External and Internal Factors of Cross-Border Capital Flows in Russia

The literature on the assessment of factors affecting cross-border capital flows is usually characterised by distinguishing of external and internal factors. The former as a rule include international indices of the global economic growth rate, interest rates and other indicators of profitability (for certain types of financial assets). The latter include domestic indices of the growth rate of the national economy, interest rates and the profitability of financial instruments, sovereign credit ratings. Since the beginning of the 21st century, cross-border capital flows in Russia have followed the same trends as capital flows in other emerging markets. A distinguishing feature of Russia was the negative impact of sanctions on the level of its financial openness. We estimated regressions, designed to evaluate the factors affecting the individual components of cross-border capital flows in Russia. Regressions for the three types of flows (liabilities of direct investment and portfolio investment liabilities, and assets) demonstrate good results. Among external factors, the dynamics of oil prices turned out to be significant, as well as the global stock index (for portfolio investment assets). Among internal factors, an increase in aggregate demand helps to attract foreign direct investment, and an increase in the yield of Russian financial assets (stocks and bonds) — to attract portfolio investments. The difference in interest rates is the determinant of all analysed capital flows. Our estimations confirmed the significance of the “round-tripping” movement of foreign direct investment in Russia.

1. Hannan S. A. Revisiting the determinants of capital flows to emerging markets — a survey of the evolving literature. IMF Working Paper. 2018;214.

2. Ahmed S., Zlate A. Capital flows to emerging market economies: A brave new world? Journal of International Money and Finance. 2014;48.

3. Herrmann S., Mihaljek D. The determinants of cross-border bank flows to emerging markets: New empirical evidence on the spread of financial crisis. BOFIT Discussion Papers. 2011;(3).

4. Felices G., Orskaug B.-E. Estimating the determinants of capital flows to emerging market economies: A maximum likelihood disequilibrium approach. Bank of England Working Paper. 2008;354.

5. When the tide goes out: Capital flows and financial shocks in emerging markets. Unctad policy brief. 2015;(40).

6. Bogatova I. E. Analysis of the composition and trends of international investment flows in Russia for 2005–2013. Rossiiskii vneshneekonomicheskii vestnik. 2014;(11):109–124.

7. Golovnin M. Yu. New trends of Russia’s participation in the international capital movement. Vestnik Instituta ekonomiki Rossiiskoi akademii nauk. 2018;(6):9–23.

8. Wang G. C.S. How to handle multicollinearity in regression modeling. The Journal of Business Forecasting Methods and Systems. 1996;15(1): 23–27.

9. Bulatov A. S. Russia in the international movement of capital: Breaking trends. Voprosy ekonomiki. 2017;(5):148–158.

10. Heifets B. A. Deoffshorisation of the Russian economy: Opportunities and limits. Moscow: Institute of Economics RAS; 2013.