Western Investments in Russia
For the second year in a row, Russia has been omitted from the top 25 list of most attractive countries in which to invest. In 2014, Russia failed to feature for the first time in the past decade and, sadly, in 2015, the picture is no rosier. The first signs that Russia’s investment environment was deteriorating was noted prior to the Russian-Ukrainian crisis.
The unpredictable policies of a government that periodically intervenes in Russia’s economic processes has been named, among other reasons, as a major contributing factor to the current perceptions of Russia as an investment prospect. However, the majority of representatives from large and medium-sized businesses from Western countries have indicated that they will resume capital infusion into the RF economy as soon as the current sanctions are rescinded. In the meantime, Russia is forced to adjust to a new “non-investment” country status due to the lack of clear and stable business perspectives. The unfavorable situation is intensified by the Russian government’s strained relations with Western countries. However, the majority of the investors that moved their assets out of the RF economy have not forgotten the financial strides they made in previous years. Such business professionals are morally prepared to revive the business relations as soon as reasonably practical. The pharmaceutical, light industry and financial services sectors traditionally remain the most promising source of future investments.
On Course to Stabilization
According to the USA billionaire David Bonderman, investors that returned to the RF in 2015 didn’t have regrets about doing so. Despite sufficiently sharp fluctuations in ruble exchange rates, the country’s economic situation in total remains stable, and numerous branches of the national economy remain potentially attractive for investors over the medium and long term. The high level of stability against the background of the current sanctions highlights the inconsistency of the imposed restrictions.
Business professionals are morally prepared to revive the business relations as soon as reasonably practical. The pharmaceutical, light industry and financial services sectors traditionally remain the most promising source of future investments.
Mr. Bonderman, who appears confident that the announced sanctions have a rather declarative and political nature, and merely irritate an entrepreneurship and the RF government officials instead of having any serious negative impact, dwells exactly on this point. Ruben Vardanyan, a successful entrepreneur from Russia, supports Mr. Bonderman’s view, stressing confidence that the RF economy remains attractive to foreign investors. Ignoring the enormous market is extremely difficult and unbeneficial for the experienced Western entrepreneurs.
Regardless of the unstable investment environment, total disinvestment in Russia is out of the question: most of the foreign corporations keep working with confidence in our country. Let’s consider which branches of the RF economy the developed Western countries invest in and how much capital they inject in these domains.
USA Investments in Russia
Despite vigorous activity and a comparatively large amount of financial injections, according to data published by the Russian Federation State Statistics Service, the USA is only the 9th largest source of foreign investments in Russia. By the end of 2013, the amount of money US investors injected into the Russian economy amounted to $10.3 bln – direct investments amounted to only $2.83 bln, and the total annual amount of investments was $384.1 bln.
The Americans, who primarily invest in domestic manufacturing enterprises, are involved in mining operations, engage in retail and wholesale, are interested in communications, transport, motorcar repair industry, real estate, and financial sector, as well as the service industry.
The U.S. enterprises demonstrate specifically strong interest in the regions of Russia that have rich valuable natural resources. The Americans are also active in regions that have a high concentration of food, automotive, aerospace, metallurgy and chemical enterprises.
By the end of 2013, British companies had invested $18.8 bln in the domestic economy, representing an increase of 40% on the previous year. In total, British investments represented 11% of the total foreign capital injected into the RF economy in 2013.
French Investments in Russia
Despite the recessionary trends, all the indicators point to favorable conditions for an increase of French investments in the Russian economy. In the car industry, the enterprises that belong to Peugeot and Renault brands continue active operations with confidence; in the food industry, Bonduelle and Danon increase their production rate; Arselor is engaged in the metallurgy; Lafarge and Saint-Gobain work in the sector of construction materials production; Michelin in the tire industry; Auchan supermarkets continue actively working in the retail industry; the hospitality industry is represented by Accor; and Societe Generale is on firm ground in the banking sector.
French investments in Russia have a strategic impact since they exert significant influence on the modernization of the economy, in general, and the high-end fields, in particular. The Russian Government frequently expresses a desire to increase French capital share in the aerospace industry amid ever-increasing potential capability in the scientific and technological segments.
Italian Investments in Russia
Italy is not in the top decile of the most significant domestic investors; however, that is not to say that investors from this region do not have an influence on the Russian economy. Approximately 80% of Italian enterprises are small- and medium-scale businesses that are not able to develop active investing activities in the context of the sanctions and numerous restrictions that are currently in effect. At the same time, multinational Italian corporations follow strategies that implies foreign market expansion will exhibit stable activity in terms of financial inflows in the RF economy.
Russia receives a massive share of Italian money through the enterprises registered in the third countries. The enterprises from Italy still extensively cooperate with the Russian companies in the field of consumer electronics production, as well as in the car, high-tech, construction, oil and gas, and power industries. Investment projects are also found in food manufacture and sales domains. Prior to the implementation of the sanctions, the leading financial Italian institutions were actively engaged in activities throughout the RF territory.
Eni and Enel, which are involved in gas production and reservoir engineering, as well as in the sector of electric power generation, production and sale, are heavily involved in Russia’s energy industry. The Italian companies Marcegaglia, Danieli and Pirelli & C. are involved in the development of innovative cooperation and high technologies. The automotive industry is represented by FIAT Group. Indesit is a big name in consumer electronics production. Cremonini, JSC, Cremonini Group and Ferrero continue working in the food production arena.
A special place in the development of the domestic economy has resulted from the expansion of the Italian insurance and financial institutions. In particular, insurance group Assicurazioni Generali, LLC, as well as the commercial banks Intesa Sanpaolo, LLC and UniCredit, work in Russia.
U.K. Investments in Russia
The United Kingdom ranks in second place in the list of major investment partners in Russia. By the end of 2013, British companies had invested $18.8 bln in the domestic economy, representing an increase of 40% on the previous year. In total, British investments represented 11% of the total foreign capital injected into the RF economy in 2013.
In terms of the structure of the financial inflows, about 87% of funds are accounted for by so-called other reverse investments, about 10% direct, and 3% through portfolio investments. In total, about 600 companies of British origin actively work within the territory of the RF, among which are giant factories like GlaxoSmithKline, AstraZeneca and Shell in Petropavlovsk, BP (holds some shares in domestic Rosneft), Cadbury Sсhweppes, British American Tobacco and Unilever.
In 2013, one of the most significant deals in the history of the Russia-United Kingdom relations in the field of big business took place. The oil major BP sold 50% shares in the TNK-BP to the domestic Rosneft, which resulted in a 70% reduction of UK portfolio investments in Russia.
In total, financial inflows from the British economy to the Russian Federation are non-uniform. About 76% of receipts are accrued to the Central Federal District, 7% to Ural and Volga regions, and 4% to Siberian and Northwestern Federal District. The rest of the regions receive immaterial amounts of investments from the United Kingdom.
Having analyzed the current situation, it’s easy to conclude that even after almost two years of sanctions and economic constraints, business relationships between Russia and the Western countries remain considerably deep and strong. Intense relations between the RF, the USA, and the EU are purely political in nature. In this context, numerous Western business entities continue to exhibit a keen interest in the revival of active investment in the Russian market. Thus, currently, there is every indication that the situation will change for the better when the first signs of international political stabilization start to emerge. Each and every country that is involved in the development of the RF economy, including Russia itself, is interested in making a profit; as such, commercial interests will, sooner or later, gain an advantage over political ambitions.