FOREIGNERS LACK CONFIDENCE IN RUSSIA

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Western investment drops 7.9% in the first three quarters of 2005

Foreign investment in the Russian economy in the first three quarters of 2005 fell by almost 8%. Experts say this is happening because the state still hasn’t specified the terms on which foreign investors can operate in strategic sectors, especially the oil industry.


Foreign investment in the Russian economy in the first three quarters of 2005 fell by almost 8% (to $26.8 billion) in comparison with the first three quarters of 2004. This was announced by the Federal State Statistics Agency (Rosstat) on Friday, November 18.

It should be noted that for the same period last year, foreign investment went up by 39.4% in comparison with the first three quarters of 2003.

Natalya Orlova, a senior economist at Alfa-Bank, said: “Investment in Russia is slowing. This concerns direct investment. Direct foreign investment went up by 32% to $4.5 billion during the first half of 2005 – so that means the growth stopped during the past few months.”

Experts say this is happening because the state still hasn’t specified the terms on which foreign investors can operate in strategic sectors, especially the oil industry. Pavel Suprunov, an analyst at Rosbank, said: “The tax burden on the oil sector is too heavy, and its growth is very insubstantial.”

However, this is not the only negative factor hindering foreign investment. Suprunov said: “Investment in Russia is a risky undertaking, for political and economic reasons. In addition, capital is becoming more expensive. Many investors have turned away from developing countries since the US raised interest rates in the developed world.”

At the same time, experts note that portfolio investment has increased by 60.5%. The Russian stock market is growing very rapidly, so such a change is logical. Investors have an opportunity to make money thanks to the stability of the ruble. However, all experts agree that increasing portfolio investment carries a certain amount of risk for Russia, because the money can be withdrawn from Russia very quickly.

But analysts say Russia has nothing to fear from this at present. Suprunov says: “Russian companies are only approaching a fair value, and most investors are counting on sustained growth, not short-term investments.”

The Russian authorities say that investment will go up next year thanks to the creation of special economic zones. But the experts are skeptical. Natalya Orlova said: “New projects will enable the Russian economy to take in more money, but these figures will not be large enough to be significant for Russia. The oil industry dominates the Russian economy, and no qualitative changes will happen, unless foreigners get access to this sector.”

It should be noted that Rosstat reported that Russian oil exporters’ revenues increased by 45.3% to $60 billion (from $41 billion) in the first three quarters of 2005.

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