Will Europeans invest in Russia?

© RIA Novosti . Roman GalkinWill Europeans invest in Russia?
Will Europeans invest in Russia? - Sputnik International
European businesses are unlikely to play a significant role at the St. Petersburg Economic Forum, which will begin on June 17.

European businesses are unlikely to play a significant role at the St. Petersburg Economic Forum, which will begin on June 17. The deteriorating economic situation in the European Union makes Russia seem like an even less attractive investment opportunity for European businesspeople. This is compounded by the fact that most of the investment opportunities available in Russia involve innovation projects, even though demand for the finished products is low in Russia.

On June 17, St. Petersburg will host the 14th International Economic Forum. Russian and foreign investors will discuss prospective investment projects and - under a best-case scenario - sign memoranda and perhaps even contracts.

The focus of this year's forum will be Russia's modernization, which is captured in its slogan, "Laying the foundation for the future." There will be a special emphasis on making deals with energy and high-tech companies, as well as large financial corporations, Presidential Aide Arkady Dvorkovich said during a news briefing at RIA Novosti on June 15.

The plan is to sign more agreements and memoranda with foreign partners at this year's forum than ever before, Mr. Dvorkovich said.

"We expect that you won't be able to count the signed investment agreements on even two hands," he said, adding that European investors plan to announce a "significant expansion" of investment in Russia.

Considering that the European Union's economic problems are multiplying by the day, it's unclear whether a significant expansion is possible. Greece is still at a risk of default. The risk is so serious, in fact, that Moody's Investors Service has downgraded Greece's credit rating four steps to non-investment grade, or "junk." Last month Greece agreed to a package of additional austerity measures in order to qualify for loans from the European Union and the International Monetary Fund.

Other EU countries - Ireland, Italy, Portugal, and Spain - have problems servicing their government debt.

Spain was also hit by a liquidity crisis on the interbank market earlier this month. Foreign banks refused loans to a number of Spanish lenders. Spain is likely to follow Greece's lead and request collective financial assistance from the EU.

Germany and France, the economic powerhouses of the EU, are more concerned with trying to solve the European Union's economic problems than with finding investment opportunities in emerging economies. They have recently agreed to establish an "economic government" to coordinate the European Union's economic policy.

Most European business leaders are more concerned with saving their capital than increasing investments. Many do not have money available for development and expansion, and what's worse, no one is lending. The banking sector has not yet fully recovered after last year's meltdown. Therefore, Russian businesses should not expect an influx of European investment right now.

Europeans are more likely to bide their time. "Positive gestures and promises are a common practice that will not be abandoned, but it would be unwise to expect any investments to actually materialize," said Igor Nikolayev, chief strategic analyst at the private auditing firm FBK.

Mr. Dvorkovich indicated which industries would benefit most from foreign investment, and they all seem to involve innovation. The government is prepared to support and even co-finance most of these projects, covering up to 30% of project costs. Foreign businessmen who are truly interested in investing in Russian companies will certainly benefit from the St. Petersburg forum, where they will have an opportunity to discuss projects with Russian business executives and government officials, including the country's leadership.

Apart from Europe's internal economic problems, Russia itself is far from an attractive investment at this point. The recession is not yet over, and Russia's macroeconomic indicators leave much to be desired, especially compared with the other BRIC countries.

The investment climate in Russia does not encourage foreign investment. Russia ranks 120th out of 183 countries on the IFC-World Bank's Ease of Doing Business Index in 2010, down two steps from last year. Russia finds itself behind Bangladesh, Argentina and Nicaragua in terms of the ease of starting a business, obtaining credit, investor protection, hiring employees, registering property, and paying taxes.

It's hard to imagine why foreigners should want to invest in Russian innovation projects. Local demand for innovation products is weak due to the lack of competition. Most entrepreneurs realize that developing research-intensive technology is far less efficient than, say, lobbying for corporate interests and government support. This gives businesses in Russia a competitive edge without having to spend on innovations.

One can imagine an investment project that could attract foreign investors, in which high-tech products are manufactured in Russia and sold in the West, where there is demand. But here Russia would face stiff competition, for example from India. Also, it is easier to develop an innovative product where there is demand for it, says Igor Nikolayev.

Therefore, the most likely investors in Russia are not Europeans. From the list of countries represented at the forum, one can expect offers from Chinese, Indian and U.S. businesses.


The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

MOSCOW. (Maria Selivanova, RIA Novosti economics commentator)

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