MOSCOW. (RIA Novosti economic commentator Nina Kulikova) - Russia's investment climate has been gradually improving in recent years.
Although there are still problems to be solved, an increasing number of Russian sectors can offer interesting projects to foreign investors.
In the first six months of 2006, the Russian economy attracted $23.4 billion of foreign investment, up 41.9% against the same period in 2005. The biggest investors in the period were Britain, the Netherlands, Cyprus, France, India, Luxembourg, Germany, Switzerland and the U.S. They accounted for 83.6% of total accrued foreign investment and for 84.7% of foreign direct investment.
At the same time, geography of foreign investment has been changing. It is no longer only Russian money returning from offshore zones, says Arkady Dvorkovich, head of the Russian President's expert department. Real investment is also growing. Moreover, the Russian Central Bank estimates that FDI has soared by 40%-50% this year.
The investment climate. The main factors of Russia's investment attractiveness are believed to be the high economic growth rate, the consumption boom and the huge potential of the domestic market. The country's GDP growth pace has been around 6% on average for several successive years. In 2005, it was 6.4%, which is less than in the rising China, but more than in the European Union and the U.S. The country's financial position is strengthening. The Stabilization Fund ($76.62 billion as of November 1) and the gold and foreign currency reserves (over $270 billion on the same date) keep growing. All this testifies to Russia's macroeconomic stability, its solvency and ability to guarantee a strong national currency. The investment-grade ratings from the world's leading agencies and final liberalization of foreign currency legislation also helped improve the investment climate.
Michael Cuthbert, Regional Managing Partner for Central and Eastern Europe for Clifford Chance, said in an interview with The Times that Russia's advantages included many highly qualified professionals and skilled workers, as well as low production costs and cheap energy. "What attracts European investors to Russia is first of all shared traditions," said Dvorkovich. The situation and mentality are easier for them to understand compared to Asian countries, which are developing dynamically, but have their own specifics, he believes.
In its FDI Confidence Index 2005, A.T. Kearney ranked Russia sixth after China, the United States, Britain, India and Poland. This is an improvement against March 2005, when it was placed 11th. Russian Economic Development Minister German Gref says that foreign companies that have not come to Russia believe that its investment climate is worse than it is in reality. At the same time, 84% of foreign investors that have already come to Russia say that their work here is successful and 94% plan to expand, Russian Prime Minister Mikhail Fradkov said recently.
Problems. At the same time, it is no secret that foreign investors encounter numerous obstacles in Russia, primarily related to the Russian legal system and law-enforcement. A survey conducted by the Economic Development Ministry in 2005 showed that the biggest problem for foreign investors was corruption, while this year they ranked bureaucratic procedures and administrative barriers first, followed by corruption. They also noted insufficient quality of corporate management and low transparency of the legal system.
Moreover, uncertainty around foreign investors' acceptable participation in strategic sectors of the Russian economy causes additional concerns and does not help to improve Russia's business climate. A corresponding bill that has been debated by the government for a few years is expected to be passed within the next few months. It will define strategic activities, restrictions on foreigners' acquisition of controlling stake in such enterprises and the procedure for considering applications from foreigners.
Yet the bill, which has been heavily criticized by the international community, does not seek only to limit foreigners' access to Russian assets. At present Russia has a "murky permission mechanism," which means that foreign companies have to consult the Russian government before any acquisition. But the new system, when permissions will be issued by a specialized inter-departmental commission, will set clear and transparent rules for foreigners' access to strategic industries. This will prevent partiality and will help to create a predictable and transparent business climate in the country. Which is clearly a positive step, given that bureaucracy and corruption are the biggest problems of the Russian economy.
The most promising industries. The energy sector and steel production remain leaders for attracting foreign investment. Aware of the need to diversify the economy, the Russian government has urged investors to put their money in manufacturing as well. It seems that an increasing number of foreign investors have decided to heed the advice. According to the Federal State Statistics Service, the most popular sectors with foreign investors in the first six months of 2006 were manufacturing (32% of accrued investment), mining (21.95%), wholesale and retail trade (21.3%), transport and communications (9.3%), and real estate (7.8%).
The Russian oil and gas industry is one of the best developed in the country and yields huge and quick profits, which makes it the most attractive area for investors. However, the Economic Development Ministry estimates that the sectors dominating now- energy and steel production - will not be able to grow faster than by 5% in the long term. Sectors that can grow by more than 7% per year include the food industry, the chemical industry, the timber industry, production of construction materials, some types of machine-building and high-tech sectors, as well as construction and communications, account for less than one third in the economy. Yet these industries have a huge potential and are becoming increasingly attractive for foreign investment.
The Russian authorities are well aware that some areas need more investment and have a longer payoff period and higher risks than commodities production. This is why Russia has recently extended the number of investment tools and has been developing new mechanisms, such as the investment fund, public-private partnership and special economic zones.
Public-private partnership is expected to help attract foreign money in the transport sphere, and talks with potential investors are underway. The projects include the construction of a St. Petersburg - Moscow high0speed motorway, a Moscow - St. Petersburg high-speed railway, multimodal transport complexes at Sheremetyevo and Domodedovo Airports, airport hubs in Yemelyanovo and Koltsovo and large logistics terminals. Despite the sector's difficulties, it attracted $3.8 billion of foreign investment in 2005, according to the Economic Development Ministry.
The government's involvement is also visible in attracting investment in the Russian high-tech sector, which is developing fast. According to the Information Technology and Communications Ministry, it has been growing four times faster than the Russian economy in the last six years. Its share in the country's GDP reached 5% by the beginning of 2006. Foreign investment in the sector in 2005 amounted to some 75 billion rubles ($2.7 billion). The government attaches special importance to developing this sector and is developing a set of state support measures: it has set up high-tech industrial parks, created an investment fund for information and communication technologies and offered a favorable tax regime for IT companies. All this provides additional opportunities for expanding international cooperation and increasing the inflow of foreign investment.
Foreign players on the Russian car market, which has been growing dynamically in recent years, also have certain privileges. Leading international carmakers are actively developing car assembly productions in Russia. Ford, Renault, GM, KIA and others have already launched their assemblies. Toyota and Nissan have begun construction of their plants. In late October, Germany's Volkswagen launched the construction of its plant in the Kaluga Region. The Russian government signed investment agreements with these companies, offering them certain customs privileges on imports of car components. In the future, the authorities intend to encourage components production on Russian territory.
The planned amount of investment in these projects is about $1.8 billion, says Industry and Energy Minister Viktor Khristenko. At the turn of 2007-2008, Russia will produce about 250,000-300,000 cars annually, he said, adding that this was a perfect example of the "investment instead of imports" principle at work.
There are sectors in Russia that attract foreign investment without help from the government. An example is retail trade. In recent years, foreign retailers, such as Metro, Auchan, and others, have started entering the Russian market, and the trend is gaining strength. In A.T. Kearney's 2005 Global Retail Development Index, Russia was ranked second after India. The Russian economy continues growing and remains attractive for retail chains that have not yet come here, the company said.
Russian real estate is also an attractive area for investment. Prices in the sector are growing at a colossal rate, sometimes by up to 100% annually. Investment in commercial real estate in Russia may exceed $4 billion by the yearend, says Sergei Riabokobylko, CEO of Cushman & Wakefield Stiles & Riabokobylko. The share of foreign investment in the sector in the first three quarters of 2006 was 62%, for the first time outrunning Russian investment. Moreover, investment in developing shopping centres has for the first time exceeded investment in the energy sector, he said.
When they enter Russia, foreign investors encounter numerous problems. But this is a huge and largely underinvested market, which is becoming increasingly attractive and which offers major lucrative projects in different sectors.
