Financial Times: Foreign direct investment: Shaken but still tempted: “Russia has become an increasingly strange place in recent months and the importance of currying government favour is not to be under-estimated”: “Above all, the energy sector dominates investment, with continued significant spending on a handful of high-profile multi-billion dollar projects, notably in two offshore oil and gas projects in Russia’s Far East: Sakhalin 1, managed by ExxonMobil, and Sakhalin 2, led by Shell.” (ShellNews.net)
By Andrew Jack
Published: October 19 2004
When top executives from leading western companies gathered in Moscow last month with senior Russian politicians for the annual meeting of the Foreign Investment Advisory Council, an unusual item was high up their agenda.
Alongside the usual proposals to improve the tax and customs system, streamline public administration and push ahead with land reform, big business devoted substantial time to discussing Russia’s promotion as an investment location.
It might seem strange for those who are making money to want to share it with their rivals; and for those who are not to encourage others to join them. But Russia has become an increasingly strange place in recent months and the importance of currying government favour is not to be under-estimated.
In relative terms, the trend of foreign direct investment looks impressive. According to Russia’s central bank, there were in-flows of nearly $8bn last year, more than double the $3.5bn of 2002. For the first three-quarters of 2004 alone, the volumes are about $7bn, and set to reach all-time highs by the end of the year.
“We see more and more activity not only from big enterprises but from medium-sized companies,” says Yevgeny Gavrilenkov, chief economist with Troika Dialog, a Moscow brokerage. “There are a lot of foreign clients who are interested in buying across all sectors of the economy. The fundamentals are strong, the oil price is high and demand is growing.”
Since this summer, deals have included Heineken’s acquisition of several breweries; GE Consumer Finance’s purchase of part of Delta Bank; the Franco-German tobacco group Altadis’ deal with Balkan Star; Alcoa’s intention to buy two aluminium plants from RusAl; and BNP-Paribas subsidiary Cetelem’s 50 per cent stake in Russian Standard Bank.
Above all, the energy sector dominates investment, with continued significant spending on a handful of high-profile multi-billion dollar projects, notably in two offshore oil and gas projects in Russia’s Far East: Sakhalin 1, managed by ExxonMobil, and Sakhalin 2, led by Shell.
“The CEOs of US blue chips continue to visit Russia with significant investment plans,” says Andrew Somers, president of the American Chamber of Commerce in Moscow. “When you look at Putin’s reforms, and the growing economy, this remains one of the best environments for business.”
In absolute volumes, however, FDI remains extremely low, and in per capita terms it is far outstripped by the volumes in much of eastern and central Europe. That may in part reflect an unfairly negative image of Russia that justifies the need for a more concerted public relations exercise abroad.
But it at least equally reflects continued uncertainties over economic reform, political stability and secure property rights in Russia. President Vladimir Putin’s current government, led by Mikhail Fradkov, has confused the picture further, slowing progress on minor administrative approvals and large-scale economic reform alike.
One clear warning to foreigners came with the attacks on Yukos over the past few months. With little clarity on its motives, the assault sowed confusion among those interested in the natural resources sector. It foiled competing discussions for a significant stake in the group by ExxonMobil and ChevronTexaco.
It looks now as though the pioneering joint venture of TNK of Russia and BP of the UK at the start of last year will be a one-off. Sakhalin 1 already has the state-backed Rosneft as a partner and Gazprom may well have a share of Sakhalin 2 in a few months’ time. Future such projects are likely to have foreigners in a minority role.
“On the demand side, nothing has changed,” says one Moscow investment banker. “People are hugely interested in Russia because of the quality and scale of resources. Russia is too big to ignore. The interest has never been higher. But investors are slightly scared by the plethora of risks, such as whether Yukos could ever happen to them. That’s the big show-stopper.”
The messages are far from entirely negative. ConocoPhillips was last month authorised to buy 8 per cent of the equity of Lukoil for nearly $2bn and has committed itself to big future investments. And Mr Putin pledged recently to lift the “ring fence” restricting foreign investment in Gazprom.
Foreigners are not to be excluded even from sensitive Russian sectors, it seems, but limited in their influence. The irony is that repeated studies have shown foreign-owned companies tend to invest more, operate more transparently and pay more taxes, as well as having fewer political axes to grind.
A survey by the consultants Droege & Co for the European Business Club, which has also worked with the Russian authorities on promoting the country’s attractiveness for investment abroad, highlighted corruption and bureaucracy as the most significant barriers for European companies operating in the country – and suggested they had got worse over the past three years.
The respondents argued that Russia remained a less attractive investment destination than China and India and indicated little faith in the legal system as a way to resolve commercial disputes fairly.
However, those companies already in place were gearing up for longer-term and more substantial investments; hiring ever more Russians in senior positions; and reporting good experiences with local suppliers and productivity close to western levels. Above all, they had high expectations of rising sales and profits.
Perhaps there really is something more to tell the business world about Russia. But maybe Russia also needs to listen more to business.