Russian capital flight – one of the major problems complicating the recovery of the nation’s economy – has been reduced five-fold since 2015.

Russian Central Bank Governor Elvira Nabiullina (L) and Russia's Finance Minister Anton Siluanov attend the 2016 International Financial Congress at the Boris Yeltsin Presidential Library, July 1, 2016. Photo: TASS

The Russian economy is gradually recovering from the economic shock of two years ago, which occurred after the sudden drop in oil prices and the pressure from Western sanctions. Most significantly, this improvement is not just announced domestically but also noted internationally, proving that it’s more than just bluster from the Russian government.

In the second half of August, both Bloomberg and Moody’s announced that Russia’s recession was ending. More importantly, statistical evidence shows improvement in Russia’s economy, and statistics are always independent of any political leaning.

The most important statistic is one that indicates the exit of capital from the country. In the first half of 2016, the pure exit of capital from Russia was reduced to $10.5 billion – a figure that is 5 times less than at the same time last year. Yearly indicators are also smaller. In 2015, $57 billion left the country, and in 2014, the amount was a record $151.5 billion.

Experts give different reasons for this reversal. Optimists believe that investors no longer wish to leave Russia, thereby strengthening its economy. Pessimists believe that the slowdown is due to the fact that all major investments have already left the country over the last two years. In short, all the capital that could have left the country has already done so.

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The cyclical nature of financial capital

Like any undulating phenomenon, the increase and decrease of capital flows into Russia reflects worldwide crises and events. In the crisis-ridden 2008, $133 billion left Russia, even though the previous year Russia gained investment capital, in the amount of $81.7 billion. When the crisis subdued, the outflow did also. In 2009, $56 billion left Russia, and in 2010 the amount was reduced to $34 billion. The same pattern is occurring during this crisis, although the amount that left in 2014 was record-breaking.

Experts believe that this record-breaking amount ($151.5 billion) is connected to the implementation of Western sanctions after Russia’s intervention in Crimea. This was an unprecedented event in the country’s history.

Most painfully, financial sanctions prevented Western companies from investing in Russia. These restrictions had a negative impact on financial inflows. The attack on the ruble by the domestic population and issues in the banking sector also had a negative effect on the flight of capital from the country.

In 2014, the government was optimistic and promised that the situation would improve fairly quickly:

“One of the main factors for the exit of capital from the country in 2014 was, in convergence with increased international asset holdings, the refinancing that was needed to pay off the debts in light of the sanctions. In 2015 there is an expected decrease in the payment of debts which should result in the decrease of capital outflows.” This was how the Central Bank summarized the situation at the end of 2014.

It must be noted that a part of the outflow actually remained in the country in 2014. These are euros and dollars that Russians bought during the ruble’s precipitous fall. Even though this money is actually within the country (even if hidden under people’s mattresses) this money is nevertheless considered outflows by the Central Bank.

In 2014, the amount of the money stored by the population in such a fashion was no less than $20-30 billion. It is possible that in 2015-2016, part of this money began to return to the markets as the ruble strengthened and oil prices stabilized.

The latest sociological surveys indicate that Russians are once again gaining confidence in the ruble. According to the polling organization VTsIOM (Russian Public Opinion Survey Center) 57 percent of the population chose the ruble as the currency in which to store their savings. This is a 7 percent increase from the previous year.

When it comes to 2015, the amount of capital outflows was less than any of the expectations of the Central Bank. The expectations were that in 2015 the outflow would be $118 billion, followed by $75 billion in 2016 and $53 billion in 2017.

However, it seems the mark for 2017 was achieved two years early.

Experts explain the fact that the outflow in 2015 was half the predicted amount in various ways. Many economists believe that the substitutions of domestic products for international ones activated domestic industry. This was especially true of the food and agrarian sectors.

Considering the outcomes of 2015, the Central Bank promises to pay off more debts. The Central Bank stated that, “There has been a significant decrease in the bank’s obligations, this was achieved not only through the sale of international asset , but also through the accumulations of funds during this period. This was aided by increased activity and demand for assets in other sectors.”

According to the data from the third quarter of 2015, there were even inflows of capital into Russia. This gave the government the authority to say that the worst had finally passed, and that capital inflows would soon once again enter the country.

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No reason to be euphoric

According the statistical data from 2016, none of this occurred. Capital outflows are continuing, but they are significantly decreased. What are tens of billions of dollars leaving the country in comparison to the hundreds that already left some two years ago?

By the end of the summer, the oil market stabilized. As a result, the ruble also stabilized. The Russian economy is showing signs of improvement and this is once again attracting investors. Besides, Russia’s Central Bank still holds its key rate quite high (10.5 percent), which makes Russia an attractive place to deposit cheap money.

But independent experts are not ecstatic. According to the director of the Institute for Strategic Analysis, Igor Nikolayev, the inflow of capital is not due to the fact that foreign investors suddenly gained faith in the Russian economy.

As Nikolayev noted, “The inflows that we are seeing are first and foremost capital of Russian companies. They are mostly from government corporations. Faced with anti-offshore campaigns and the danger of having their assets confiscated, our entrepreneurs began returning to Russia. Moreover, the country is currently lacking liquidity. Therefore businesses are simply forced to return their offshore funds here in order not to fold.”

Another reason for the slowing in outflows is that companies lack resources to remove their capital. Nikolayev added, “The outflow decreased because all that could have been moved, has already exited the country. This happened two years ago when the ruble collapsed. Capital in the country is, after all, not limitless.”

The head analyst of the financial group Kalita-Finance, Alexey Viazovsky, attributes the decrease in capital flows to the decreased incomes of the Russian population. Part of the income formerly was used to purchase foreign currencies.

The second reason is the radical decrease in debt of Russian corporations and factories, which were also expressed in foreign currencies. Old debts are slowly paid off, and new credit is not given because of the sanctions. “This can hardly be called a positive factor, but even though the outflows are decreasing, Russian companies need foreign credit like humans need air,” said Viazovsky.

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Viazovsky also believes that the decrease in capital outflows is helped by the fall in the prices of commodities, “If, before, exporters confidently converted their gains into rubles, because the ruble was stable, now they keep it in foreign currency, mostly in order to pay off foreign debts.”

At the same time, experts concede that the situation is looking better than it did a year and a half ago, and especially better than two years ago. Igor Nikolayev stated that, “After any shock, there is a period of stabilization. Our adaptation to the shock occurred in the end of 2014 and the beginning of 2015. The country has already lost a lot of capital, and this process has a logical conclusion. But the crisis itself has not ended, all other symptoms are still present, including outflows in capital.”

But the government is nevertheless optimistic in its outlook. Russia’s Ministry of Economic Development improved its macroeconomic prediction, and estimated the capital outflows for this year at around $35 billion. Later, the head of the institution, Alexey Ulyukaev, announced that capital outflows might be even below this figure, or even cease completely. That has to be good news for anyone looking for signs of hope for the Russian economy.