G8 between 1998 and 2014.

Russian Foreign Minister Sergei Lavrov stated: “If our Western partners believe the format has exhausted itself, we don’t cling to this format.”

So, what does Putin have to lose now? The ground has been prepared for a war in which Putin has nothing less to lose than his own power or ego being jolted a little. If he sits back and does nothing now that the G8 has become the G7 and Russia has been excluded (from one of the very few moments that the West actually communicates with Russia), then he will suffer the public consequences and humiliation of the Western world.

The West believes that is can draw a line under the annexation of Crimea, that it should tell Putin to stop there and all will be accepted as it is. But, Putin’s point is that Russia has been humiliated for decades by the West. The West has constantly treated the Russian Federation as a backward, Soviet-era country in which the people drank vodka all day and ate pelminis (that’s when the state was able to hand them out after queuing for three hours to get a slice of bread at a state shop). There might be many drawbacks to Russia where the people don’t quite do things the way of the Western world. Yes, they have lack of freedom of the press and yes there is an omnipresent state and a dictatorial leader. Although, the sole difference is the fact that Russia doesn’t pretend to be magnanimous and caring for anything but international power. The difference is that Western leaders do pretend (sometimes).

By taking away the privilege (if we can call it that) of sitting around a table with the other members of the G8, this will only exacerbate Putin’s feeling of humiliation. He will not stand for it. He will not accept it and he is so far in now that he cannot back down. The West is willing to wound Russia, but fears striking them since they are wary of the volatility of Putin as leader of a country with a damaged ego. Why at the present time, in the present predicament of the financial crisis with Greece in debt for generations, the French failing to do anything of any economic worth and the British threatening to leave the EU, would you wish for one moment to expand it by adding Ukraine into the already-failing union? Doing so, could have only had one result: causing the ire of Moscow. By going to Kiev in the beginning to defend the rights of anti-Russian and pro-European crowds, the US and the EU could only bring about egg being splattered on their faces. That, from the start was a case of nigh-on interference in the domestic affairs of another nation. What happened to the notions of state-sovereignty and self-determination? The US and the EU should never have publically got involved and should have stayed with using diplomatic channels.

Capital controls will only hinder economic progress in Russia, but what are the other alternatives to putting an end to the flight of capital from the country? Using legislation or volume restrictions will only send the message to the world that the Russian economy is still developing and is not worthy of investment. Capital controls won’t be used just yet and capital outflows will have to get to a worse point before that happens. Russia’s current account is preparing to get into a deficit and imports will outweigh exports. The amount of outflows from Russia is nothing today for the moment compared with the financial crisis and the $150 million that left the country every single quarter.

It would be a brave investor or one with fortuitous insight to take the step to invest in Russia today. Russian stock was already running on the cheap side before the sanctions imposed by the West. Markets have no possibility of dealing with the geopolitical risk involved in Russia. Earnings per share (EPS) have already been cut by analysts who predict a drop of 8.5%. That could increase to at least 62% which was being experienced in 2008-2009.

For the moment, Russia is playing it icily cold and decidedly Siberian. But, that is probably proof that something is going to happen. Putin will not be able to sit back and watch his suspension from the herd of the rich boys in The Hague yesterday, not without showing them he’s the boss (at least where he comes from).

Originally posted: Russia: Capital Controls?