Russian President Vladimir Putin highlighted the strong growth of investments in Russia during a meeting with Sberbank CEO Herman Gref. In collaboration with Nikita Maslennikov, head of the Economics and Finance Department at the Institute of Modern Development, Invest Foresight explored today’s most profitable investment opportunities.
– Is there actually an increase in investment, and what is driving it?
– In a sense, yes. Statistically speaking, investment rose by 14.5% in the first quarter of this year, compared to 9.8% in the same period last year, and around 7% in 2022. For the first half of this year, growth was at 10.9%.
However, there are a few considerations to keep in mind.
First, this growth stems largely from inorganic factors, with strong inflation playing a significant role. This creates an interesting paradox: from a cost perspective, investments are rising, but in terms of physical volume – analyzing the production index for investment goods such as equipment and materials, primarily domestically produced – we actually see stagnation.
In other words, you’re spending more money for less actual output. To put it simply, the same piece of machinery now costs about one and a half times more than before, which naturally inflates the investment figures.
A second major factor driving this increase in investments is defense production. Statistically, the manufacturing of complex military equipment and long-term weaponry contributes significantly to this growth.
– What is long-term weaponry?
– This includes virtually everything except ammunition, footwear, and uniforms. Naturally, the increase in defense production is recorded as investment.
Here’s the paradox: when we examine the supply index trends, adjusted for seasonal factors, we clearly observe stagnation – specifically in civilian production.
– Are there any current challenges with investments?
– First, earnings are often directed toward wages and addressing labor shortages, which reduces the funds available for investment. Currently, about 59-60% of investments rely on companies’ internal funds.
In the first half of the year, these internal investments were down by 5.8% compared to the same period last year.
– Is that a lot?
– Yes, it’s substantial. This indicates a reduction in investment volume and a clear shortage of internal funds. Corporate and investment loans are becoming more costly, and there’s considerable uncertainty about the future, which is dampening investment plans. This is another major challenge, as confirmed by the Central Bank’s enterprise monitoring. The first quarter was fairly stable, but by the second, conditions had already worsened.
Furthermore, there is uncertainty on the horizon. The profit tax is set to rise by 5%, and the federal investment deduction for profit tax has yet to be finalized. If a compromise is reached and the relevant departments come to an agreement, the investment benefits for the year will amount to only 200 billion rubles. This is relatively small, especially considering that the business needs expressed are estimated at around half a trillion rubles.
For now, they have obviously agreed to do so, given that it is a pilot project that’s better to launch than argue about.
One thing is obvious: it will bring certain advantages, although fairly insignificant.
– As regards prospects for investments, will they increase or decline? What factors could contribute to positive trends?
– In the short term, prospects are relatively clear. Russia’s Ministry of Economic Development forecasts a growth of 7.8% this year. But experts’ forecasts seem less optimistic: for instance, the Institute for Economic Forecasting suggests the increase of 4-5%, while the following year they expect the growth of only 2.1%.
Yet, we see a base effect due to adequate growth observed this year. But the main problem is that investment growth comes from increased labor productivity, with this indicator lagging behind the growth of real wages and real disposable personal income.
Basically, we see an immense inflationary pressure persist. With supply and demand unbalanced, we will experience this imbalance throughout next year, although it will be shrinking.
– And what does this mean?
– This indicates rather high inflation in 2025. The Ministry of Economic Development believes that the Central Bank will manage to substantially reduce it only in 2026. As evidenced in practice, both in Russia and globally, the inflation surpassing 5% largely restrains investments, particularly private ones. Bringing inflation back to 5% could allow for a certain investment growth, but this trend must be stable.
So far, we see things occurring as they are. All of this will restrain enterprises’ investment strategies, with investment loans growing expensive. Obviously, one can use alternative options to raise funds, such as placing corporate bonds in the exchange, a method extensively used today – that is, bond issuance.
However, this is also an expensive option as the coupon rate affects bond pricing. You pay today and receive payoff through profits in the following periods. There is also a 5 percentage point tax increase as well as vague prospects for tax deductions.
So, 2025 could see slightly more favorable conditions for investment activity than this year, although they will still be rather harsh.
Therefore, we should not expect any substantial growth in private investments. They will obviously take place anyway, but in lesser amounts than in the current year.