Last Friday, Pres. Medvedev met with several members of his cabinet to discuss economic issues. At the meeting, the issue of Russia’s investment climate came up. Pres. Medvedev opined that, while Russia’s investment climate is not “prohibitively bad … we still have not done much to improve it recently.” He added that actions towards realizing this goal are long overdue. Here is Medvedev at the meeting:
Lessons of 2008-09
So how should Russia approach the question of foreign investment? It might start by looking at recent history. Simply put, the end of 2008 was a disaster for foreign investment in Russia – virtually all of the foreign portfolio investment (FPI) fled the country in the wake of the war with Georgia, collapse in oil prices, and increasingly serious financial crisis. Similarly, foreign bank loans and credits to major Russian enterprises (think oligarch- and state-owned corporations) were suddenly being called in. With the easy money supply suddenly cut off, the Russian state had to expend considerable amounts of its stability and national welfare funds in order to prevent the collapse of many “key” economic actors – “too big to fail po-Russkiy.” These expenditures, along with declining tax revenues from lower oil prices, means that all of Russia’s “national projects” have been put on hold. The national projects – which include measures to improve Russia’s housing, health, education, and other social/economic infrastructure – are essential to the country’s ability to grow out of its Soviet-era economic shell.
The lessons are clear – over reliance on paper money foreign investment is insufficient to finance the economic changes that the country requires. In fact, they may create a level of instability that undermines these investments. By the end of 2009 and beginning of 2010, however, we already see some troubling developments. Indeed, the level of FPI and other foreign credits into Russia have again started to pick up and over the past few weeks there has been an almost-orchestrated media blitz on Russia as a portfolio investment destination, despite Finance Min. Kudrin’s statement that Russian stocks are overvalued!! In an RBS survey of these investors, the number one reason in favor of investing in Russia was the valuation of the companies, which apparently outweighed the top three “cons” – the price of oil, corporate governance, and influence of politics (see graphic below via Vedomosti):
2010 – Prioritizing FDI Should Be the Goal
Russia’s attractiveness as a destination for FPI and other “paper” foreign investments is not matched by foreign direct investment (FDI). Total foreign investment in 2009 was $70 billion, which is approximately one-tenth of the value it should be based on Russia’s potential (e.g., size, income-level). Much of this shortfall can be attributed to FDI – which Russia leads the CIS in total FDI, it’s per-capita FDI levels are much lower than comparable emerging markets. At the December meeting of the Committee on Foreign Investment in Strategic Sectors, PM Putin stated that Russia doesn’t simply need foreign investment, but foreign investment with new technologies. Again, this is only something that can happen with FDI.
The First Test of 2010 – Amendments to the Strategic Sectors Law
Russian policymakers could start the year off right – in the next one to two weeks, the Russian government will release the proposed amendments to the Strategic Sectors Law of 2008. According to sources who have seen an “advance” copy of the proposals, TRM has learned that in their current form, the changes fall far short of addressing the several substantive ambiguities and superfluities found in the law. The Russian government has promised that it will work with foreign investors and listen to their concerns in crafting the amendments. This has not happened in any real sense so far. If the Russian government fails to live up to this promise and merely passes superficial changes, it would be reasonable to conclude that Moscow has not learned any lessons from 2008-09.