Capital is pouring out of Russia as global investors struggle to fathom president Vladimir Putin’s Crimean endgame in Ukraine. Much of it, investors and analysts say, is winding up in Latin America’s larger and more reform-minded markets.
Chris Palmer, who manages $6bn as head of global emerging markets at Henderson Global Investors in London, draws a direct comparison between reform-phobic Russia and Mexico, busy liberalising and deregulating key markets including energy and telecoms. “When one country slams the door shut, another flings the door open – it’s as stark as that. Nothing delivers investment capital like reforms and no country is reforming like Mexico – the country’s energy market will be a major global landing ground for capital over the next five years.”
Palmer also points to evidence of capital flowing directly out of Russia and into undervalued Latin American assets, notably equity in Brazilian banks and leading corporates. “We’re seeing clear signs that foreign investor flows into Brazil have outperformed” in recent weeks – a process that coincided directly with the unrest in Ukraine and to Crimea’s recent Russia-led referendum.
Capital outflows have become a hot topic in Russia, with many fearing that its government may be forced to impose capital controls. The World Bank warns that $150bn may bolt the country in 2014 – a record sum, exceeding the 2008 figure of $120bn – if the standoff over Ukraine worsens. Capital flight is set to hit $70bn in the first quarter – another record, according to Russia’s deputy economy minister, Andrei Klepach.
Charles Robertson, chief economist at Moscow-based pan-emerging market investment bank Renaissance Capital, sees Latin America’s larger and more reputable markets benefiting directly. “I would have thought a third of the capital flight in the first few weeks after Crimea went to Latin America. Markets like Mexico and Brazil are much safer than Russia at the moment.” That could put Latin America’s gain in the first few weeks of 2014 at Russia’s expense at between $20bn-$25bn.
Speak to investors and bankers and you get a clear view of the painful situation Russia finds itself in. Capital, notes a leading Moscow-based investment banker, “always flees Russia at the first sign of trouble. But this is different. Say you have $20m in savings – you may want to keep it safe in London or Switzerland. Or you could put it to use in higher yielding assets in the likes of Latin America. Either way, right now, you’re not going to keep it Moscow, where the government may steal it.”
Vladimir Tikhomirov, chief economist at Otkritie Securities in London, says he is constantly speaking to “cross-over investors who are even less inclined to invest in Russia now than they have been in the past”. Nathan Griffiths, lead portfolio manager, emerging markets equities at ING Investment Management, said foreign investor concerns over Moscow’s Crimean meddling made them “more likely to reduce than increase exposure” to Russian equities.
Many investors, said one emerging market-focused, London-based fund manager, saw Crimea as the next step in a concerted process of “grabbing assets and land”, even if the final cost “is to sour the world’s image of the Russian state and Russian corporate governance”. He pointed to the de facto nationalisation of oil firm Yukos, the 2008 conflict in Georgia and now Russia’s attempts to drive a wedge through Ukraine.
And the clash of culture and civilisations over Crimea may not be over yet. Capital flight “is likely to remain high through the second quarter,” said Liza Ermolenko, emerging markets economist at Capital Economics in London, with outflows remaining high through the second quarter. Added Otkirite’s Tikhomirov: “Things are likely to get significantly worse before they get better. We certainly expect outflows to continue throughout the year.” Again, he notes that key Latin American markets, notably Mexico, will be those well placed to mop up capital as it continues to spill out of troubled Russia.