The Investment Rating Results

The investment climate in Russia is stabilizing. The number of marginalized regions is declining and the number of “middle-class” regions is growing. The difference between Moscow and St. Petersburg and outlying suburbs is shrinking Only smaller regions, the autonomous ethnic federation subjects, are exceptions to these general positive trends.

The smaller regions, as a rule, are not able to properly reduce their investment risk. Their administrations, as a rule, are less efficient (see Table 8). This is especially apparent in regions’ average risk. While in 2001 the index of integral risk per region (excluding Chechnya) was 1.102, in 2002 it was 1.122 and has now reached 1.131. This is the highest level since 1997 (Chart 2). (According to our methodology, the average risk for the country overall equals one. This means that that an increase in the average per-region risk can only occur due to an increase in high-risk regions.)

Nonetheless, over the past year, the integral risk index only grew in 42 federation subjects, as opposed to 47 in 2001-2002. Yaroslavl and Novgorod Provinces stayed in the highest category of regions with minimal risk and were joined by Belgorod Province and, after a four-year hiatus, St. Petersburg. On the other hand, Moscow Province fell from this category, as did Moscow city for the first time in the history of Expert RA’s ratings. The lack of a law governing investment activity was one of the most significant factors for Moscow’s fall; 80 other federation subjects already have such a law. Mayor Yuri Luzhkov only gave the city government the order to draft such a law in March 2003.

The number of “marginalized” regions is declining steadily – i.e. the regions with extremely high risk or very low potential. It often seems easier to start from scratch than to perfect something. As a consequence, many regions are creating a fairly satisfactory investment climate and joining the “middle class.” Further progress will require qualitative administrative reform and the development and implementation of an investment strategy. Few seem up to the task.

In terms of the rating, this process is reflected in increases in the popular 3B1 category, the “middle-class” regions with reduced potential and moderate risk (Chart 3). There are now 27 such regions, as opposed to 24 in last year’s rating. Competition for investment between regions falling in the 3B1 category is particularly stiff.

This year saw less frequent “migration” of regions between rating categories. While last year, 19 regions changed their risk or potential categories, only 14 did so this year. Those regions who moved up, the leaders of this year’s rating, by improving both risk and potential include Belgorod Province, which went from 3B2 to 2A, and Buryatia, which moved from 3C2 to 3B1 (Table 2, Chart 4, and Map 1). Only 9 regions improved their risk and potential index, as opposed to 11 in the last rating (Chart 5). At the same time, fewer regions saw an increase in risk and a decrease in potential, only 28 as opposed to 31 last year. This further confirms that the investment climate is “averaging out” in the overwhelming majority of smaller regions.

Leaders and outsiders

In the investment risk rating there occured significant changes. Fisrt of all, there appeared a new leader - Yaroslavl province that has been constantly reducing its investment risk during the last for years and for the first time it became leader (Table 3). In the second plece, regions has been reshuffled again. These shifts are accounted bu changes in the criminal risk, namely by the way crimes are registered now. Because of that Astrakhan and Tyumen provinces have improved their integral risk significantly. Most of all investment risk has deteriorated in Tver province, not only becouse of the situation with the governor, but also due to the criminal and financial risk aggravating (Table 4). The increasing investment risk in St. Petersburg province is connected with the criminal risk worsening, as well as ecological and social risks. And the catastrophic increase of risk in Nenetsky AO is accounted by the whole bunch of negative factors (all risks, except plitical and ecological). (Table 5)

One of the most notable results of the rating was the substantial decline in position of two of the biggest economic centers in Russia, Moscow and St. Petersburg (Table 6 and Map 2). However, this does not necessarily mean that city officials and entrepreneurs have let things slide. It indicates that other regions are outpacing them in terms of growth (as position is determined relative to national averages). The investment potential of the regions closest to Russia’s two biggest cities, Moscow and Leningrad Provinces, grew particularly rapidly. If one compares this trend with historical developments in Western Europe and the US, it appears to be the natural result of the exodus to the suburbs of businesses or facilities that are inefficient, inappropriate to an urban setting, and require more space, such as wholesale trade, rail transport, and aviation. These businesses and companies either close down or restructure, or move their business to nearby suburbs. They are replaced by technologically advanced small and mid-sized firms, office centers, expensive hotels, boutiques, entertainment facilities, and sports and health clubs.

Regions’ progress in terms of increasing potential was less significant, as demonstrated by the limited number of regions belonging to the most dynamic in improving investment potential (Table 7). The leader is this area, Bryansk Province, improved its potential by increasing the number of people with higher education involved in investment. To all appearances, this is related to defense companies getting back to work. The increase in investment potential in Chechnya resulted from a minor economic revival and the introduction of accounting practices for a range of investment climate indicators.

The top six regions kept their leading positions in terms of potential, and all in all the top ten regions for investment, despite some minor shifts in position, remained the same.