7. Domestic and foreign investments

In terms of investment resources mobilized into the sector, the year 2001 was one of the more successful for the chemical enterprises over a few past years. The aggregate domestic and foreign investment amounted to US$ 1.118 bln, i.e. 31.3% more compared to the previous year. The capital investment in the sector in 2001 has almost gained the maximum over the past five years recorded in 1997 (Fig. 7.1). The leading role in the financing of capital requirements in the chemical sector belongs to domestic companies and banks. In 2001 they accounted for over three quarters of the sector's capex. Foreign investors in the chemical and petrochemical industries have somewhat lost their positions, seeing their share dropping from 28.5% in 2000 to 24.6% in 2001.

Fig. 7.1
Structure of investment in the Russian chemical
and petrochemical industries in 2001, %

Domestic investment

In 2001 chemical and petrochemical industries received Rbs 24 bln (US$ 822.5 mln) of capital from Russian sources, with the majority of investors being companies of the sector that invested their own funds in the capex. But as corporate finances are limited, this cannot but tell on the amount of investment. In this respect, the sector is the last but one in the list of more or less investment-attractive segments of the Russian industry, although in terms of capex growth (Table 7.1), chemical enterprises rank third, with their more than Russia's average rate of capex growth. Until recently, though, the majority of enterprises had enough of their own funds only to maintain the operations at their existing technological plants, capable of replacing or upgrading only the fully depreciated equipment. Large-scale capital expenditure projects that could change dramatically the technology and economics of the operations can only be handled by the largest of the corporations. GASPROM and SIBUR, for instance, have plans to implement, together with SIBUR-Neftekhim, a comprehensive, $2 - 2.5 bln 10-year development program at Nizhni enterprises. The program provides for the expansion of the aromatic hydrocarbons operations that would provide for separated paraxylol; development and operation of Volonshinsky gas field, with subsequent processing of the natural gas, and construction of polyethylene, films, and polypropylene plants, projects for pvc, cable elastron, acrylate and isopropyl alcohol. SIBUR- PETF intends to fully retool its production lines at Tver Khimvolokno. Nizhnekamsneftekhim has plans to upgrade its rubber lines and build polystyrene and polyethylene facilities. The agrochemical corporation AZOT has unveiled its plans to build an ammonia and carbamide plant in the city of Primorsk in the Leningrad region. Evrokhim will invest over a period of five years in excess of US$ 40 mln to develop its own enterprises in southern Russia: Nevinomyssk azot and Minudobrniya (Belorechensk).

Table 7.1
Capital investment by sectors in 2001

Pursuant to the Strategy of development of chemical and petrochemical industries over the period up to 2010, government capital investment in the industry will be going down, as the government tries to stimulate own corporate investment in the sector and borrowing. The proportion of own funds invested by the companies is expected to narrow to 62% in 2002, and to 30% by 2004. The process will be compensated by the growing share of debt raised from financial lending institutions and other borrowing, which would rise to 35% and 67%, respectively. The principal constraints for the bank-led lending is the low profitability rate of most local enterprises; the deficiency of legislation as far as creditor's rights are concerned; and high level of taxes applicable to production and finances.

Foreign investment

The aggregate foreign investments in 2001 totaled US$ 275 mln (Table 7.2), or US$ 32 mln more than in the previous year. Compared to more investment-attractive sectors, this is even less than modest. In terms of capital expenditure funded by foreign investment, the chemical sector is hardly half as successful as non-ferrous metals, and has less than one fifth of the capex in the food industry. The investment growth in the sector over the past year is significantly below the industry's average: aggregate foreign investment in the Russian industry grew 19.9% over 2001, while chemical companies benefited only from a 13.1% growth in foreign capex.

Table 7.2
Foreign investment by sectors in 2000-2001

A positive shift in the investment structure came from the expanding segment of direct capital investment in the chemical sector. Compared to 2000, its share grew 11.8 percent to 32.0%. However, over a third of foreign investment is in the form of lending raised by corporates themselves or against guarantees by Russian or foreign government agencies. As the Russian stock market can offer practically no liquid shares in chemical companies, the proportion of portfolio investment is extremely narrow: it was 0.4% in 2001.