RS Brief news We are growing, but slowly

We are growing, but slowly

March 2013

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Russian prime minister, Dmitry Medvedev, when giving a speech at the Worldwide Economic Forum in Davos, declared that in order for the Russian economy to grow by no less than 5% annually investments should growth by at least 10% per year during the next few years. First off, it is necessary to boost investments in transportation and energy infrastructure by replacing old and inefficiency equipment with new, highly efficiency equipment. The task set is quite ambitious, to say the least.

Direct investments are growing

Today investors are willing to view Russia as an attractive country for investments. Preliminary data from the Ministry of Economic Development and Trade show that direct foreign investments into Russia’s economy grew from 56 billion dollars in 2011 to 60 billion dollars in 2012.

‘Although we are often self-critical, and rightly so, regarding the quality of our investment climate and attracting investments in general, Russia looks quite good in numerous other countries. In 2011 almost 56 billion dollars of direct foreign investments were made in our country. This year we’re predicting a figure of roughly 60 billion dollars’–stated Andrei Belousov, the head of the Ministry of Economic Development and Trade, when presenting at the State council at the end of December 2012. Therefore, the volume of direct foreign investments in the Russian Federation over the past year may grow by roughly 7%.

Rosstat (Russia’s statistical center) is still processing information on investment flows over the past year, but it is already known that based on the results of three quarters of last year the volume of foreign investments (taking into account direct investments) decreased by 14.4% (up to 114.5 billion dollars) relative to data from the first three quarters of 2011. Direct foreign investments grew by 4.6%–up to 12.277 billion dollars.

Last year Russia was 10th out of 20 leading countries in the world on the amount of direct foreign investments for the year

‘This is taking into consideration the overall tendency towards investment outflow from developing countries due to the debt crisis in Europe. Without taking into account this factor Russia has attracted 263 billion dollars of direct foreign investments over the last 5 years. This is 6th in the world and second after China amongst BRICS countries’–says the head of the Ministry of Economic Development and Trade.

Capital is running out of the country slightly slower

Generally speaking, the inflow of investments into Russia is traditionally compensated by a capital outflow. Gross capital outflow from the Russian Federation by the private sector in the fourth quarter of 2012, according to preliminary data on the payment balance, amounted to 9.4 billion dollars versus 35 billion for an analogous period for the previous year. Overall, the outflow in 2012 totaled 56.8 billion dollars versus 80.5 billion in 2011, according to Bank of Russia’s calculations.

In December discussion heated up regarding the figure calculated by the Central Bank for pure capital outflow. According to the authors of the Russian Private Investment Fund and Ernst & Young run research, the Central Bank’s figure takes into account operations which economically speaking cannot be considered capital inflow-outflow. For example, transactions on Russian companies absorbing foreign assets (thereby strengthening their international position) are noted in Central Bank’s statistics as capital outflow. Consequently, experts say that Central Bank’s assessment at least exceeds the real amount of capital outflow by twofold.

In his turn, the head of the Central Bank, Sergei Ignatyev has stated numerous times that this uncharacteristically high for developing countries capital outflow from Russia can be linked mostly to its unfavorable investment climate.

The positive capital inflow-outflow balance in 2012 can be attributed solely to operations in the non-financial sector which by the end of the year totaled 80.4 billion dollars of gross capital outflow. Companies increased their foreign assets by 98.9 billion dollars, while the item ‘gross mistakes and gaps’ made the result worse by 10.4 billion dollars. Foreign passive assets in the non-financial sector grew by 28.9 billion dollars over the course of the year which slightly compensated the record outflow figures.

The banking sector at the end of the year noted a gross capital outflow of 23.6 billion dollars: banks boosted their foreign assets by 15.9 billion dollars while simultaneously increasing their foreign passive assets by 39.5 billion dollars.

Capital outflow from Russia can be attributed to the risks with which investors encounter in the country when funding their projects. ArkadyDvorkovich, the vice-premier, stated this. He clarified that the macro-economic situation in Russia is not the reason for such outflow, but rather its insufficiently good investment climate does the trick.

In 2013 the Bank of Russia is forecasting a decrease in net private capital outflow down to 10 billion dollars given that the price of oil will be 97 dollars per barrel (that’s the base prediction). If the price of gas decreases to 73 dollars per barrel the Central Bank is expecting gross capital outflow to settle at 35 billion dollars, while if oil reaches 121 dollars per barrel a zero capital outflow-inflow is expected.

A slew of forecasts

Expert forecasts turn out to be worse than the Bank of Russia’s base scenario.

In 2013 capital outflow will amount to roughly 20 billion dollars, forecasts the head economist at Deutsche Bank in Russia, YaroslavLisovolik. ‘We believe that outflow will drop relative to the previous year partially due to a lesser degree of risks (economic, political and global). We are expecting not only a decrease in capital outflow, but an inflow growth including for portfolio investments’–he clarified.

Also, direct investments will continue to grow. This will promote Russia’s accession to the WTO in 2012, in addition to ensuring a relatively favorable situation on the world market and improvement on the capital markets which one can observe this year.

The head economist at BNP Paribas, YuliaTseplyaeva, believes that: ‘if things go our way capital outflow may amount to 20-25 billion dollars, but this is not the most probable developmental scenario. If TNK BP shareholders decide to ‘park’ their money (29 billion dollars) abroad, then capital outflow from Russia in 2013 may reach 45 billion dollars’.

‘This year we are expecting a gross private capital inflow of 50 billion dollars, but like in previous years the outflow of foreign investments from the Russian Federation on acquiring foreign assets will turn out to be higher’–says the head economist at HSBC, AleksandrMorozov.

The situation with direct foreign investments (which are so much desired by the Russian government) is not particularly good now, says Mrs. Tseplyaeva. ‘But this figure is traditionally low in Russia and has never exceeded 1% of GDP. Direct foreign investments remain negative for the third year in a row which is cause for concern for the government’–Tseplyaeva considers.

The balance of direct foreign investments will most likely remain negative, seconds Mr. Morozov. ‘One can expect that non-residents will be taken into account. On the one hand, the fact that the Russian economy is growing (unlike Eurozone economies) makes investments in the Russian Federation a bit more interesting, while on the other hand, growth prospects in the Russian economy do not look so cheery. The country is not developing as quickly as it was before the 2008 crisis’–he argues.

The world community views oil extraction in Russia as the most competitive sector; therefore we should put our first big hopes on changing the economic situation in the country on this industry.

By the way, in 2012 a few changes which will promote capital inflow occurred. ‘It is important that the rhetoric regarding foreign investments in the oil and gas sectors has changed. Before the government gave foreign businessmen wishing to invest in the raw materials sector a solid ‘no’, while now civil servants are talking about joint shelf and deposit development in Eastern Siberia’–says Tseplyaeva. Also there are many joint projects on geological exploration. ‘If oil will be found then many big investments may potentially come flowing into these regions’.

Maria Selivanova, editor of the expert portal www.opec.ru,
exclusively for Russian Survey RS