gazeta.ru June 13, 2002 Survival instinct attracts capital to Russia By Petr Ivanov
For the first time in the past ten years Russia has not reported an outflow but an inflow of capital. This is comforting news, indeed. The question is, however, whether this inflow is enough to modernize the infrastructure and industry before the vector of capital flow changes again.
The ''unique situation in the Russian economy'', whereby capital is actively
returning to Russia, rather than leaving it, was announced by Deputy Finance
Minister Alexei Ulyukayev in an interview to the ORT channel on Tuesday evening. Earlier the deputy chairman of the Central Bank Oleg Vyugin shared the same observations with journalists.
The reason for such an encouraging phenomenon Ulyukayev believes is a reappraisal by the majority of foreign investors of their risks in Russia. They consider ''those risks normal, not too high'' anymore, Ulyukayev said.
Indeed, in the past two weeks almost all international ratings agencies have
either upgraded Russia's credit rating, or improved their forecasts concerning Russia's economic development. In addition, the United States recently recognized Russia as a market economy as did the European Union.
Against a background of stagnation in Europe and especially in the US, where
the main economic barometer, the Dow Jones index, continues to reflect the worsening investment climate, Russia with its steadily growing RTS index is looking much better. Capital inevitably finds its way to those places where there are better growth opportunities.
An additional incentive to invest in Russia is the macroeconomic stability. Ulyukayev, in particular, has expressed assurances, that by the end of the year the dollar exchange rate in Russia would not exceed 33 roubles, and in 2003 -- one may ''forecast with certainty'' -- the dollar price will not grow above 34 roubles.
In the opinion of Ulyukayev, there are presently no grounds for worrying ''about a week rouble, yet there are grounds to worry about a very strong rouble'', which undermines the competitiveness of home-made goods.
The deputy finance minister also pointed out that in 2003 Russia is to earmark a total of $17 billion for servicing and repayment of its foreign debt.
Yet, he refrained from mentioning two other critical factors, which, as expected, will become particularly apparent next year -- demographic decline
and the mass failure of obsolete infrastructure installations.
According to experts' estimates, in 2003 the moral and physical wear and tear of production assets in certain Russian industries will amount to nearly 75 per cent. First of all, that problem will concern the power industry. If the
economic growth rate in Russia reaches 5 per cent GDP per year -- and President Putin insists on even higher growth - energy consumption is expected to increase by 3-3.5 per cent, which the Russian power industry, according to all estimates, will barely cope with without extra investment.
As the World Bank experts note in the Russia economic development report published recently, the results of the first quarter of 2002 proved discouraging. There is an impression that the wear and tear of production assets does not bother anybody. In the opinion of the WB experts, the main surprise of the fist quarter is the considerable decrease in investment in production assets. Investment growth had practically come to naught in January-February, having grown only by 1.2 per cent as compared with the same period in 2001.
Admittedly, the authors of the WB report note that the decrease may be connected with low oil prices at the end of last year and consequently, the oil firms, who along with other exporters are the main investors in Russia, have been running short of funds.
A relative improvement of the situation on world oil markets this year and a
healthy instinct for self-preservation in Russian corporations -- the obsolescence of production assets is of no benefit to any oligarch -- have apparently caused a capital inflow to Russia.
Major Russian corporations have been working on new investment plans (such as multibillion rouble projects for the construction of new trunk pipelines) and restructuring old programmes of late.
Moreover, the government has assumed an increasingly active role in lobbying
the interests of major businesses. In these conditions it will hardly be a surprise, given the stagnation in world markets, the inflow of "real" foreign investments into Russia should increase.
The question is how long the enthusiasm to invest in Russia lasts. Since Russia is a major exporter of raw materials, foreign consumers, including the US, who are no longer willing to be dependent on supplies from OPEC, are interested in the modernization of Russia's raw materials sector. Thus, it appears that Russia, with the help of foreign investors, will preserve and develop its production assets in that sphere. Foreign investors are far less
interested in the development of other Russian industries. And Russia has yet to think of a way to make them more attractive for investors.