Capital amnesty and the Russian crisis response

The key focus area of the annual keynote speech delivered by Vladimir Putin on December 4^th was around the state of the struggling Russian economy in the face of currency speculation and the aftermath of the Ukrainian crisis.

Declining oil prices, with Brent crude now touching $70/barrel has created quite the nervous stir in Kremlin with budgets balancing around $90/Barrel for 2015. The most recent attempt (almost desperate) at stirring the economy was the announcement of full amnesty for capital returning to Russia.

The Russian economy has been facing turbulence and accusations against corruption charges even prior to the Crimean annexation. Jailing of oil baron Mikhail Khodorkovsky after fall out with Putin and expulsion of William Browder who campaigned against corruption had raised red flags around investment prospects – a price that was paid by stocks trading on Russian exchange. Russian stocks have been trading at a discount (P/E of 5.2) for a while now - significantly lower than the P/E of comparable emerging nations (12.5).

The image has been sourced from an article published by The Economist

As demand and supply imbalances led to declining oil prices,  Russia – the world’s third largest oil producer and net exporter felt a deep impact. The ban on food imports (Russia is the 5^th largest food importer in the world) dealt another blow with inflationary consequences (annual inflation rate based on the Russian CPI was 8.29% in Oct 2014 compared to 6.27% in October 2013).

Capital outflows have been a concern and was estimated to be around $125 Billion, almost twice of what the economy witnessed in 2013. Despite the fact that Russia is the only one among the emerging economies to have a free floating capital account under current circumstances the issue of capital flight is a major concern.

Russia has tried its hand at tax amnesty before in 2007 collecting $130 million in the first 6 months - participation being limited to those who had not been convicted of tax evasion. The current effort comes under trying circumstances.

With sluggish growth rate and prospects, the investment environment perhaps may not seem appealing for investors bring their money back. The key areas the government is depending on is agriculture and the industries where activity has picked up post the imposition of sanctions.

As Putin faces the risk of trading 15 years of wage gains to spending cuts and austerity the ‘money amnesty incentive’ is perhaps the last straw as far government initiatives towards consolidating the weakening Russian economy is concerned.

So what are your thoughts on Russian policies and growth prospects for 2015?

 The content for the blog has been sourced using the following:

Russia Is The 5th-Biggest Food Importer In The World , Trillion-dollar boo-boo, Inflation Russia 2013, 'Money amnesty incentive for Russians to bring billions back home' , Putin welcomes billionaires back to Russia – but will they come?, Putin Grasps at Straws as Economic Cures Fail to Impress, Putin’s New Deal Spells End to 15 Years of Wage Gains