MOSCOW. (RIA Novosti economic commentator Mikhail Khmelev) - Russia is becoming increasingly open to foreign businesses.

This is proved by the growing number of international transactions: foreign companies are buying Russian assets and Russian firms are making acquisitions abroad.

The total sum of such transactions last year doubled compared to 2005. Russian businesses' integration in the global economy could be even higher but for the resistance it faces when trying to buy into foreign companies.

According to a report on the Russian mergers and acquisitions market in 2006 prepared by KPMG, interest in M&A in the country is growing fast. The total number of transactions disclosed by companies soared by 62%, from 505 to 817. Public transactions on this market accounted for 56%, compared to 30% the year before. The report cites Thomson Financial, which estimated the entire Russian M&A market at $63.6 billion (compared with $40.5 billion in 2005). At the same time, the number of non-public transactions remains high. According to some estimates, their total value may reach $20 billion. The average price tag of a deal in the open segment of the market was $77.8 million as opposed to $80 million in 2005. The reason is that investors are increasing their activity in the medium and lower price ranges, and that the number of huge transactions is declining.

The growth of the Russian M&A market primarily testifies to the positive qualitative and quantitative changes in the Russian economy. Foreign direct investment in Russia last year more than doubled, to $35 billion, while the inflow of foreign capital reached $41 billion, according to the Russian Federal Service for State Statistics. This allows experts to predict that foreign investment this year will be at least $25-$30 billion. Ongoing consolidation in different sectors means that the biggest ones are reaching a new level of integration and growth. The market's transparency is improving: Russian companies are increasingly using foreign experience when making transactions abroad and for initial public offerings. The total value of mergers and acquisitions with foreign participation reached $24.4 billion last year, an increase of 90%. Cross-border deals accounted for 38.3% of the M&A market in 2006 compared with 32% in 2005. The number of foreign acquisitions of Russian assets reached 201, totaling $14.5 billion (versus $4.3 billion the year before).

In previous years, foreign strategic investors were interested in extraction industries; now foreigners are investing in all sectors of the Russian economy. They spent $7 billion on the acquisition of oil and gas companies, $3.7 billion on financial firms, $1.1 billion on steel and mining enterprises, and $800 million on retailers and companies operating in the consumer sector. European businesses accounted for 58% of acquisitions in monetary terms. Europeans invested a total of $8.6 billion in Russian companies, a two-fold increase from 2005 ($4.2 billion). These acquisitions are encouraged by foreign companies' interest in direct access to the huge Russian market. The Russian authorities took several measures last year to attract foreign investment, including paying more attention to legislative regulation of the process.

But the situation with capital flow in the opposite direction is less spectacular. Russian businessmen are extremely interested in acquisitions abroad. There are several obvious reasons for this: they want to expand their geographic presence, get access to foreign research and technologies, and achieve horizontal and vertical integration. Non-public companies want to quickly get listed on Western exchanges (a reverse takeover). Russia's share of the global market of mergers and acquisitions grew from 1.8% to 2%; its share in Europe was up from 4.4% to 6%. But these figures could have been higher.

Resistance to Russian businesses entering Europe grows in proportion to their activity abroad. Russian companies encounter the strongest opposition at the state and local levels. The value of the European assets Russians were able to buy in 2006 fell by a factor of 1.6, from $5.4 billion to $3.4 billion. The aggregate sum of transactions that fell through for economic, political and cultural reasons was $50 billion. Offers from Russia's leading companies were rejected; Gazprom was not allowed to buy Britain's Centrica for $20 billion, a stake in Italy's Eni for $8 billion or in Poland's PGNiG for $1.5 billion. The steel giant Severstal failed to buy Arcelor, for which it offered $13 billion. Sistema offered $10 billion for Deutsche Telecom, and LUKoil $1.5 billion for Lithuania's Mazeikiu Nafta refinery. MMK tried to acquire Pakistan Steel. Russian companies are hindered by the negative image Russia has in the West. The coverage of their activities in the Western mass media did not help either.

However, all these problems can be resolved. Russian companies hope that their European partners will change their opinion. Russian businesses are working on their image and changing their corporate management and culture. The European Union is Russia's biggest trading partner, which leaves no alternative to mutual rapprochement. Russia's forthcoming accession to the World Trade Organization will offer even more opportunities for the integration of its industrial, financial and consumer sectors into the European economy.