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Analysis & Opinion
10.03.10 The Return Of The Investor
By Svetlana Kononova

Recent data from the Federal State Statistics Service shows that in 2009, foreign investment in Russia dropped by 21 percent to $82 billion. Also, since last year, direct foreign investment has fallen by 41 percent to $16 billion, the federal service reports. As a result of the global financial downturn, which dealt a heavy blow to Russia’s economy, foreign investors withdrew billions of dollars from the country. But will they ever come back?

Despite the dire figures, analysts still believe that Russia’s economy could recover in the next couple of years. “The dramatic capital outflow in the first quarter of 2009 has had a huge impact on the index of the whole year,” said Alexander Osin, the chief economist at Finam Management, “but since the country’s economy slowly recovered in the remaining three quarters of 2009, some investment has partially been returned to Russia. Nonetheless, due to the overall recession of investment, especially in the manufacturing industry, it was not possible to fully make up for the capital drain that took place at the beginning of 2009.”

Yevgeny Balatsky, the editor in chief of the Capital of the Country online magazine, pointed out the main reasons behind the capital outflow: “The reasons why foreign investment has decreased are to do with the global financial crisis,” he said. “The investors’ confidence has fallen. Many of them are waiting for more predictable market conditions elsewhere. Russia is probably not the most attractive destination for foreign investment. Moreover, many economic indicators, including Russia’s GDP, have decreased dramatically during the crisis, which makes Russia a high risk place for foreign investors.”

Official statistics show that last year, Russia’s largest foreign investors were Cyprus, the Netherlands, Luxembourg and Britain. The most popular segments of Russia’s economy were wholesale and retail trade, mining operations, transport and real estate. “Foreign investors still bet on ‘fast money’ in Russia, although it may be more sensible to turn their capital flows to long-term investment projects with low risks,” Osin said. He believes that in the past year, investment in wholesale trade and the financial sector showed the best dynamics.

But Balatsky said that there are many more areas in Russia’s economy that are potentially attractive to foreign investors. “Our research shows that investors are interested in the woodworking industry, the manufacturing of construction materials, the food processing industry, building logistics centers and scouting for natural resources,” he added. “Thus foreign investors show interest in the regions of Russia where they could develop these businesses. Moreover, the Tula Region and the Khabarovsk Territory seem to be attractive destinations because they are developing the innovation sector, which might be of interest to foreign investors.”

Competition on the global financial market has intensified following the financial crisis, and Russia’s main rivals for foreign investment are the other BRIC countries whose economies are developing quickly. For example, China was less affected by capital outflow and managed to preserve most of its foreign investment during the “crunch.” Experts predict that Russia’s economy will grow by some four to six percent this year, while India’s will grow by seven and China’s – by nine. Investors in all BRIC countries are expected to benefit from a boom in consumption caused by the burgeoning middle class.

Nowadays Russia lies at the bottom of the Doing Business 2010 rankings of countries with advantageous investment conditions, positioned 120th out of 183. In comparison, Belarus comes 58th, and Kazakhstan is 63rd. In some sectors, such as the difficulty of obtaining building permits, Russia is the second worst in the world.

In an effort to make the investment climate in the country more attractive, Russia’s President Dmitry Medvedev recently confirmed plans to simplify the visa regime for foreigners investing in Russia. The new procedure will make it easier for foreigners involved in projects contributing to science and high technology to obtain a visa. Earlier Prime Minister Vladimir Putin called for equal conditions for Russian and foreign investors in energy projects, and announced that investments in transportation infrastructure, telecoms and digital television are the most welcomed. The Sochi 2014 Olympics open up many possibilities for investors in all of these spheres, he said.

So, what are the prospects for foreign investment? “The volume of foreign investment will probably increase in 2010,” Balatsky said. “In fact, as soon as the financial crisis has passed global investors will look for new areas to apply their funds. Russia will probably be in their sphere of interest.” Balatsky speculated that it will take two or three years to achieve a significant growth in investment, and Osin predicted growth as well. “The amount of foreign investment in Russia will probably be around $90 billion to $120 billion in 2010,” he said. “In the last three quarters of 2009 the flow of foreign investment grew faster than other economic indicators, such as GDP. I expect that this year these rates of growth will be equal.”
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