Investment paradox

There has appeared a phenomenon of risk division in Russia: investment risks are being transferred from the federal level to the regional one

Since 2000 investment attractiveness of Russia has been growing, but growing also have been investment risks in most regions of the country. Cardinal risk reduction on the regional level could be expected in 2009-2010 the earliest, when the administrative reform will have been completed and the vertical of power will start working in full all the way down to the municipalities.

State image

Since 1999 ratings of the international rating agencies have been clearly showing a favorable attitude of investment community towards Russia. For instance, according to Euromoney magazine, our country has gone up in the national rating from the 133rd place in March, 2000 to the 64th in September, 2004. Russia has surpassed Azerbaijan and again become the fifth among the former USSR countries.

For international pundits the investment attractiveness of the country is first of all related to the state of its economy and finance. Super high oil prices and high prices for metals ensured a great inflow of money into the country and thus the possibility of early repayment of foreign debt. The Russian GDP growth in 2003 made 7,3%. This accordingly was accompanied by the growth of production of main products and services, growth of investments and especially direct foreign investments into the economy. The number of regions with reduction of industrial production has decreased twice as compared to 2002 (see table 1).

These changes led to qualitative shift in technical fitting out of the economy: for the first time in 15 years the main assets depreciation has decreased, the share of investments in GDP has made 18% as compared to 16,4% in 2002. Though we are still far from the "investment corridor", one can state, that last year in the Russian economy there appeared some signs of the investment type of development. The growth of the real income of the population is quite impressive and the rates of poverty reduction have increased.

In the sphere of state governance there was further normalizing of legislation and enforcement of vertical of power – the actions of the authorities have become more predictable on all the levels of state government and local self-government. Even the "YUKOS case" couldn’t discredit the federal authorities in the investors’ eyes.

Finally, in political sphere the results of the State Duma elections, in the investor’s view, contribute to improving stability in the society, since they practically exclude any confrontation between legislative and executive powers in the process of laws adoption.

Risk division

Any changes, more so the reforms touching the very foundations of state structure, increase the number and effect of uncertainty factors and thus the investment risks.

And the rating results clearly prove it – average regional index of investment attractiveness grew sufficiently in 2003, but the number of regions with the reduction of integral risk index reduced by more than two times. To a great degree this was sequent to the preparatory stage of the reform: quite negative for the regions change of interbudget relations, changes in the legislation related to the administrative and social reforms, new principles of forming elective state bodies.

Since 2000 we’ve been witnessing a paradox of "risk division", when investment risks are being transferred from the federal level to the regional one. In spite of the fact that investment attractiveness of Russia in the world is growing, average regional risk indices, especially that of political and social risks, in 2003 increased. Only the average of economic risk decreased which last year depended rather on the market situation, than on the reforms impact.

The reform has effected in stabilizing the political situation on the federal level and in credibility gap for regional and municipal authorities. The unanimous voting at presidential and parliament elections, that reduced the “federal constituent” of political risk, was exceeded by the increased political tension in regions, especially in the republics of Southern Federal okrug. Regional government retirements have become more frequent and the number of inspections of regional governors has increased.

The growth of social risk was influenced by such factors as aggravation of strike movement and growth of accidents at communal grids in winter time.

The average of legislative risk of investments in regions hasn’t noticeably changed. This was achieved due to the manoeuvres of regional authorities on a fast-to-change legislative field.