Foreigners drastically increased investment in the economy of Russia

16.05.2019

According to the Bank of Russia, in the first quarter of 2019, foreign direct investment in the non-banking sector of our economy grew eight times. The indicator, as noted in the bulletin “What the trends are talking about,” published by the Research and Forecast Department of the Central Bank of the Russian Federation, rose to $ 11.5 billion in quarterly comparisons.

The regulator partially explains such sudden positive changes by restoring investments in debt instruments, although it acknowledges that it is premature to talk about a steady revival of foreign investment in the non-banking sectors. In general, such high growth in the Bank of Russia is associated with individual intra-group transactions of large companies. However, what particular deals are in question, the Central Bank does not specify.

Nevertheless, the overall situation remains not so rosy: if we exclude these transactions, the dynamics of foreign investment in the Russian economy in the first quarter of 2019 improved only marginally. It’s too early to talk about stability in improving the investment climate in this sector, notes Yevgeny Vengerovsky, a teacher at the Department of Legal Regulation of Economic Activities of the Financial University under the Government of the Russian Federation. A one-time increase can be explained by the current trend: when investments from Russia decrease abroad, investments from abroad increase.

The expert recalls that in 2018 foreign investment in the non-banking sector declined amid the threat of toughening the sanctions policy, while today’s “surge” can be called such only against the background of the 2018 decline. The current temporary increase in investment activity, Evgeny Vengerovsky is sure, can lead to an increase in investor risk against the background of a general unfavorable investment environment caused by a low inflow of portfolio investment and a decrease in the repayment of other liabilities.

A small improvement can be attributed to the effect of a low base, adds Gennady Nikolaev, an expert at the Academy of Financial Management and Investments. So, in comparison with 2017 in 2018, investments in Russia decreased almost three times ($ 8.8 billion), and the net capital outflow reached $ 23.1 billion (maximum values ​​over the past 5 years). There are a lot of reasons: against the background of the trade conflict between the USA and the PRC, investments in the EM segment as a whole are declining, and the Russian economy is growing rather sluggishly in comparison with other developing countries.

In addition, the analyst continues, a recent criminal case against Michael Calvey, the founder of Baring Vostok, is expected to have undermined the confidence of non-residents. This dynamic motivates players to look for more profitable, but at the same time not so risky assets. They don’t rush to invest in the domestic economy and Russian companies, which can be seen from the net capital outflow: if earlier, in order to reduce costs, the business used to withdraw capital to offshore companies to make deals through project companies and then returned it back, now entrepreneurs prefer to invest in foreign assets.

Thus, Gennady Nikolaev states, it’s premature to talk about the growth of investments in the country – it’s not at all clear what the Central Bank means by individual transactions of large companies. Perhaps we can recall such transactions as the purchase of Total 10% in the Novatek project – Arctic LNG, German investments in the framework of Nord Stream-2, or the construction of a Mercedes plant in the Moscow Region. In other words, there were no really serious changes in the field of investments.

Given the concerns of investors about the global economy and another round of deterioration in relations between the US and the Russian Federation, the United States and China – as the main driver of global economic growth, we should not expect any changes in the near future, the expert believes. Nevertheless, if the trend towards improving relations with individual EU countries and China continues, in the long-term, domestic investment can once again become attractive, despite American sanctions and other risk factors.

Source: Expert Magazine