MOSCOW BLOG: Investment into Russia triples - is the tide turning?

By bne IntelliNews September 2, 2011

bne -

As one of the few fully functioning economies left in Europe, Russia appears to be attracting foreign investors in their droves. In July, Russia took in $87.7bn of fresh investments - triple the amount from a year earlier, according to Rosstat. Is the tide turning?

It is good headline, but the numbers are actually a bit deceptive, as much of this money is profits reinvested by existing foreign investors, which is counted by Rosstat as foreign investment. Likewise, more of this number is due to foreign loans made to pay for M&A deals and the re-registering of Russian business to foreign domiciles. Still, the result is indicative of a general rising by foreign investors - especially retailers - in the Russian market.

Out the total, foreign direct investment (FDI) jumped by 29.8% to $7bn, says Rosstat, with the "other" category making up almost all of the rest. This is a much more modest figure, but still encouraging. The Central Bank of Russia is even more upbeat and estimates total FDI into Russia at $26bn over same period - nearly twice the result it reported for the first half of 2010. So although the wave of "real investment" into Russia is clearly rising, it is not quite as dramatic as the headline figures suggest. Nevertheless, even the "non-real" investment arriving in Russia will have a positive impact on the economy.

Capital flight and back again

About half of the general investment was actually short-term credits (180 days or less), accounting for $46.5bn of the total. Broken down by sector, short-term borrowing by Russian banks also accounted for about half of the borrowing, or $44bn of the "investment," with $42bn coming from Switzerland alone. But this number is also confusing as much (all?) of this last number is probably rich Russian lending to their own companies as a way of getting money into the country to support their companies, but leaving the door open to get the cash back out again when things improve.

This trend also testifies to improving sentiment amongst Russia's rich, as starting in the last quarter of 2010 Russia experienced a sharp outflow as capital flight reappeared for the first time in a decade. A total of $31bn flowed out of the country over the first half of this year and altogether some $50bn is thought to have left for sunnier shores ahead of the dual parliamentary and presidential elections in December and March respectively. However, the capital outflow came to an end in July as money began to flow back into the country again in July.

What appears to be going on is that those oligarchs whose businesses are dependent on politics were salting away a little something just in case the elections spring a surprise. This doesn't mean a change at the top, which no one expects, but just as damaging are changes further down the chain of command. As politically tainted business relies heavily on relations with bureaucrats, this sort of change can lead to an oligarch losing control of their business entirely. Indeed, Russian President Dmitry Medvedev has specifically started a campaign to remove state officials from the boards of state-owned companies and more of the same can be expected in the new year.

At the same time, asset prices are getting cheaper with the price/earnings ratio on stocks falling to a ridiculously low 4x during the worst of the recent sell-off in the last week of August. However, the economy continues to grow at around 4% and the state's forward-looking forecasts for oil remain at about the $100-per-barrel mark. At the same time, lending by banks was up by over a quarter in the first seven months of this year. All this suggests that the economy will bounce back, as has been widely expected, albeit at a slightly slower pace than anticipated due to the sovereign debt problem in the rest of the world.

For those businessmen doing "real" business, the investment climate is improving. The boldest are going back to investing in their businesses, as in the long term the main goal of most businessmen remains to capture as much market share as they can while it is still up for grabs. This is what happened in 1999 when Roman Abramovich led the turnabout by buying the PAZ busmaker on the open market because it was a good company but the stock was at a rock-bottom valuation.

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