Asian investors replace western players in Russia's FDI

Asian investors replace western players in Russia's FDI
The number of FDI projects in 2017 hit a record high.
By Ben Aris in Berlin August 8, 2018

A number of investments from western countries in Russia are on hold, but the situation is more than made up for by new investors from Asia.  Foreign investors put up capital for 238 projects in 2017 – a record number for Russia, according to an annual survey by EY.

Asian countries showed strong interest in the Russian economy: China last year became the leader by the number of foreign direct investment (FDI) projects for the first time, with Japan and South Korea also among Russia’s top 10 investors.

However, in monetary terms the growth of FDI was a lot more modest. According to central bank data, FDI in the second quarter (excluding banks) was just $1.7bn, down from $12.6bn over the same period of 2017. The latest figures suggest the moderate recovery in FDI following the 2014-16 recession may be going into reverse. Recent figures have in any case been flattered by Rosneft’s share sale to Glencore and the Qatar Investment Authority. 

Manufacturing was the sector boasting the largest number of FDI projects, says EY. By excluding portfolio investments and M&A, EY claims that its survey reflects real investments in manufacturing and services by foreign companies across Europe.

The regions are becoming increasingly attractive to investors, led by rising FDI flows channelled into Tatarstan, Bashkortostan, Primorsky Krai, Lipetsk and Belgorod oblasts.

Of the total 238 FDI projects, this represents 16% growth in the number of projects y/y, a striking improvement compared with only 2% growth in 2016, according to EY’s latest European Attractiveness Survey - Russia.

As in 2016, foreign investors focused on the construction of new manufacturing facilities in Russia (202 projects), rather than business expansion (36 projects).

Alexander Ivlev, EY country managing partner for Russia, commented: "The manufacturing industry once again proved to be the most attractive industry for FDI in the Russian economy, gaining 127 new projects, or 18 more than the year before. Last year, the number of projects in the power industry grew by more than 50%, from 15 in 2016 to 26 in 2017. The number of projects in the finance and business services sector more than doubled, from four to 10 in 2017. The transport and communications sector remained almost the same with 31 projects in 2017. Agriculture slowed somewhat with 38 projects in 2017 against 41 projects in 2016."

The unquestionable leader among all manufacturing industries was pharmaceuticals with 35 projects. The machinery and equipment sector was number two with 21 projects. In addition, foreign investors heavily invested in the chemical and plastic products sector (19 projects). Mineral reserves and metals saw positive growth in 2017 with the number of projects having increased by four and three, respectively. The digital technologies sector grew to seven projects against only one in 2016. However, the electrical equipment sector halved compared to 2016 with just seven FDI projects. 

"Last year saw a remarkable trend — strengthening interest of Asian countries in the Russian economy and their growing presence, which more than doubled in 2017 — from just 30 projects in 2016 to 76 last year. China took the lead for the first time, boosting the number of its FDI projects by more than three and a half times, from nine in 2016 to 32 in 2017. This is the largest number of projects financed by Chinese investors since the launch of the survey,” Ivlev said.

South Korea, with 12 projects, became one of Russia’s top 10 investors in 2017. Its top 10 placing was the first achieved since the launch of the survey. The South Koreans were behind just two projects in 2016. Japanese investors kept up with a rising trend, financing 17 projects last year versus 12 in 2016.

While Asian investors are on the move, western investors were in retreat in Russia in 2017. Germany, which had ranked first by the number of new projects in 2015 and 2016, lost the lead, funding only 28 projects last year versus 43 in 2016. France followed suit, reducing the number of its new projects from 20 to 11 over last year.

On the other hand, Italy increased the number of FDI projects in 2017, with 17 new projects in Russia, on par with the Japanese. Switzerland also boosted its presence in Russia by investing in 11 projects last year compared with seven in 2016. The UK also increased the number of its projects, but from a very low base. It put up capital in eight projects in 2017 versus two in 2016, thus becoming one of the 10 largest investors in Russia. Finland ranked tenth among Russia’s top investors, with seven projects in both 2016 and 2017, according to EY.

After record growth in 2016, the US slowed investment activity in Russia, reducing the number of projects by half, from 38 to 19. Yet, the US ranked third among the 10 largest FDI providers for Russia.

Moscow and Moscow Oblast remained the most attractive to investors in 2017, with 54 projects (2016: 49). In 2017 a significant number of those projects (10) comprised investments in the pharmaceuticals industry. The leader in investing in the Moscow region was Germany (10 projects) followed by China (six projects). US and Swiss companies invested in four projects each.

St. Petersburg and Leningrad Oblast were placed at number two with 17 FDI projects vs. 15 projects in 2016. Of those, Finnish investors financed three projects. German, Israeli and US companies supported two projects each.

"Based on the 2017 results, many Russian regions demonstrated positive growth. In Tatarstan, the number of FDI projects doubled from seven to 14, of, which three are financed by US investors. China and Turkey invested in two projects each,” Ivlev said.

Primorsky Krai in Russia’s Far East also showed significant growth, with the number of new projects increasing in 2017 from seven to 12. Interest predominantly came from Asian investors, with three projects financed by investors from mainland China, while Japanese, South Korean and Hong Kong companies invested in two projects each, and businesses from India and Cambodia invested in one project each."

With nine FDI projects, Lipetsk Oblast made it into the top 10 regions in 2017 (from only two projects in 2016). All of the projects were financed by European investors except two projects supported by US companies.

Several Russian regions raised FDI for five projects each: Bashkortostan, Belgorod, Vladimir, Novosibirsk and Ulyanovsk oblasts, and Stavropol Krai. Bashkortostan was the only region in Russia, which attracted investors from Vietnam. Two projects in the food sector were financed by Vietnamese companies. Three out of five projects in Belgorod were launched by German investors. In 2016 only two projects were underway in Belgorod and none in Bashkortostan.

The situation was the reverse in Kaluga Oblast, which is home to a highly successful auto-cluster and was number two in 2016. In 2017 the number of FDI projects declined from 15 to seven, with the investors being only from Europe.

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