Batuk Gathani

THE Russian President, Mr Vladimir Putin, wooing key American and European businessmen ranging from the media tycoon, Mr Rupert Murdoch, to the Chief executives of Siemens, Philips, Citibank Group and IBM has raised many an eyebrow in the European financial circles. It has also triggered a major debate in the Continent over the "ifs and buts" of investing in Russia.

The silver lining on the otherwise depressed Russian economic horizon is that the soaring consumer spending has triggered heavy investment in the Russian economy. After 15 years of "serious pondering", Japan's Toyota is structuring a plant near St. Petersburg. The $144-million plant will produce 50,000 cars a year. Despite such headline-grabbing FDI projects in the consumer sector, Kremlin's reluctance to allow foreign investment into oil is holding Russia back. The neighbouring oil-rich Kazakstan has attracted $1,000 per capita FDI compared to Russia's $70 per person in 1991. At the same time, the Russia is becoming a high-spending economy, with the per capita income reaching $2,600 in 2004 from $800 in 1999. The rise in personal income in Russia has outpaced national economic growth in the last five years.

Foreign banks are looking for opportunities to invest in Russia and of the some 1,300 registered Russian banks, only 36 have 100 per cent foreign capital. In the years to come, this profile will enlarge and current estimates are indicate that foreign banks will end up with a quarter of the Russian domestic banking business.

The Russian authorities are concerned with fall in fixed investment that has led to a slowdown in the economic growth. Russia's fixed investment accounts for 16 per cent of GDP compared to Central Europe's 25 per cent. Mr Putin has hosted top businessmen and vowed that the days of "tax terrorism" are now history. Yet, the shadow of the Russian oil giant, Yukos Oil Company nationalised overnight and accused of tax evasion and fraud still looms menacingly in the background.

According to European observers, the reality is that despite record high oil prices ($60 per barrel) and Russia being a key producer, investor and trader, its economy is in the doldrums, registering an economic growth of less than 5.4 per cent compared to 7.1 per cent in 2004. The Yukos affair has left Western majors "guarded and cautious" over prospects of bidding for the lucrative Russian oil fields in the Far East region. Mr Putin has assured European and American investors that Russia is processing a "dynamic investment strategy". According to German industrialists, Mr Putin proposes to follow a `benevolent' investment policy to allow foreign companies exploit Russia's vast human and natural resources.

How much of all this can be translated into key investment decision remains to be seen. Germany is currently Russia's largest investment and trading partner, but the current Euro-Russian investment profile is modest. Hungary, for example, attracts $220 in per capita investment compared to $64 by Russia.

The key argument among Western investors is that Russia is a "high risk" investment area because of its notoriously corrupt bureaucracy, weak rule of law and "not-so-well-defined" property rights. Yet, despite such obvious "investment handicap", Russia has a "special fascination'' for investors because of its sheer vastness and untapped human and mineral potentials.

Western investors have stayed away from Russia by scaling down investments and even taking money out of that country. It is argued that vast majority of the Russian investors have stashed their money in `secret' European and American bank accounts.

An educated guess would suggest that the real amount would be $30 billion-plus. Russia has attracted modest investment flows. For example, in 2004, it attracted $27.8 billion, of which $10.1 billion came from Cyprus. Many Russian investors have bank accounts in Cyprus. The Russian mafia or criminal money is also stashed in major European financial capitals.

The most lucrative and daring property buyers both commercial and residential in London and major European financial capitals are Russians, and Russian children often go to the best and most expensive schools in the European capitals.

How Mr Putin and his administration evoke fresh investment confidence in the economy , remains to be seen. Apart from Cyprus, the largest foreign direct investment in 2004 came from the Netherlands ($8.8 billion), US ($4.3 billion), Germany ($2.6 billion), the UK ($1.6 billion) and France ($0.4 billion) . Mr Putin has promised European and American businessmen that Russia will strengthen its courts and banking system but foreign investors desperately await tangible results.

In a recent report on the state of the Russian economy, OECD stated that the biggest obstacles to reforming the Russian economy were opacity, inefficiency and corruption in every government institution. "After more than a decade of reforms, the Russian state still relies too much on direct control over assets and intervention in the market."

(This article was published in the Business Line print edition dated June 30, 2005)
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