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
#20 - JRL 7139
Analytical department of RIA RosBusinessConsulting
April 9, 2003
Capital to flow into Russia 
An unprecedented inflow of capital to Russia is expected this year:
foreigners and large exporters started buying Russian assets actively 

Speaking at a meeting of the “Open Russia” club of regional journalists
earlier this week, Senior Deputy Chairman of the Central Bank Oleg Vyugin
said that the inflow of capital to the Russian economy in 2003 would be
record high. In the first quarter of 2003 alone, Russian companies borrowed
$3.3bn on foreign markets, and about $1bn was invested in the Russian
economy by foreigners. An unstable situation on the international market,
on the one hand, and high profit margins of Russia’s raw materials sector,
on the other hand, attract foreign investments to the country. In addition,
“raw material” earnings of Russian exporters, earlier taken out of the
country, are returning to Russia. Amid unstable markets and a lack of
choice for investors, Russia becomes a “magnet for capital”. 

Last year, capital flight from Russia’s private sector reached a record low
level over the past seven years. According to the Central Bank, $10bn was
taken out of the country in 2002, $6bn less than in 2001 and $14bn less
than in 2000. At the same time, the inflow of capital to Russia increased.
According to the Central Bank, foreign obligations of non-financial
organizations in January-March 2003 reached $4.3bn. Economists say there
are several reasons for that. Firstly, it is high oil prices, which were
around $30 per barrel in the first quarter of 2003. “Profits of exporters
were rising, and, accordingly, export proceeds were rising, too,” Olga
Belenkaya, an analyst at the Olma investment company, told RBC Daily.
“Clearly, with profit margins of raw material exporters being high,
investors give them loans readily. On the other hand, low interest rates on
international financial markets fuel the demand for corporate borrowings
from non-financial Russian companies,” she noted. 

Raw material earnings of domestic exporters, earlier taken out of the
country and now being repatriated, account for a substantial portion of
capital inflow to Russia. For example, Cyprus, one of the most popular
offshore centers for Russian businessmen, remains one of the main investors
in the Russian economy. “Because of a continuing recession in the West,
and, as a result, falling stock indices, investors are turning to the
developing markets,” Alexander Kuzmichev of the BKG company told RBC Daily.
“Russia, which has been growing steadily over this entire period, becomes
attractive for investments,” he added. 

In 2001-2002, export-oriented companies showed a great interest in
acquiring processing companies in the Commonwealth of Independent States
and Eastern Europe, but this tendency is weakening. “Market leaders became
convinced that, to strengthen their positions, they have to take care that
processing companies be built in Russia,” Alexei Kazakov of the NIKoil
company told RBC. 

Perhaps, the current increase in the capital inflow is due to the coming
re-division of the land market. Although the land reform “slowed down”
ahead of the presidential elections, nobody doubts that this issue will be
solved within the next few years. “Large Russian companies are preparing
for the re-division of the land market, which will require huge investments
from them. To solve this important issue, they will both repatriate their
capital and borrow on foreign markets,” Mr. Kazakov said. 

Portfolio investments make up 80 percent of investments pouring into
Russia. According to analysts, most of direct investments in Russia are
made in the consumer sector. They say the growing consumer demand and high
profitability of the consumer market will be attracting investments to this
sector over the next five years or even longer. “Apart from a deal with the
British Petroleum, the largest part of direct investments is being made in
trade, the beer sector, the production of consumer goods and food
products,” an analyst with Troika Dialog brokerage told RBC Daily. “This is
a highly profitable sector, and, I think, the tendency for increasing
direct investments in this sector will remain in place,” he added.
Meanwhile, the largest part of portfolio investments is still received by
export-oriented companies in the oil, gas and metal industries, and, to the
lesser extent - in the fishing and wood-processing industries. “Many large
financial and industrial groups in Russia are now striving to complete the
restructuring of their portfolios. This is confirmed by the fact that the
volume of mergers increased in 2002. In order to complete the process of
consolidation and creation of horizontally and vertically integrated
holding companies, financial groups will need additional resources,” Mr.
Kuzmichev said. He noted that there was a tendency for growing portfolio
investments in the processing industry in ferrous and non-ferrous
metallurgy. “For example, the Russian Aluminum group does not want to
produce ‘prime aluminum’ any more. Instead, it is investing in the
development of the processing industry,” the analyst said. 

According to analysts, the tendency towards growing foreign investments
will remain in place in Russia over the next few years. “Russian companies
still have a low debt/equity ratio, that is why they need loans. On the
other hand, with a steady 4 percent growth in Russia, foreigners are
interested in investing in the Russian economy,” Mr. Ivanov believes. For
his part, Mr. Kazakov expects that Russia’s investment rating will be
upgraded soon, which will make Russia more attractive for foreign
investors. “The Central Bank will be able to ensure the stability of the
ruble’s exchange rate, because it has been accumulating its gold and
currency reserves over the past few years. They are expected to reach $60bn
by the end of the year. In addition, the political situation is also stable
in Russia. Indeed, there is no real alternative to the incumbent president
in the coming presidential elections. That is why investors can expect that
there will be no major economic and political changes in Russia over the
next four years,” Mr. Kuzmichev said. 

On the other hand, experts say that an increase in the capital inflow could
also have negative consequences for the Russian economy. A massive inflow
of dollars into the country will force the Central Bank to print more
rubles, at the same time buying dollars and euros from exporters. But this
printing would not be secured by a corresponding increase in the
productivity of domestic demand industries. The budget will also be unable
to remove the excess ruble liquidity, because it is forecast to have a
lower surplus. And an inflow of unsecured rubles might fuel inflation. To
prevent that, the Central Bank will have to “let the ruble free”, which
will lead to the strengthening of the national currency, a decrease in the
profits of exporters and a boost to the competitiveness of imported goods.
“The Central Bank is facing a dilemma: whether to continue accumulating its
gold and currency reserves, preventing the ruble from strengthening in real
terms, or to let the ruble ‘float freely’ and decrease the profits of
exporters,” analyst Sergei Pukhov said. However, according to experts, the
situation might become critical only if oil prices remain at $30 per
barrel. In addition, the government has another option to get rid of the
excess liquidity. “It can be used on making early debt payments,” Mr.
Pukhov believes. 
Top    Next