Information and Methods

The attractiveness to investors of Russia's regions is determined by two basic characteristics: investment risk and investment potential.
The amount of investment risk indicates the likelihood of losing investments and the revenues from these investments. Integral risk is made up of seven types of risk (Table 6). A region's rank by each risk type is determined by ranking the regions according to the significance of investment risk, the relative deviation from the Russian nationwide average risk level (taken as a unit of measurement).

Investment potential reflects basic macroeconomic characteristics such as the density of production in the area, local consumer demand, and other factors. The total investment potential of a region consists of eight separate indicators of potential (Table 3), which are in turn determined by an entire group of factors. A region's rank according to each potential type depends on quantitative evaluation of the size of its potential as a percentage of the aggregate potential of all 89 Russian regions.

Overall indicators of risk or potential were calculated as the weighted total of the separate types of risk or potential. These indicators were tabulated, each with its own weighted coefficient. The region's final rank was calculated according to the size of weighted sum of the individual indicators. As a result each region was given not only a rank, but a quantitative evaluation reflecting the size of its investment potential or risk.

The ratings themselves divide the regions up into 12 groups according to their total potential and integral risk (Table 2, Graph 3, and Map 1). According to the results of our research, all regions fell into the following groups

• Maximum potential, minimum risk (1A);
• High potential, moderate risk (1B);
• High potential, high risk (1C, no region fell into this group in the current rating);
• Average potential, minimum risk (2A, no region fell into this group, either);
• Average potential, moderate risk (2B);
• Average potential, high risk (2C);
• Low potential, minimum risk (3A);
• Reduced potential, moderate risk (3B1);
• Reduced potential, high risk (3C1);
• Negligible potential, moderate risk (3B2);
• Negligible potential, high risk (3C2);
• Low potential, extreme risk (3D).

This year, our methodology underwent several changes, allowing us to evaluate the investment climate under current conditions more precisely.
The factors used to calculate crime-related risks were adjusted to a certain extent. The "number of murders and attempted murders" was exchanged for a more representative factor in our opinion, the number of serious and extremely serious crimes. The abstract "economic crimes" was replaces by "crimes connected to the use and sale of narcotics."

We included new tendencies in investment regulation in our calculations of legislative risk, such as strategies and long-term programs for economic or investment development in the region, investment project catalogs and investment site registries, and budget subsidies for interest on loans taken out by legal entities from commercial banks for investment purposes.

To compare the amount of Russian domestic investment with foreign direct investment, the former were converted into their hard currency equivalents using the exchange rate from the corresponding year.
Main sources of information: data from the State Statistics Committee, the Ministry of Finance, the Ministry of Economic Development and Trade, the Central Bank, the Ministry of Taxation and Duties, the Ministry of Natural Resources, The Russian Government Center for Economic and Market Trends, the Consultant Plus-Regions Database, and Expert RA Rating Agency databases. We furthermore used other information the administrations of individual federation subjects provided at our request or published online.

We determined the contribution coefficient of each component in the overall potential or integral risk by surveying experts from Russian and foreign investment and consulting companies and firms in 2001 and 2002. Experts from many companies participated in the survey, such as BKG Management Consulting, The Boston Consulting Group, the Russian Development Bank, Alfa Bank, ROEL Consulting, Kirovsky Zavod, the German Manufacturing Development Institute (BFA), Permskie Motory, and Nizhnekamskneftekhim. For the first time, directors of regional investment departments were invited to participate as experts. Survey results showed that in the post-Crisis period, investors' ideas regarding investment attractiveness and the importance of various separate factors changed noticeably (Graph 2). Changes in experts' evaluations of risk can be explained by the fact that the majority of Russians have a low standard of living while government assistance is constantly shrinking. Due to these factors, experts placed increasing significance on social and crime-related risks.
As in previous surveys, experts are least concerned with environmental risks and most concerned with legislative risks. Experts saw regional regulatory measures related to investment an increasing important risk. This confirms the great influence of regional authorities' activities on the investment climate.

According to experts, Russia's regions are important to investors first and foremost as a source of quality human resources and consumer markets. To a great extent, experts placed increasing significance on the institutional potential supporting market function. This demonstrates that Russia has progressed to a more civilized market based on a deeper division of functions between manufacturing and services.

A region's internal financial potential continues to lose significance. Companies and consumers continue to lack resources, and budget resources are losing their regulatory role in the investment process. Under current conditions regional authorities can only attract investors by subsidizing interest on loans and lowering land rent. The majority of regional budgets are not in a position to provide financial guarantees to investors or form collateral funds.