With the exception of only two years – 2006-07, when oil prices were at their highest – capital has been flowing out from Russia since the early 1990s (Fig. 1). In order to finance this capital outflow, Russia has had to earn a current account surplus by exporting more than importing, producing more than consuming, and saving more than investing. This problem is known as ‘capital flowing uphill’, i.e., from poor to rich countries; whereas general economic logic suggests the opposite – as a rule, capital should flow from capital-abundant (developed) countries to capital-scarce (developing and transition) countries.
The usual explanations – poor investment climate; lack of liberalisation; corruption; slow growth; poor institutions; chaos and disorder within Russia – may be missing the point, because countries with a good investment climate and rapid growth also often have a current account surplus: China is the primary example. Even though there is an inflow of private capital into China, until recently the Chinese monetary authorities had been exporting capital in the form of an increase in foreign exchange reserves, so China was also saving more than investing, and producing more than consuming. Like Russia, China has had a current account surplus; unlike Russia, it has been a net importer of private capital rather than an exporter. What are the origins and implications of the similarities and differences between the Chinese and Russian models, in terms of capital flows and balance of payments?
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