Old Saint Basil's Cathedral in MoscowJohnson's Russia List title and scenes of Saint Petersburg
Excerpts from the JRL E-Mail Community :: Founded and Edited by David Johnson

#6 - JRL 7134
April 7, 2003
Investments welcome, prospects gloomy
By Olga Proskournina

Participants of the 6th Russian Economic Forum, held in London against the background of the Iraqi war, did not sound as optimistic about the prospects of attracting new foreign investments to the domestic economy as they have in previous years. It transpired that many leading Russian businessmen, politicians and market analysts do not expect any major investments flowing into the Russian economy in the near future, despite optimistic forecasts after the multi-billion deal between BP and the Tyumen Oil Company (TNK).

Two months ago British Petroleum announced it was buying 50 per cent in Russias TNK. Many politicians, as well as market analysts hailed the $6.7 billion deal as a precursor for an influx of huge strategic investments in Russia. Even skeptics admitted that BPs decision to return to the Russian market regardless of its failed investments of the mid-1990s was supposed to alter the general attitude of foreign investors towards Russia.

The Russian Economic Forum in London has proved that the optimists conclusions were somewhat hasty. Indeed, the BP-TNK alliance was mentioned in nearly half of all the speeches made at the gathering, and a lot was said of the positive perception of the Russian economy by foreign companies.

However, when it came to the possibility of new deals at the same level in the oil sector, it transpired that western experts are not inclined to expect similar investment solutions in the near future. What they count on is another major acquisition and this will not happen before the presidential elections, as foreign investors seek assurances of political stability in Russia.

Then, the problem is that investors willing to follow in BPs footsteps do not have much of a choice. In the opinion of many forum participants, there is only one company that is likely to repeat TNKs success, and that is Sibneft. Sibneft qualifies as an acquisition target, by virtue of possessing certain requirements set by western investors, ranging from western principles of corporate management to effective operations.

Yukos, indeed, remains the leading Russian oil firm in terms of attractiveness. It is known, that Shell and ENI have expressed an interest in Mikhail Khodorkovskys company. However, as the chief analyst with UFG Stephen OSullivan and the TNK vice-president Stan Polovets assume, today it is already clear that its main shareholders will agree to share control only for a very high price.

Other oil firms agreeing to sell to western ''strategists'' would most likely cost less, but from the standpoint of the above-mentioned corporate managers, they are less predictable.

Therefore, it is not worth anticipating an inflow of foreign investment in connection with BPs arrival in Russia ''for a long time'' the companys vice-president Robert Dudley emphasized in his speech at the forum that BP has plans for the following 20-50 years.

Interestingly, among those to respond to [Unified Energy Systems CEO] Anatoly Chubaiss call to invest in the power sector reforms in the regions was a representative of a European waste processing company: during a discussion held on the side-lines of the forum he suggested that environmentally-friendly waste-burning power plants could be built in Russia (a proposal accepted with gratitude).

If not everything is clear yet for Russian strategic investors in the energy sector reform plan, and they are buying into regional energy companies more out of a fear of being left out when the reform is completed, then western investors have nothing to worry about. For Russian metal companies the principle question is how much they will be paying for electricity in 2006 - $0.01, $0.02 or $0.035. For foreign businesses, which, for the most part, do not produce anything in Russia and are not affected by rate changes, it would be cheaper to steer clear of the energy sector reform altogether.

Incidentally, for Russias metallurgists, as Evrazholdings president Alexander Abramov implied in his speech (Abramovs company runs the Nizhny Tagil metallurgical combine), building their own power stations may prove to be more beneficial than taking part in reforming existing ones.

There is no doubt that many western companies are seeking to enter the rapidly growing Russian market. However, so far they seem to prefer investing not in production but in the service industries, in particular, retail trade.

And this, beyond doubt, is a justified strategy: why not make a profit out of the post-crisis increase in incomes of Russians? As for the production sphere, as many at the Russian Economic Forum emphasized, it remains largely under-invested, like the Russian economy in general. According to Alfa-Banks CEO Pyotr Aven, this sector remains small and in need of capital.

So it seem, even if Boris Berezovsky heeded the request from the Communist Deputy Vasily Shandybin to bring all his capital home, very little would change.

Top    Next