The nationwide investment context

After two years of fairly energetic growth, the trend shifted starting mid-2001 and economic growth in Russia began to slow down.

One of the main reasons behind this change is the insufficiently slow restructuring of the economy. More than half of production capacity at many Russian companies was obsolete and worn out (sometimes from the very moment it was put into production). According to our estimates, immediately after the 1998 Crisis domestic manufacturing had a significant reserve of unused capacity, which allowed for a 22-25% increase in production. Now that reserve has been used up, just like the potential of a cheap ruble.

Only investment double or triple today's levels will give a new impulse to the Russian economic development. However, the basic data on Russia's investment development demonstrate that just the opposite is occurring (Table 1). In 2001 the growth rate of investment in fixed assets fell, and the amount of foreign direct investment (FDI) declined by 11.1% overall. Thus, while in 1999 ten regions saw a decline in production, in 2000 only Kalmykia and the Aga Buriat Autonomous District saw declines. In 2001 11 regions again saw declines, and in 2002 this number had growth to 28.

The steadily increasing depreciation of fixed assets in the Russian economy testifies eloquently to the investment deficit. In other countries, on the contrary, development encouraged by investment usually leads to a lower rate of depreciation and a dramatic influx of FDI (the share of this kind of investment reaches 25-35%). For precisely this reason when many talk about attracting investment, they usually mean attracting the cautious and finicky foreign investor. This kind of investor does not want to come to Russia, no matter how much Russians invite him to investment forums and conferences, of which there were more than 70 held in this year alone.

Foreign direct investors are again losing interest in Russia. They are frightened away by the infamous investment climate. In spite of all attempts to the contrary, foreigners don't seem to appreciate Russia's economic accomplishments in the past few years.

An excellent example of this is Russia's position on international national (country) ratings of comparative attractiveness to investment. Unlike the Soviet Union, which in 1988 Euromoney Magazine rated 17^th right after Italy and Taiwan, Russia can't seem to get out of the tail end of the first hundred countries (Graph 1). Worst of all, there seem to be no signs of any movement in that direction.
By comparison, according to Euromoney's evaluation of September 2000, Kazakhstan was 81^st in the world, in September 2001 76^th, and by March 2002, it was already 70^th (the leader among CIS countries). Russia for the same period not only yielded to Kazakhstan and Azerbaijan (95^th), but also notorious Papua New Guinea (89^th).

The international rating agencies have also shown Russia no mercy. At least, not one has seen fit to include Russia in its investment level ratings. As a result, Russia is losing out in the competitive battle on the world market for direct investment not only to China and the countries of Eastern Europe and the Baltic, but also to its more dynamic neighbor to the south, Kazakhstan.

At the same time, it is not fair to say that the international business community has not noticed Russia's huge potential. According to AT Kearney's Foreign Direct Investment Confidence Index (which reflects how leaders of major transnational corporations view the feasibility of purchasing or setting up businesses in a certain country), Russia is 17^th out of 60 countries. This means that foreign investors would like to put their money in Russia. However, existing conditions still prevent them from making the decision to do so.