INVESTORS PULLED their money out of Russia in the wake of the Georgia conflict at the fastest rate since the 1998 rouble crisis, new figures showed yesterday.
Russian debt and equity markets have also suffered sharp falls since the conflict began on August 8th, with yields on domestic rouble bonds increasing by up to 150 basis points in the last month.
The move come as Russian president Dmitry Medvedev faces pressure from business leaders concerned that the impact of the global credit crisis is starting to be felt in Russia.
Credit conditions are to be discussed at next month's "summit of oligarchs" - the Russian Union of Industrialists and Entrepreneurs.
Vladimir Potanin, head of Interros, one of Russia's largest industrial groups, has complained to Mr Medvedev about the shortage of long-term credit.
The tight credit conditions have been exacerbated by foreign capital flight since the war. Data released by Russia's central bank showed a drop in foreign currency reserves of just over $16.4 billion (€11 billion) in the week beginning August 8th. This was one of the largest weekly drops in 10 years, according to Lehman Brothers analysts.
It was mostly spent defending the rouble, which has sunk slightly since the crisis began. The only larger drop in reserves since 1998 was $16.5 billion in June 2006, when Russia paid off most of its Paris club debt. Gennady Melikyan, the central bank deputy chairman, said the sell-off was triggered by the "political situation", adding "foreigners are pulling out of some assets and stock markets and the exchange rate has suffered most. I think we have come close to the bottom now."
The stock market has fallen 6.5 per cent since August 7th. Russian companies are experiencing problems raising finance as investors demand higher yields to buy their bonds to reflect perceived risk.
The moves show that Russia's economy, in spite of having one of the strongest national balance sheets in the world, is not immune to global market sentiment, which could end up being a check on Kremlin decision-making.
"The million-headed hydra of the bourgeoisie has sent a signal: 'Change your course, comrades!' " wrote the popular internet columnist Dmitry Oreshkin in a reference to the communist background of Russia's leadership.
Minister for finance Alexei Kudrin said the capital flight had largely subsided and would be more than made up for by inflows. Russia's foreign currency reserves, at $581 billion, are the world's third largest. "Nothing that has happened . . . could cause us to change . . . plans," he said.
But the ebbing of foreign investor confidence will make it harder for Russian companies to raise debt and equity finance since foreign sources account for a disproportionate share of long-term capital for Russian corporate borrowers. "The market is vulnerable to foreign capital flight," said Kingsmill Bond at Troika Dialogue, the investment bank. "The major Achilles' heel of the Russian market is that there is very little domestic long-term capital."
Partly as a result of the Georgian conflict, yields on domestic rouble bonds have increased in the last month by between 75 and 150bp, Mr Bond said.
