#6 - JRL 7241
Russia's Fifth Year of Economic Growth Lures BP, Danone, Nestle
June 26 (Bloomberg) -- Russia's longest spell of economic growth since the fall of the Soviet Union, rising wages and the nation's energy reserves are attracting record investment from Western companies including BP Plc, Groupe Danone and Nestle SA.
BP, the world's third-biggest publicly traded oil company, plans to spend $6.75 billion on a Russian venture, the nation's largest foreign investment. Nestle, the world's top foodmaker, plans to spend $120 million on a plant. Danone, the No. 1 yogurt company, is considering taking control of a Russian rival.
The Russian economy, which collapsed in 1998, may expand 5.4 percent this year, the fifth year of growth, as President Vladimir Putin cuts taxes, allows land sales and splits up state-controlled monopolies such as RAO Unified Energy System, the world's biggest electricity company. Higher oil prices also help, investors said.
``Political stability gives a sufficient feeling of comfort and confidence to both Russian and foreign companies,'' said Mikhail Fridman, chairman of Alfa Group, one of Russia's biggest financial industrial groups and a partner in BP's oil venture. ``A very favorable situation in commodities is also a reason.''
BP's investment will get final approval during Putin's visit to the U.K. this week. Yesterday BP said it may increase its $6.75 billion investment announced in February by incorporating half of AO Slavneft, which was worth about $2.5 billion last year, when the government sold three-quarters of it.
Local companies are also combining as oil prices hover near $26.83 a barrel. AO Yukos Oil Co., Russia's biggest oil producer, announced in April a $15.3 billion takeover of OAO Sibneft, its fifth largest. The acquisition, the biggest in Russian history, will create the world's sixth largest publicly traded oil company.
``The deal is a breakthrough for investment in the Russian economy,'' said Alfa's Fridman, who once sold theater tickets and is now Russia's third-richest man, according to Forbes magazine. ``It's a step to integrate Russia into the global economy.''
Russian oil reserves, the world's seventh largest, have attracted Royal Dutch/Shell Group as well as Japan's Mitsui & Co. and Mitsubishi Corp. E.ON AG's Ruhrgas, Germany's top natural gas distributor, is the biggest foreign investor in Russian OAO Gazprom, the world's largest natural-gas producer.
Spreads between Russian eurobonds and U.S. treasuries have narrowed to 283 basis points from more than 6,800 basis points following Russia's August 1998 default on $40 billion in domestic debt. Russia's default led to the collapse of Long-Term Capital Management LP, a hedge fund which lost $4 billion in the first nine months of 1998 as bets on bonds failed, and the biggest one- month decline in the Dow Jones Industrial Average since 1987.
Russian stocks are near a six-year high while the Russian Trading System stock index is the best performing index in the world over the past 5 years, rising 191 percent. That puts it ahead of Pakistan's Karachi Stock Exchange index and South Korea's Kospi index.
Germany, U.K., U.S.
In the first quarter, foreign investment totaled $6.3 billion, two thirds of the figure in the 12 months leading to Putin's appointment as acting president on the last day of 1999.
The largest investor in the Russian economy is Germany, followed by Cyprus, the U.S. and the U.K., according to official statistics. The money from Cyprus is likely to be Russian money that left the country during the 1990s, according to Putin.
``I assure you, that this is the return of Russian capital that was taken out of the country in the past,'' Putin said at a Moscow press conference last week. ``Capital always flows to where the best conditions exist for its use, whatever you might say or desire. So our task is above all to create such conditions.''
Average monthly wages rose 25 percent from May last year to 5,202 rubles ($171.50), more than four times the figure at the beginning of 1999. Retail trade more than doubled to $55.5 billion in dollar terms in the first five months of this year from $24.7 billion in the first five months of 1999, according to the state statistics committee.
Ikea, the world's biggest home-furnishings retailer, Unilever, the largest maker of food and soap, Altria Group Inc.'s Philip Morris, the world's No. 1 cigarette maker, Gillette Co., the biggest razor maker, and Wm. Wrigley Jr. Co., the largest maker of chewing gum, are all expanding in Russia.
Danone, based in Paris, is considering raising its 6.25 percent stake in OAO Wimm-Bill-Dann, Russia's biggest dairy and juice producer, the Russian company said last week.
Vevey, Switzerland-based Nestle, which has invested $250 million in Russia since 1995, will spend as much as $120 million to build a coffee production plant in southwestern Russia.
Nestle Managing Director for Russia Hans Gueldenberg told journalists this month that sales in Russia were about 1 billion Swiss francs ($723.8 million) last year. Nestle, the maker of Nescafe, had total revenue of 89.2 billion francs last year.
``Russia is now more important than the revenues from Switzerland,'' Gueldenberg said at a conference in Moscow.