Data and methods

The two general components determining a region’s attractiveness to investment are investment risk and investment potential.

Investment risk represents the likelihood of the loss of investments or income from investments. The integral risk evaluation consists of seven different risk types (see Table 3). A region’s rank in terms of each kind of risk is determined according to its relative deviation from the Russian national average risk, which equals one.

Investment potential takes macroeconomic characteristics into account, such as the geographical concentration of industrial facilities, consumer demand, and other factors. The aggregate investment potential of a region consists of eight individual potential factors (see Table 6), each of which in turn is defined by an entire group of indicators. Each region’s potential ranking depends on a quantitative estimate of its potential as a portion of the total potential of all 89 Russian regions.

The general indicators for potential or risk were calculated as the weighted totals of the individual potential or risk factors. Indicators were totaled, each according to its own weighted coefficient. A region’s final ranking was calculated according to the total weighted sum of the individual factors. As a result, each region has a qualitative rating in addition to its rank, reflecting how great investment potential is and how great the risk to investment in that particular region.

Regions are also divided by their overall potential and risk into twelve groups (Table 2, Chart 4, and Map 1). According to research results, all regions fall into the following categories:

High potential – moderate risk (1B) - 4 regions.
High potential – high risk (1C) - 1 region.
Average potential – moderate risk (2B) - 15 regions.
Average potential – high risk (2C) - 5 regions.
Low potential – minimal risk (3A) - 1 region.
Reduced potential – moderate risk (3B1) - 27 regions.
Reduced potential – high risk (3C1) - 5 regions.
Insignificant potential – moderate risk (3B2) - 16 regions.
Insignificant potential – high risk (3C2) - 11 regions.
Low potential – extreme risk (3D) - 4 regions.

This year, no regions fell into the 1A (maximum potential – minimal risk) and 2A (average potential – minimum risk) categories.

The changing conditions for investment in Russia and changes in the format of available data demanded that we make several adjustments to our calculations of individual risk and potential factors. This primarily affected our estimates of crime-related risk, which caused the greatest changes in regions’ ratings. First, the new Criminal Code introduced in the middle of 2003 has a milder interpretation of when legal violations are subject to criminal prosecution. This led to a dramatic decrease in the number of reported crimes in almost all regions and to substantial reshuffling of crime-related risk ratings. Secondly, an indicator of violent and extremely violent crimes was reintroduced as a criterion for determining the extent of crime in a region.

When evaluating legislative risk, free economic zones were attributed substantially less significance as a result of their minor importance for investors. Limits set on investment in formerly state owned or soon to be privatized companies were also given less significance.

The results of elections for regional leaders that had been held before this rating was published were taken in consideration when evaluating political risk.

The former indicator of social risk, the cost of a fixed group of goods and services, was replaced by the cost of the minimal amount of basic food products.

Finally, the institutional potential indicator for the first time takes into account the number of entrepreneurs who are not operating as official legal entities.

The weighted contribution of each component in aggregate potential or integral risk, originally estimated by means of surveys of experts from Russian and foreign investment and consulting companies and firms, saw no substantial revisions.

To compare the amount of domestic capital investment with direct foreign investment, domestic investment was converted into hard currency equivalents at the dollar exchange rate of the corresponding years.