The Wave Effect

Investment climate is not only defined by local authorities. It is also defined by neighboring regions. The Russian investment climate gets increasingly worse as one moves east and south. The waves of economic development expand in concentric rings from Russia’s investment core.

Russia’s investment profile

Regions with the best investment climates are for the most part concentrated in European Russia. The Northwest, Central, and Privolzhsky Federal Districts have particularly favorable climates. Almost two thirds of Russia’s investment potential is concentrated in these regions, and investment risk per region is lower than the national average. As one moves further east and south, the investment climate grows gradually worse, as overall potential decreases and risk increases (Charts 7 and 8). In the Far Eastern Federal District, average investment risk per region is almost 1.5 times greater than in Northwestern Russia, while in the Southern Federal District, it is 1.6 times greater.

Concentric rings

Russia’s investment core, as revealed by last year’s rating, lies between Moscow and St. Petersburg and has yet to gain a sufficiently stable and favorable investment climate. Its center has shifted to the northwest and to St. Petersburg, as the attractiveness to investors of Moscow city and Moscow Province has declined. Tver Province has fallen out of this core group, and investment risk in Leningrad Province has increased dramatically. At the same time, the investment climate in Vologda and Yaroslavl Provinces has increased significantly.

Improvement to the investment climate in Russia has taken the form of gradually decreasing concentric rings moving out from the center of the investment core to the periphery. This is demonstrated by the significant improvement in investment climate in the regions lying near the investment core, such as Belgorod, Nizhegorod, and Kostroma Provinces and Tatarstan. In order for this wave of increased investment attractiveness to reach further into the periphery, new sub-centers and investment cores, regions with minimal investment risk, need to form. Tatarstan is the most likely candidate for this role, as it had a minimal risk in the 1998 and 1999 ratings. Other possibilities include Krasnodar Territory, Bashkortostan, and Nizhegorod, Rostov, Samara, Perm, and Tyumen Provinces.