Russia and Foreign Investments
As research has shown, the issue of attracting foreign investment is essential in post-Soviet states. Investments play an important role in modernizing post-socialist economies through introducing Western standards, attracting new technologies, personnel training, innovative management etc.
Last year, two countries headed the list of the most successful recipients of foreign investments: China and Russia. They managed to receive 30% more than the year before. The main investors in the Russian economy remain Germany, the United States, Cyprus, Great Britain, France and the Netherlands.
Foreign investments in Russian economy 2001-2004
Source: Federal Statistics Agency
There are several reasons why Russia is attractive to investors:
Russia is a country rich in mineral resources such as metals, minerals, timber, oil and natural gas. Thus, raw material prices are expected to be less than in the rest of the world for decades ahead. It also has tremendous potential for agricultural development. Vast market The population of Russia is 3 times larger than, for example, the population of the UK. Strong internal demand for all kinds of goods and services and insufficient supply from local sources create a gap that is largely covered by imports. Support to investors from federal and regional authorities As Russian authorities are principally interested in attracting new investors, they place a great emphasis on developing a favorable investment climate. This includes the work of the Foreign Investment Advisory Council chaired by the prime minister and involves the participation of the largest and the most prestigious foreign investors in Russia. Enormous investment potential in such priority areas as: Oil, gas and petrochemicals, scientific and technical sectors, defense and conversion industries, machinery, transport and transportation, import substitution, consumer goods manufacturing, pharmaceuticals, telecommunications, general infrastructure, agriculture, food processing and distribution sectors are in need of new technology and know-how. Medical services and health are also priority areas. Fast growth of competitive export-oriented industries Foreign investors have the opportunity to use modernized Russian factories as producers and suppliers of competitively priced goods worldwide. High technology niches The conversion of military enterprises provides broad opportunities for foreign investments. These enterprises have a nucleus of highly qualified, disciplined personnel and access to modern technology and equipment. They are accustomed to strict quality control and are experienced in flexible manufacturing development, applying new inventions and scientific achievements. Russia leads the world in many areas of fundamental research and development ranging from eye microsurgery to space technology. This resource is now also available for foreign partners. Highly educated population There is a relatively well educated population ready to be retrained. The work force is well qualified and keen to work. Relatively low labor costs Labor is relatively inexpensive and supply exceeds demand. The average wage is still a fraction of that in OECD countries. Ideal natural bridge between East and West Russia has major transportation links that connect Scandinavia, Western and Eastern Europe with Central Asia and the Far East and is strategically located between most developed countries and emerging markets. Extraordinary business opportunities The synergy of all of the abovementioned factors creates an unprecedented business environment for successful investments. The average profits of foreign investors proved to be among the highest in the world. Graph 1 No one denies the existing obstacles for investing in Russia. The instability of the early 1990s still affects the image of Russia. The country must demonstrate a higher level of political, economic and social stability that is based upon democratic reforms and establishes a framework of law and order. Russian bureaucracy might also prove to be a challenge for Western businessmen who decide to invest their money in Russia. One always has to take into account the additional costs caused by Russian bureaucracy. Yet many Western businessmen admit that the situation depends on the regions. Authorities of a number of regions have understood that the cost of an inefficient bureaucracy is too high, as it terrifies investors and thus can bring the region to economic stagnation. That’s why some regions have created a more favorable climate. Culture is evidently a significant factor to take into account when making the decision to invest in Russia. The “mysterious Russian soul” so vividly described in Russian classics is not always ready to absorb everything that is brought from outside. To be successful, a businessman must possess a minimum of basic knowledge about the Russians, their preferences and dislikes. Thorough research into the cultural aspects of Russia would be undoubtedly useful for achieving high results. Graph 2 New investments, the amount of which is growing year by year, have several important consequences that concern not only the economy but also political power and security aspects. Russia is becoming increasingly involved in the global market. Its cooperation with the rest of the world is many times higher than in Soviet times. Having established strong economic ties with other countries, Russia will not be able to return to the so-called policy of the Iron Curtain, being separated and hostile to the rest of the world. Secondly, intensive economic cooperation helps Russia to improve its democratic institutions. Attracting foreigners to invest in Russian businesses requires Russia to adapt to Western standards. Thus in modern Russia, business is the most significant driving force for further liberal and democratic reforms. One of the best specialists in the field of investment business Andrey Podoynitsyn, President of the National League of Management and Investing Companies, describes to WSN readers the investment climate in modern Russia. Andrey Podoynitsyn has great experience in working with Russian investors as well as with foreign ones. WSN: Thank you for your time and effort. It’s always a pleasure to know the opinion of a highly qualified specialist. What do you think about all those changes that Russia has gone through for the last 10-12 years, since 15 years ago no one thought of investments at all and moreover of attracting foreign investments. What has been achieved and what is to be achieved? WSN: Still western investors are afraid of something. What do you think about the present level of cooperation between Russia and European and American investors? Why did communist China attract several times more investments than democratized Russia? AP: A good question and the answer is evident. Despite being so “red”, China managed to provide investors with certain, understandable but stern and regimented business rules, which no one tries to change. The establishment of such rules in Russia is its main achievement of recent years. The evidence of this is that institutional investors are starting to work in Russia. These are pension funds, insurance companies, the world's largest producers. But the first who came were large retailers: Auchan, Metro, Ikea. This business is not merely flourishing; it is experiencing an unbelievable boom, development, profits and popularity. With a clear conscience we can invite foreign investors. We understand that Russian realities may seem different and rather peculiar to them. But judging from my own experience, after foreign companies come to Russia and work here for a couple of months, it is impossible to drive them back. Such big profits, salaries, bonuses and opportunities for further development are very difficult to find anywhere else in the world. WSN: Let’s speak then about the relations between business and Russian state authorities. The UKOS case is the first thing many businessmen start thinking about when they hear about Russia. How would you comment on the situation with UKOS? What are your thoughts about the relations between business and government in Russia? AP: Every situation should be studied in its context; it’s essential to know the background. Those who really want to understand the situation must examine the history of the creation of UKOS. Recently, UKOS started making colossal efforts to make its business clear and open, to introduce a Western way of management and to get rid of shadow affiliates. I’d like to point out that the political ambitions of UKOS were quite evident, particularly the political ambitions of Mr. Khodorkovsky. It’s important to emphasize that these ambitions were proclaimed in a very radical form. Thus the UKOS affair doesn’t relate directly to business and to the relations between the state and business. It was a political clash of interests. By the way, it is still not clear which side violated the rules first. If we remember the chronology of the events, it will become evident that it was not the state that provoked further actions. It is also clear that the state also wants to bring its taxation system in order. Speaking about the relations between the state and business in general, on the one hand business and the state must be strictly separated. On the other hand, business and the state must have a constant, constructive dialog and I can admit the situation is developing in this direction. For example, the organization that I represent is one of the examples of this constructive and positive dialog between business and state. In fact our whole branch of business of investment foundations has grown from this dialog. WSN: What does Russia expect from Western investors, and what requirements and wishes do you have? WSN: Still there is a problem of assets escaping the Russian economy. What is the possible development in this sphere? AP: One tradition has been established in Russia for the last 10 years: Foreign investments are better protected from all kind of external influence than Russian investments. This habit is so strong that many assets are leaving Russia only to reappear under a Western “cover” through Cyprus, the Caimans, Luxemburg, the US, Germany etc. So Russian business is very eager to come back to Russia, as well as Western investors are ready to come here, too. WSN: Could you describe - using the example of your company - the interaction between Russian and Western businesses? AP: We are sure today that the real estate sector will experience a growth period for the next several years. A number of essentially important documents were adopted at the end of 2004 (Housing Code and 27 other laws). They form the legislative base of the mortgage system in Russia. All these rules will at last regulate all interaction between the state, citizens and the judicial system. This is far a higher level of judiciary regulation. We would very much welcome western investors, as they are the lucky owners of long-term investment resources that are only beginning to be formed in Russia. Our new project that we started this summer incorporates specialists in banking, investment and real estate. Consequently, we are the first to offer our customers the combined product in the field of real estate from consulting to the final stages. We present a combined product that includes all steps, so all risks can be minimized and the profits precisely evaluated. The consumer of our investment product doesn’t have to worry about the many technical details that might seem too difficult. To begin with we show the consumer the project of investments, we provide the results of our checks and tests, explain the situation and dynamics of the market and we evaluate risks and profits. This is our work. We are also trying to generate new innovative projects that have never been implemented in Russia before. There are a lot of extremely interesting projects from aqua parks to the construction of new cities in the suburbs of Moscow. We are 100% certain that these products will be enormously popular among consumers. Therefore, we are interested in a dialog with Western investors. The fact that risks have become easy to evaluate and profits will be higher than in Europe opens great perspectives for our cooperation.
Immense supply of natural resources
The Dynamics of Foreign Investments in Russia
Source: Federal Statistics Agency
Structure of foreign investments in Russia’s economy in 2004
Source: Federal Statistics Agency
Exclusively for WSN: An interview with Andrey Podoynitsyn, President of the National League of Management and Investing Companies (Russia)
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