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16 Aug, 2007 14:45

Foreign credits drive growth

Russia attracts record-high investment from abroad in the first half of the year. We look at what drives the trend and its impact on the country's economy.

Foreign investment into Russia more than doubled in the first half of the year, reaching $US 60 BLN.

Credits from abroad fuelled the growth, accounting for over 50% of all foreign investment into the country.

The last six months have seen more and more Russian companies get loans from abroad.

Borrowing in dollars to invest in roubles is the way to go, if you want to make a profit, especially as the dollar weakens and the rouble becomes stronger. This has led to a rise in foreign investment, according to some analysts.

“The appreciation of the rouble has encouraged massive capital inflow, in particular borrowing. It is a one-way bet, if the Central Bank guarantees you that the rouble appreciates in particular against the dollar on the back of global weakening of the dollar, so money comes in,” explained Evgeny Gavrilenkov, Chief Economist at Troika Dialogue Group.

This, though, is not the full story, according to Aleksandr Morozov of HSBC. He says Russian companies prefer to borrow abroad, because the domestic market is limited and cannot offer big loans.

“Russia is still developing economy and financial markets in Russia are still underdeveloped compared to such countries as the United States and the Euro zone. Over time, of course, Russian companies will be able to borrow more locally, but at the present moment,” outlined Aleksandr Morozov, Chief Economist at HSBC Russia and CIS, Moscow.

Russian companies like Gazprom and Rosneft, for example, borrowed about $US 30 BLN from foreign banks to participate in the Yukos auctions, but analysts say increased borrowing can backfire.

“There is a risk that, at some point, these inflows will be replaced by outflows because investors will become worried about the situation here in Russia or globally in financial markets and to some extent this process has already started,” warned Aleksandr Morozov.

Other market insiders link the potential risks to the possible strengthening of the dollar.

“If at some point the dollar starts appreciating, which cannot be ruled out, then there may be certain risks for companies who have borrowed in dollars, in particular, and they have to pay also in dollars their debts,” concluded Evgeny Gavrilenkov.

The dollar has dropped to record lows against the Euro, as budget and trade gaps in the United States have outstripped foreign investment. Currently the Euro stands at about $US 1.35.

The situation in Russia is exactly the opposite to that of the U.S.

Russia's Central Bank has been strengthening the currency for the last 18 months. This has done little to lower inflation, and has instead resulted in increased capital inflows. And more money in the economy could in itself become a cause of inflation, making increased foreign credits  both a blessing and a bane for the Russian economy.