Attracting domestic and foreign investments in the real sector of the economy represents a priority task of Russia’s economic policy.

The problem has been acute since the early 1990s when Russia was experiencing a severe investment crisis.

It still remains on the agenda although, since 1999, the country’s production has been on a rise and, which is particularly important, domestic investments have been increasing (during January through August 2000 the volume of investments in the major assets was 17.6 percent above the corresponding figure of 1999).

But Russia is still in need of investments, and the country needs them in large amounts.

Obviously, there are two basic ways of obtaining investments that would finance technological modernization and ensure the stable growth of Russia’s economy.

One way involves orientation primarily on state investments and the second involves orientation on private capital, both domestic and foreign.

Given the scarcity of budget funds and low efficiency of budget investments, priority should be given to the attraction of private capital, including direct foreign investments.

During the 1990s, the main source of investments in the main assets were the owned funds of the enterprises.

The share of such investments equaled 53.4 percent in 1999 and 49.3 percent during the first 10 months of 2000. But these investments are obviously insufficient.

Bank loans still remain a minor source of investments. In 1999, their share in the total of investments in the main assets equaled only 4.3 percent and dropped to 3.3 percent for the period of January-September 2000.

The year 2000 saw an increase of investments from such sources as borrowings from other organizations and budget funds, but their volumes are not large enough to resolve the problems that have accumulated for years.

Due to the financial crisis the volume of portfolio investments in Russia fell from $681 million in 1997 to $191 million in 1998 and further down to $31 million in 1999.

Despite Russia’s economic growth, portfolio investments remained meager in 2000: $59 million in January-September.

Given that Russian enterprises have limited access to foreign financial markets, there are no reasons to hope that portfolio investments (as well as investments provided in the form of trade loans and credits of international organizations) would be of any great help for improving the situation in the sphere of investments in the next several years.

Analysis of the situation indicates that the main attention should be devoted to attracting direct foreign investments.

The weakness of Russia’s competitive positions and the drawbacks of its investments-attraction policy find their reflection in the low volumes of direct foreign investments in Russia’s economy and their unsatisfactory distribution among the branches of industry and the regions.

According to the State Statistics Committee, during 1992 through 1999 Russia received a total of $25.5 billion worth of direct foreign investment.

In terms of direct foreign investments accumulated during the 1990s, Russia is ahead of all the European post-socialist countries (except Poland) and is approximately on a level with Hungary. But this is quite a poor boast given Russia’s size.

Per capita volume of direct foreign investments in Russia during 1992 through 1998 equaled only $108.7 compared to $1,134 in Estonia, $705 in Latvia, $408 in Azerbaijan and $325 in Kazakhstan. In 1998, Russia’s share in the world’s total of accumulated direct foreign investments was as low as 0.3 percent, while that of Brazil was 3.8 percent, that of China was 6.4 percent and that of the United States was 21.4 percent.

The primary motivations for investing in Russia remains the same as they were: Access to the country’s consumer market and, second, access to its natural resources, especially to hydrocarbon deposits. Therefore, investments in the raw-material-producing industries (primarily fuel), trade and public catering constitute a major part of the direct foreign investments in Russia (approx. 40 percent). Different branches of industry dominated in the structure of foreign investments in different periods of time. Thus, in 1998, the food industry accumulated 35.5 percent of the total of direct foreign investments and the fuel industry got nearly 29 percent in 1999. At the same time, investments in the processing industries and infrastructures, which are essential for Russia’s economic growth, remain very low. The shares of transport and communications in the total volume of direct foreign investments tended to increase in 1999 and 2000. This is a positive trend, although it is obviously too early to speak about changes in the preferential directions of foreign investments in Russia.

In addition to the differentiation by branches of industry, the flow of foreign investments in Russia is characterized by a clearly manifested differentiation by the regions. As of 1999, top six regions accounted for some 73 percent of the accumulated volume of direct foreign investments and 59.2 percent of the direct foreign investments that arrived during the first 10 months of 2000 went into Moscow, Moscow Oblast, St. Petersburg and Krasnodar Krai.

Such uneven distribution of foreign investments among branches of industry and the regions reflects the weakness of an investment-attraction policy that fails to create conditions and stimuli for foreign investments to arrive in the processing industries, infrastructure and the majority of Russian Federation members.

Those enterprises that have been established in Russia from funds that came as direct foreign investments are characterized by considerably higher technological levels. For example, in terms of production volume per employee, such enterprises are 100 percent above Russia’s average level. In 1998, enterprises and organizations with foreign investments in Russia employed only 1.5 percent of the country’s total labor force, while their production volume constituted 8 percent of the GDP.

Foreign investors operating in Russia can be roughly divided into the following three groups.

The first group is represented by investors who operate outside the general legal frame, i.e. under special regulations and/or agreements with the authorities that give them certain exemptions in taxation, customs and other fields (for example, free economic zones, enclaves, etc.). These investors are best-protected against the unpredictable changes of business conditions in Russia.

The second group is represented by medium- and small-goods producers operating on the basis of their original technologies. They usually hold patents and know-how, produce competitive goods and are determined to gradually and rationally expand their production.

The third group is represented by investors oriented on speculative profit. They live off price fluctuations and other factors of instability characteristic of an economy in transition.

From the viewpoint of Russia’s economic development, most interesting are investors belonging to the second group. Their presence on the market stimulates competition and promotes the introduction of effective technologies and methods of management.

The main obstacles hampering the attraction of direct foreign investments in Russia can be divided into the following three groups.

The first group is represented by political, social and economic problems characteristic of the transition period of Russia’s development that affect all enterprises and business in the country, including those with foreign investments.

The second group is represented by problems stemming from the government’s policy in the field of investments, specifically the weak attention of the authorities toward support and regulation of investment process. This causes repeated failures of investment projects and federal targeted programs for developing certain branches of industry and/or certain regions. And there is a lack of coordinated action by the branches of the government and the absence of clearly defined priorities in the government’s policy in the field of investments in general.

The third group is represented by specific problems related to the conditions of operation for foreign companies in Russia.

At this stage Russia is facing a difficult task: to create attractive conditions for foreign capital with due respect for the interest of the foreign investor as well as for the interests of Russia’s economic development. This requires the implementation of a series of coordinated measures in the legislative and executive spheres directed at maximally possible disclosure and use of the country’s investment potential and boosting its attraction for foreign investors.

(This article was prepared based on material obtained by a research project of the Bureau of Economic Analysis)