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Russia: Analysis From Washington--Buying Out Of Russia

Washington, 4 March 1997 (RFE/RL) - In a vote of no confidence in the Russian economy's future, ordinary Russians are buying ever more foreign currency even as they dip into savings to cover current needs, according to a Russian government report.

The Russian State Statistical Committee said this week that in January 1997 Russians spent nearly one-quarter of their incomes to purchase $5.2 billion worth of foreign currency.

That represents an increase in private purchases of such currency from 14.3 percent of total income in 1995 to 18.5 percent in 1996, according to the Interfax summary of the committee report.

During the same month, the Statistical Committee reported, Russians spent some 4.5 thousand million rubles more than they earned by drawing on their past savings.

This combination of increased purchases of hard currency on the one hand and negative savings on the other suggests that what is involved here is something far greater than the capital flight some Russian officials are now routinely pointing to.

In an interview published in Moscow on Monday, for example, Russian finance minister Aleksandr Livshits dismissed widespread Russian concerns about capital flight.

While a serious matter, capital flight should not be the Russian government's first concern, Livshits warned.

"Some of that money will come back when the climate in the country changes, but some of it will never come back: the money has already been invested in profitable businesses in the West," the finance minister said.

Moreover, any attempt at blocking the outflow, he suggested, would only mean that "the river would simply bypass the dam," thus leaving the Russian government with lower tax revenues and less control over the country's economy.

But he admitted that on this and other points, he now has "virtually no allies" in the Russian capital.

Some of the foreign currency now in private hands clearly is going abroad. Another part is simply being hoarded as a hedge against inflation.

And yet a third may be playing a role in that part of the Russian economy that remains denominated in dollars rather than rubles.

Neither Livshits nor the Statistical Committee provided the data necessary to determine exactly just how Russians are using their foreign current purchases, especially given that they are dipping into their existing savings to live.

But almost all the possible variants point to problems ahead.

To the extent that foreign currency purchases are in fact part of the current capital flight from the country, such a trend would only exacerbate the task facing Moscow and Russian managers.

Indeed, if most of the hard currency purchases go in this direction, the size of capital flight from Russia would overwhelm any conceivable amount of outside investment.

To the extent that such purchases are simply a hedge against inflation, they are extremely unproductive. Further, they highlight the lack of confidence many Russians have in both their economy and their government.

And if such purchases do go back into that part of the Russian economy that is still denominated in dollars, they will be contributing to the growth of that part of the economy Moscow finds difficult if not impossible to regulate or tax.

All of these negative outcomes are made even worse by the fact that these hard currency purchases are taking place even as Russians draw down their savings.

Were Russians earning more and simply deciding to invest more abroad, as Livshits implies, that would be one thing and possibly even a positive development.

But the figures the Russian government released this week suggest a far more negative conclusion for the Russian economy and ultimately for the Russian polity.

Unless the Russian government can find a way to inspire confidence in the future, the Russian people may soon begin to desert it even as the latest figures suggest they are deserting the Russian economy.