Why foreigners are in no hurry to invest in Russia’s regions

Almira Nagimova, PhD in Economics, experts on capital markets, author of the book Mutual Investments of Persian Gulf States and CIS

According to the UN data, foreign direct investment in the Russian economy has grown by 62% in 2016, and amounted to $19 bln. But this growth is actually the result of one large deal worth $10.5 bln, when 19.5% of Rosneft shares were sold to the consortium of investors made up of the Qatar Investment Authority and the Swiss oil trader Glencore. Taking this deal out of the equation shows that foreign direct investment remained at the level of the previous year 2015 ($9.8 bln), which is considerably less than the peak figures of 2013 ($53 bln) and 2008 ($75 bln).

As for the investments in Russia’s regions, Central Bank statistics for the 3Q 2016 demonstrate that out of 85 Russian Federation constituents only seven regions are the net recepients of direct investments. These are the Sakhalin, Chelyabinsk, Lipetsk, Sverdlovsk, Moscow and Primorye regions and the Republic of Tatarstan. Looking at the figures for 2014 and 2015, the region of Tyumen can be added to the list. This means that only one tenth of the Russian regions has learned to systemically attract investors even under the sanctions regime, while the rest have either no skills in doing this, or can only brag about rare successes (Republic of Sakha, Vologda, Leningra and Kostroma regions). On the one hand, it would be easy to blame the federal authorities for the regional failures — macroeconomic instability, political sanctions and the country’s overall low investment potential all make the process of bringing investments difficult. On the other hand, the experience of the aforementioned regions demonstrates that the objective of attracting foreign investment is quite realistic. This means that the principal problem is the lack of vision and relevant ambitions on the part of the regional authorities. But what can be done to make sure that the investors’ plans are systematically implemented? What steps should be taken so that the investment projects become a trend, not a one-off affair? How can the pipeline of investments be directed to the Russian regions?

First, this requires a long-term strategy of cooperation with investors. The past few years give the impression that the majority of regional authorities have no long-term plans regarding potential investors — the decisions are made spontaneously and on the basis of immediate interests. There are no comprehensive investment policy programs and no showcases of successful projects. The regional development programs contain no mentions of the foreign investors and the mechanisms of attracting them. You can’t simply come out and say: “Come to us, wherever you want, and we’ll help you.” There should be clearly-set objectives, there should be regional brand positioning. Specific market niches that may be interesting to investors should be discovered and promoted. Simply by clearly setting the trajectory, concentrating resources and creating working mechanisms for implementation of investment strategy, the regions may increase their gross output by 1-2%.

Second, the principle of transparency is very important. Unfortunately, beyond Russia’s borders nobody knows about the overwhelming majority of its regions — they are rarely represented at the international economic forums, they don’t have missions abroad, and their names are hardly ever mentioned in the international ratings and foreign media. But to attract foreign investors total transparency is very important, and one of its components is the regional branding, similar to the Invest in Tatarstan campaign engineered in Kazan. Good reputation is the foundation for dialogue, especially when it comes to new investors, while the regional brand incorporates leaders and events, company brands and traditional regional products, cities and their quality of life, specific clusters and industries. Along with branding and reputation, specific practical features of the investment climate are no less important. Today’s investors who come to the regions have already made a strategic decision to enter the Russian market, but they do, as a rule, choose between 3 and 5 different regions on the basis of several indices. From there, it’s for the regions to compete for these investors’ attention: whoever provides the fastest support, and shares information about resources, venues, opportunities and potential, gets the contract.

Third, the regions should actively implement the instruments for attracting investments. In the ATKearney’s Foreign Direct Investment Confidence Index for 2017, China is third, India is eighth, Brazil is 16th, Mexico is 17th, and South Africa is 25th, while Russia didn’t make it into the rating at all due to its high investment risks. When it comes to the Russian regions, Expert Rating Agency has included the following regions in its low-risk investment list: Krasnodar, Lipetsk, Tambov, Leningrad, Kursk, Belgorod, Moscow and Voronezh regions, the city of St. Petersburg and the Republic of Tatarstan. To negate their high investment risks the other regions have to be enterprising — and to seize all of the initiatives suggested by the federal center. The example of Tatarstan and Lipetsk region is very illustrative in this regard: these regions closely watch all of the proposals coming from Moscow, and even before they take effect, the regions start to implement them, and to seek new investments. It should also be noted that the free economic zones of these two regions have demonstrated excellent results and were included in the Financial Times’ rating fDi Intelligence – Global Free Zones of the Year.

The names of the mechanisms for attracting investments are not that important. These can be the direct investment funds, state-and-private partnerships, clusters, industrial parks, special economic zones — if they can help to attract capital to the region and to create new jobs, the regional authorities should learn to use them.

Fourth, it’s important to create unprecedented conditions for investors. An important element of this process is the provision of investment stimuli in form of tax breaks, subsidies and access to the infrastructure. Plus, investors evaluate any region with a set of objective criteria — economic potential, transport infrastructure, access to the sources of energy and raw materials, price of land, utility tariffs and their predictability. Subjective criteria, which include the level of red tape, political stability, population skill set, compliance with law, and the local administration’s professionalism and consistency, also have a special role in the decision-making process. These subjective criteria are what cause the problems for the majority of regions, as the local officials’ abuse of power negate all of the efforts of the development institutions. Such questionable regional reputations created by the use of double and triple standards, constant shifts in the laws of the game, corruption scandals and litigations relieve the investors of any desire to invest their money and to grow their business in such regions.

Nonetheless, the work should continue, because in the current situation of federal and regional budget deficits, the fall in population’s real disposable income and unemployment growth, the ability to attract long-term investors will become perhaps the only criterion of the regional authorities’ effectiveness. And it doesn’t matter whether investors are foreign or domestic — what matters is that such investments will help to create new jobs, increase tax revenues, facilitate the regional economic growth and raise the overall standard of living in the regions.

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