Investment climate components

New Leaders

The current rating confirmed our conclusion that attractiveness to investors is a conservative characteristic that is extremely difficult to increase. As a rule, the basis of much of a region's potential depends on the natural resources at local authorities' disposal.
As a result, the top five regions with the greatest potential remained on top, and those in the top ten did not change (Tables 3, 4, 5). Only Samara (from 8^th to 6^th) and Nizhny Novgorod (from 9^th to 8^th) Provinces rose in the ranks.

The most significant changes, as in the past, occurred in the middle of the table. The regions there differ little in terms of their overall investment potential.
Risk, however, is often the result of the local administration's activities. The top ten regions with minimum investment risks changed insignificantly, but in a systematic way. Novgorod Province managed to keep its position as number one in terms of investment risk, though second-place Moscow closed some of the gap (Tables 7, 8, 9). For the first time in the history of the ratings, Leningrad Province reached the top ten. The Nenets Autonomous District also became one of the leaders. Kalingrad Province and Krasnodar Territory fell out of the top ten. Belgorod and St. Petersburg lost ground, while Yaroslavl and Moscow Provinces improved their standings. The difference in the risk level between the regions is minimal, a few ten-thousandths of a percent (0.0006). Among the larger regions, Moscow, Samara, Sverdlovsk, and Irkutsk Provinces had the most success in lowering their risk for investors.

However, the regions with limited investment potential proved the most dynamic. If local governments take a series of steps to improve the investment climate, the results can be seen quickly and lead to a reduction in risk. The regions that rose in the rating like Leningrad, Ivanov, Vladimir, Ryazan Provinces and particularly the Nenets Autonomous District (where almost all factors determining risk improved) support this thesis.

In addition, investment risks in small regions are subject to various factors that have little effect on larger regions. An example of this is the significant increase in investment risk in smaller regions near the Russian border. Out of the 12 regions that fell into the worst rating category due to increased risks, nine are located along the border and are on narcotics smuggling routes. The most alarming situation emerged in Saratov Province, where in the last year all risks, with the exception of political ones, increased. Not long ago (in 1998 and 2000), this province was one of the top ten regions in Russia in terms of investment risk.

Regional Regulation

The ratings showed that the most effective element in investment policy is the creation of a regulatory basis for investment activity and the development and implementation of a long-term investment strategy. This approach gives the maximum result in the minimum amount of time.
The first step in this direction, as a rule, is passing regional laws on investment activities. At present, such laws haven’t been passed (or are not made public information, which is all the same for investors) in Moscow City, the Yamalo-Nenets, Taimyr, Aginsky-Buriat, and Chukotsky Autonomous Districts, in the Karachay-Cherkess Republic, and in the Jewish Autonomous Province. The investment advantages of the first two regions are well-known and for the time being they don’t need to worry about special laws to attract investors. The consistent extremely low ratings of the remaining regions can be explained to a great extent by the lack of any initiative on the part of regional authorities to create a good investment climate for the entire history of the ratings. It is telling that five of the six “passive” regions in 1999-2001 had elected new leaders.
At the other end of the regulatory spectrum are regions where not only has regulatory legislation been passed and put into effect, but where it is constantly being perfected and amended as conditions change. In the period from September 1, 2001 to September 1, 2002, laws on investment activity were amended in 30 regions.

Finally it is absolutely necessary to develop a regional investment strategy. The basis of this document must be realized independent of the personality of the regional leader in power at the given moment. This significantly lowers investment risk. However, so far not a single Federation subject has its own investment strategy. Moreover, the only areas, according to our information, with any sort of long-term, complex plan or program for socio-economic development are Tatarstan, Bashkortostan, Karelia, Murmansk, Saint Petersburg, Novgorod, Vladimir, Yaroslavl, Nizhny Novgorod, Penza, and Samara Provinces.