#16 - JRL 7304
RIA Novosti
August 27, 2003
COMMENTARY: FOREIGN INVESTMENT IN RUSSIAN ECONOMY -
PRESENT PROBLEMS AND FUTURE PROSPECTS
On August 26, the Anti-Trust Ministry approved the creation of a new oil and gas holding, TNK-BP Ltd. formed through the merger of the oil and gas assets of Russia's Tyumen Oil Company /TNK/ and those of British Petroleum in Russia. The capitalisation of the holding is estimated at 18 billion dollars. The TNK-BP deal is the biggest one of its kind to attract overseas investment to the Russian economy and marks an entirely new stage in this process.
Foreign capital, after a sharp decline in 1999, has been increasingly flowing into Russia in the past few years. This growth is not in direct or portfolio investments, but in capital that is categorised in Russian statistics as "other investments". It is in fact recallable financial resources or credits, and above all commercial and banking deposits.
Factors that keep back long-term investments in Russia usually include the lack of political stability in the country and favourable business conditions.
It should be noted, however, that the European Business Club in Moscow recently conducted a survey of 50 European companies doing business in Russia. They were asked about the most serious problems they faced in their respective fields. The respondents drew up a list of problems itemising them by their importance. The findings suggest that the risk of property seizure and arbitrary behaviour of the authorities - both federal and local - are not viewed as a serious problem by foreign entrepreneurs.
This is confirmed by the fact that the YUKOS case had little impact on the behaviour of external investors. A Prosecutor-General's Office probe into the privatisation of the Apatit works, indirectly related to YUKOS, and the arrest of one of the company owners Platon Lebedev had little if any effect on the plans of YUKOS and its foreign partners. Its merger with Sibneft is proceeding normally and so is a deal to sell a 25 per cent stake in the company to the American oil giant Chevron Texaco. None of the major foreign partners in Russia's oil and gas sector has announced a change of plans.
Exxon has recently started commercial drilling under the Sakhalin-1 project. Shell is signing new contracts with Russian gas buyers from Sakhalin-2. Gazprom and Wintershalle are working on a joint venture in which more than 700 million US dollars will be invested. Work is proceeding apace on the technical documentation for a North European gas pipeline across the Baltic Sea, and a portfolio of foreign investors is being formed.
Among the positive trends in economic growth in Russia contributing to the investment process are the following:
- in the first half of 2003, GDP grew 7.2 per cent;
- production capacities were used 70 per cent, against 51 per cent in 1998;
- business activity in GDP terms increased 7.6 per cent, in construction 12 per cent, and in industry 9 per cent;
- real incomes of the population went up 9.1 per cent, and wages more than 20 per cent;
- ruble-denominated household deposits rose to 590 billion roubles, and in foreign exchange to 7.2 billion dollars;
- the monetary base increased to 700 billion roubles;
- the Central Bank's gold and hard currency reserves as of July 1, 2003 stood at around 65 billion dollars, meeting all the country's short-term liabilities;
- in the first quarter of the year alone the country received 6.268 billion US dollars in direct investments.
On top of that, Russian society has, for the first time in many years, begun experiencing some political stability. Capital flight abroad has declined appreciably. In the middle of the year the Legsi stability index reached an all-time high.
Privatisation is going full speed ahead. Among the latest deals, following a cabinet discussion of the 2003 privatisation programme, First Deputy Property Minister Yuri Medvedev described the sale of a state-owned stake in the Magnitogorsk iron and steel works. Medvedev noted that the government had already prepared a draft resolution to that effect. He also said preparations were under way to sell a state stake in Svyazinvest and a stake in Rosgosstrakh. Apart from civilian enterprises, defence sector plants are likewise being put up for sale.
The programme for privatisation of federal property for 2004 and the guidelines for privatisation of federal property until 2003 say: "In 2006 privatisation is expected to be completed in the aircraft industry, in the production of armaments, means of communications, spacecraft and rockets, ammunition, and special chemicals; in the shipbuilding and electronic industries; and in the radio industry as it relates to the fulfilment of the special federal programme 'Reforming and Developing the Defence Industry Sector (2002-2006)'".
So, in 2004-2006, nearly all federal property which is not used directly to support the state's functions and duties will be put up for privatisation.
These and other factors make Russia even more attractive for investors.
It ought to be noted that the branch-by-branch breakdown of foreign capital investments is changeable, yet in the most basic fields it tends to keep steady. In industry, the bulk of foreign capital goes to the oil sector (24.7 per cent of all investment in industry), with 19.8 per cent going to the food industry, 15.4 per cent to the non-ferrous metal industry, and 7.5 per cent to engineering and metal working.
Foreign injections have increased even into Russian farming (a growth of more than 6 per cent a year) and construction - up to one-third of a billion dollars into each.
Experts believe that the economic conditions and prerequisites for growth created in 1999-2003 may be responsible for a 10 to 20 per cent rise in investment in basic capital a year. Consumption will also grow, if more slowly, while GDP may advance by 5-8 per cent. This ratio will ensure balanced and accelerated economic development. An average annual GDP growth of 5.5 per cent over the next decade (provided the investment potential is used in full) will boost its volume 70 to 75 per cent by 2010. As a result, in the medium-term, Russia will be able to spend 10 to 20 billion dollars a year on its foreign sovereign debt.
Among the most attractive branches are the building sector (capable of growing by up to 10 per cent a year) and transport, and not necessarily pipeline transport. Next come the services sector and the mortgage industry. Consumer credit and land-mortgage services have solid potential. The insurance market is developing rapidly, while computer technologies and communications have great reserves for growth. Small and medium-sized businesses, which are gradually emerging from the shadow economy, are growing more and more attractive to investors. Profits in these branches is low, compared with oil and gas, but the level of investment is incomparable. Moreover, these sectors are less liable to changing international business conditions and bring in quicker returns.
The shifts in the structure of foreign investments coming into Russia can be interpreted as meaning that overseas investors, as before, still have little faith in the Russian economy and are sceptical about its present state and future prospects (mainly in qualitative, rather than quantitative terms). At the same time, the foreign investors are now placing more trust in the financial stability and creditworthiness of the Russian state and Russian companies. The latter is confirmed by Russia's increased financial ratings on world financial markets, which now allow it to attract foreign capital on slightly more favourable terms than in the past.
Today, with political stability and predictability of the country's top leadership well in evidence, prospects for attracting direct foreign investments are becoming increasingly real.
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