FDI into Russia continues slide as talk of economic rebound gathers pace

Illustration by Lael Henderson
Foreign direct investment into Russia in 1H 2009 plummeted 45% year on year to $6.1 billion, with overall foreign investment, including loans and securities flows down 30.9 % to $32.2 billion according to Rosstat data.

The Federal Statistics service said Russia’s manufacturing industry received the largest amount of investment in the first six months, with foreign investors adding $9.2 billion to the sector, including stock and bond purchases.

The Netherlands was the largest foreign investor in Russia over the period, followed by Cyprus and Luxembourg, with the U.S. the eighth largest source of investment.

On the upside

Despite the data, Alexey Uluykaev, the first Deputy Chairman at the Bank of Russia told Itar – Tass in an interview that he thinks Russia’s economy had passed the worst by May 2009.

“From my point of view, the last year was the year of the crisis, while 2009 is the year of overcoming it, going out of it.”

According to Ulyukaev, the first signs of a rebound started appearing in the end of 1Q 2009, mostly in the financial sector. First, the currency market stabilized, as well as exchange rates, then the structure of household and business deposits, and inflationary expectations. He added that bank lending is also stabilizing along with banking system, and that he thinks the real economy began showing positive by June-July.

“Now we could probably say that we passed the trough in May. The so-called “bottom” is in the past.”

Ulyukaev’s assertion is supported by better than expected industrial production growth in July coming in at -10.8% year on year from -12.1% in June.

Uralsib Chief Economist, Vladimir Tikhomirov, thinks that an upturn in major global economies could lead to an upturn in FDI later this year.

“I expect significant growth of foreign direct investment into Russia’s economy in 4Q this year, when the recovery of the world markets becomes more obvious. Already now such economies as France, Germany, China and the USA have seen the first clear green shoots, which will boost demand for raw materials and, consequently, investment into the Russian economy will also rise, as it’s one of the biggest and the most reliable suppliers of oil. ”

He sees Russia’s emergence from recession as following a similar path to the rebound from the 1998 recession.

“I think, this time around we’ll go the same scenario as in late 90’s, when the food industry and consumer goods industry were the first to recover. Given that today food produced inside the country has become more popular, foreign investors will probably become especially active. I think demand for more expensive goods, such as cars, for example, will take more time to recover for the banks are too conservative now and a so-called “crisis factor”, when people are conscious with their spending for some time at first. ”

On the downside

Despite signs of a turnaround, the collapse in foreign investment shows that despite being much cheaper than they have been in some time, they aren’t being snapped up by global investors according to Natalya Orlova, Chief economist at Alfa-Bank.

“Though assets are cheaper, the fact that FDI is falling sharply means that companies aren’t rushing to use this drop in price.”

Vladimir Tikhomirov also notes that the FDI figures show that Russia isn’t becoming more popular with international investors as an investment location, with the countries at the top of the list being largely countries to which Russia exports capital, meaning that a significant part of the investment from these countries is actually Russian investment.

“Russia has historically exported capital for political instability, the very nature of capital, I mean criminal money from tax evasion, for example, coupled with the absence of really interesting areas of application. Furthermore, the rights of foreign investors are better protected in our country than those of the local. So, Russian companies prefer to send their money abroad and then invest it back into the country under a more favorable status of a “foreign investor” at times of high oil prices. And other foreign economies are not that willing to put their money into our as business climate in Russia is unfavorable and it’s simply too dependent on oil, which involves huge risks. ”