Capital in the form of money and talent is fleeing the country of Russia at a pace that is raising fears within the Russian banking industry and investment institutions. Sanctions by the U.S. and the EU, along with the increasing isolation caused by Russia’s support of pro-Russian separatists operating in two key areas of eastern Ukraine, continue to threaten the Russian economy.

Speaking Thursday to a group of lawmakers in Crimea, an area of southern Ukraine recently annexed by Russia, president Vladimir Putin did not mention the economy. He did emphasize that he would not allow the West to treat Russia with arrogance. Russia’s economy is strained, and even economic leaders at home have begun to question the wisdom of a new three percent sales tax. Putin’s recent policy of reverse sanctions against the West have begun to drive up prices as removal of Western food products from store shelves commences. German Gref, chief executive of Sberbank, was also in Crimea, where he told the news agency ITAR-TASS that Russia’s future development should be integrated with the international community.

The Russian economy is primarily driven by sales of natural resources, and Russian economists are worried that oil and gas are not the only assets flowing out of Russia. Recent bans prohibit government officials and employees from exporting personal assets, but that has not stopped those impacted from buying dollars and euros as a hedge against a falling rouble.

The Russian Ministry of Finance has projected capital flight as being around $100 billion in 2014. The Moscow Times reports that the 2013 estimate from the Finance Ministry was $61 billion, but some economists believe the flight of assets has already eclipsed that figure this year. At the same time, Sberbank, the largest bank in Russia, reports that government cash reserves are in danger of falling below government estimates.

Capital flight out of Russia is raising fears across Europe, too. In May, Europe’s Central Bank president, Maria Draghi, projected that capital flight out of the country has already exceeded $214 billion this year. While some say that Draghi’s figure is high, even Moscow’s prestigious Higher School of Economics has said that capital outflows might reach $150 billion for 2014.

Capital controls, as least so far, have only been mandated for elected officials and government employees. Many Russian citizens, however, fear that private assets may be targeted next for restriction. The Moscow Times quotes one official who says that millions of U.S. dollars are being hidden “under Russian mattresses.”

Money is not the only asset leaving Russia. The Levada Center in Moscow is a widely respected and independent polling firm that tracks Russian attitudes on a wide variety of issues. Lev Gudkov, Levada’s executive director, told reporters recently that Russia is losing some of its most intelligent and entrepreneurial citizens.

As relations falter between Russia and the West, it seems that more Russians are leaving Russia permanently. Officials have noticed an increase in the number of citizens migrating out of Russia since the large scale protests over allegedly rigged Duma (parliament) elections in 2010, the reelection of Vladimir Putin to the presidency in 2012, the continuing crackdown on opposition figures and the muzzling of independent media since Putin has returned to the Kremlin.

Russia’s annexation of Crimea seemed to convince some to leave. Russian support of fighters in Ukraine’s east has caused more to leave. Along with the prospect of rising inflation, capital flight out of Russia is raising fears about the long-term prospects for the economy.

By Jim Hanemaayer

Sources:

Reuters

Bloomberg Businessweek

The Moscow Times

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