What Determines Capital Flow Dynamics for Russia

Abstract

The paper studies the impact of external supply or “push” factors (global economic and financial indicators, oil prices, sanctions etc.) and internal demand or “pull” factors (actual and expected GDP growth rates, institutional indicators, openness indicators etc.) on private sector capital low components (foreign direct, portfolio and other investments) and capital flow aggregates (gross capital inflow and out-low, net capital inflow) in the Russian case, based on regressions utilizing 1994-2018 quarterly data. Among the external factors, the VIX volatility index, the real effective exchange rate of the U.S. dollar and the sanction intensity index prove to be consistently significant. The impact of sanction shocks is found to weaken over time, probably refflecting adaptation to sanctions. Among the internal factors, only the expected GDP growth rates prove signifficant. In contrast to existing literature on emerging markets as a whole, no signicant impact of the interest rate and GDP growth differentials (with respect to advanced economies) is established. It is demonstrated that the push factors account for the larger share of explained variance of gross capital inlow and outlow as well as net capital inflow. In addition, capital low volatility indicators are analyzed, with positive correlations found for the VIX index, the U.S. interest rates, the oil price volatility, and the financial account openness index.