Results of the ratings

The investment climate in Russia today is governed by two interrelated trends: a growing differentiation between regions and the formation of an investment core.

Centrifugal Forces. In 2001-2002, the difference between Russia's regions grew. While after the 1998 Crisis, they fell onto the same risk-potential plane, now differences between them have started to grow (Graph 3). Thus, in the previous regional rating the maximum risk was 2.8 times higher than the minimum (the Republic of Ingushetia versus Novgorod Province; Chechnya was not included in the rating). This year, however, they differ by 3.2 times (the Koryak Autonomous District versus Novgorod Province). In terms of the differences between investment potential, in the last rating Moscow exceeded the Koryak Autonomous District by 296 times, while this has now grown to 333 times. In other words, the rich are getting richer.
Only five regions, predominantly large and medium-sized ones such as Moscow, Leningrad, Yaroslavl, and Tula Provinces, and the Khabarovsk Territory, qualitatively improved their standing in the investment ratings. At the same time, 14 regions (the largest among them being Krasnoyarsk Territory, Primorsky Territory, and Volgograd Province) fell into a lower ratings class (Map 1). The most notable change in ratings was Belgorod Province, which went from the elite of class 2A (minimum risk-moderate potential), and the number of regions in the most crowded 3B1 class (low potential-moderate risk, basically the ratings' "middle class") fell from 30 to 24, returning to its level in 2000 (Table 2 and Graph 4).

The fact that the number of regions with minimal investment risk grew compensates in part for this bad news. Moscow Province joined class 1A (high potential-minimum risk), and Yaroslavl Province rose to class 3A (low potential-minimum risk). Orlov Province and Tatarstan both have a strong chance to rejoin the regions with minimal investment risk (Tatarstan left their ranks back in 1999).

Yet another reassuring fact is that the change in the general geography of investment (Graph 5, 6 and Map 2). A comparison of changes in the investment climate in 2001-2002 versus 1997-1998 shows improvements in the overall distribution picture. While previously most regions saw a simultaneous rise in both risk and potential, the largest group in the current rating is made up of regions where risks are declining, but so to is potential.

The formation of a Russian "investment core." A new aspect of regional investment development is the dramatic improvement of the investment climates in the regions lying between Moscow and St. Petersburg. Previously we singled out these two poles of investment attractiveness, Russia's two biggest cities, which led the pack. Now contiguous regions-Moscow and Saint Petersburg Provinces-have joined the two loners. These two poles border on satellite regions with minimum investment risk (Map 1.), namely Yaroslavl and Novgorod Provinces. They form a sort of "investment backup" for implementing projects, which for various reasons (high real estate costs, bureaucratic foot-dragging, environmental requirements, etc.) would be impractical or difficult to do in the big cities and their surrounding provinces. Novogorod Province has already been taken over by investors, in particular foreign investors, but Yaroslavl Province has for the first time in seven years been able to present itself to investors as one of Russia's best regions for investment. Also taking into account the fairly high investment ratings of Tver and Volgoda Provinces, we can see the formation of an investment core along the axis of the E95 Highway. This core is ringed by several less attractive regions, extending via Vladimir and Nizhegorod Provinces, through Chuvashia and Tatarstan to the east.
The eight regions belonging to the "investment core" have about a third of Russia's total investment potential, and their share has been rising steadily over the past several years. Here is also concentrated the majority of Russia's institutional (53%) and innovation (46%) potential (Graph 7).

In the last three years, the core regions' share of other resources like labor, financial, and consumer potential has grown substantially and grown in all the areas most valued by investors, particularly Western ones. If we also add in their low level of risk, then the fact that foreigners are paying more attention to the core regions makes complete sense. These regions' share of foreign direct investment (FDI) has been growing each year and has already reached almost 47% (Graph 8). At the same time, the expansion of domestic capital out of the two urban centers to the periphery has reduced the core's share in overall capital investments.