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#7 - JRL 8009
Moscow Times
January 12, 2004
Foreign Capital Sinks to New Low
By Alex Nicholson
Staff Writer

Foreign direct investment hit a record low in 2003, dropping $3.5 billion year on year, according to Central Bank estimates.

Analysts agreed that the aggressive investigations into oil major Yukos, as well as a strong showing of parties hostile to big business in recent State Duma elections, certainly played a role in the drop.

But some observers suggested that the real issue is not the fall in foreign direct investment, but the fact that the volume of FDI in Russia remains miniscule, especially given President Vladimir Putin's ambitious goal to double gross domestic product in 10 years.

The most important event that investors are waiting out, they said, are the presidential elections in March.

Data on Russia's balance of payments on the Central Bank's web site showed that despite initial rosy government predictions, the Central Bank now expects investors to divest some $2.4 billion in the fourth quarter of 2003, meaning $100 million of FDI left the country last year.

"In a year when the government was saying we'd have a $6 billion to $6.5 billion FDI inflow ... we're winding up the year with minus $100 million," said Peter Westin, chief economist at the Aton brokerage. "This is the lowest level ever in Russia."

Official records of Russia's balance of payments started in 1994. Over three years FDI fell from $3.3 billion in 1999 to $2.7 billion in 2001, though it bounced back up to $3.4 billion in 2002, according to Central Bank statistics.

The Central Bank's estimate puts Russia at the bottom of FDI rankings for 27 Eastern and Central European countries, according to Aton.

Based on a comparison of FDI data from 1994 to 2002, Russia has accumulated net FDI of $52 per capita, with only Uzbekistan and Tajikistan receiving less.

Assuming little change to other countries' FDI, and based on the new Central Bank data, Russia would come at the bottom of this table, with just $22 accumulative net FDI per capita, according to Westin.

"I was surprised by the sheer size of those numbers ... Russia is not getting any new direct foreign investment. They are now at the lowest accumulated level of all transition countries. This doesn't reflect the overall economic situation we have here," said Westin.

Yet not everyone expressed surprise at the Central Bank estimates.

Sergei Gavrilenkov, chief economist at Troika Dialog investment bank, was quick to point out that figures were likely to change.

"The figures could be very different when the Central Bank finally prints its final payments balance in three months' time," he said. "If at the start of the year the hopes for the first half were positive, in the second -- when there were all sorts of uncertainties -- this flow stopped. The final figure will most likely be the same as the year before."

Whatever the final figure, Gavrilenkov said, one thing was clear: Little had happened to suggest that the investment climate had improved, despite rallying calls from the president and the government.

"The well-known events around big business are one of the reasons," Gavrilenkov said, alluding to the Yukos affair.

Other analysts challenged the importance of FDI at its current levels as a useful indicator per se, suggesting that the drop could be attributed to the growing ease of borrowing capital at home.

The lion's share of Russia's FDI comprises companies' foreign borrowings, and part of the reason for the fall is that domestic companies have borrowed considerably less overseas in 2003 than the year before, said Chris Weafer, chief strategist at Alfa Bank.

Companies have been able to generate more cash within Russia to cover their expansion, he said.

Furthermore the Central Bank calculations are based on funds flowing into Russia from abroad and not linked to foreign ownership. Therefore BP's multi-billion dollar acquisition of half of TNK in 2003 did not appear on the FDI radar screen, as the company paid a Cyprus entity for the shares.

Weafer agreed that investors were holding back in the aftermath of the Yukos investigations and said that as a statistic FDI would only take on real relevance in the wake of the presidential elections.

"To be honest what we're doing is scraping around in the basement in terms of FDI. The level has always been relatively insignificant and remains relatively insignificant," Weafer said.

"There won't be any serious improvement until the government makes more progress reforming the economy and clarifies some of the concerns. If foreign direct investment is plus or minus $3 billion or $4 billion, it's largely irrelevant."

For Russia to stick to Putin's target of doubling GDP, FDI would already now need to be between $10 billion and $15 billion, Weafer said.

"In this stage in the country's development FDI needs to get up to 5 percent to 10 percent of GDP," he said, up from less than 1 percent of GDP today.