Structure of foreign investment by industry in 2005-2007

Russia is most actively encouraging the participation of foreign companies in the oil and gas sector, not only for their capital contribution, but also for their advanced technology and experience. Nearly all the major international oil companies and many smaller ones have expressed interest in participating in the exploration and development of Russia's oil and gas reserves and willingness to commit modern technology and billions of dollars of capital on a long-term basis, provided Russia creates investment conditions compatible with international practice and which take account of the long-term character of investments in this sector. Such conditions include an opportunity to share in the production generated by the investment, a clear and reasonable tax regime which allows an equitable return on investment, a stable set of rules, and an equal opportunity to obtain and exercise rights to the oil and gas fields.

In 2005, there has been great increase in manufacturing and wholesale/retail sector as foreign investors started understanding the increasing purchasing power of Russians and lots of new plants were opened. However, the situation with Sakhalin 2 project, when Russian government has made all possible to give controlling package of shares to “Gazprom” even though Shell, Mitsui and Mitshubishi were ready to pay more, has lead to the decrease of interest of some multinational organization to invest in Russia.

In fact, Russian government is, of course, more interested in the investments and development of high technologies and manufacturing. However, even such kind of investments can be harmful for Russian producers. For example, after Ford, General Motors, Renault and other producers of cars have opened their plants in Russia, there has been great decrease in the demand of AvtoVAZ production.

In January-September 2007, an increase took place in the share of wholesale and retail trade by a factor of 2 in comparison with January-September 2006. The foreign investment inflow into manufacturing activity and extraction of minerals increased by 2 times, but the shares of this kinds of economic activity in the total amount of foreign investment inflow into Russia slightly went down to 24,6% and 17,3% correspondingly compared to January-September 2006. /9/

 

Risks in the sphere of international entrepreneurship

Main methods of risk assessment and management.

As risk is a danger of loss by an enterprise of resources or gains its quantitative measure may be determined in absolute and relative indices.

In the absolute expression risk can be determined by the size of possible losses in material-tangible (natural or physical) or value (monetary) form, if the type of such loss can be measured in such a form.

In the relative expression risk is determined as a value of possible losses related to a certain base which is usually accepted as:

а) property status of an entrepreneur;

b) total input of resources to this type of entrepreneurial activity;

c) expected gains (profit) from entrepreneurship.

 Losses themselves called forth by various risks may take different forms:

1. material losses – additional spendings or direct losses of equipment, property, products, raw materials, energy and other resources;

2. labor losses – days lost (in man-hours, man-days, etc.);

3. financial losses – direct monetary damage, associated with unforeseen payments, fines, taxes, defaults on debts, reduction of gains due to landslide of prices, intensification of inflation, change in the exchange rate of national currency, etc.; 

4. special losses in the form of damage to life and health of people, environment, entrepreneur’s image and also because of other unfavorable socio-psychological and political phenomena.

The measure of risk and probability of occurrence of losses connected to it are directly linked to the change of conditions of project implementation or operation of an enterprise in time. It is exactly for this reason that calculated risks and current risks are distinguished.

A calculated risk is a risk which is determined at business-project preparation stage. A current risk is a risk which is assessed in the course of the project implementation. In unfavorable concurrence of circumstances a current risk can exceed not only a calculated risk but also marginal limits of risk determined for the given project which in its turn may lead to cessation of the project or to making significant amendments to it.

By time factor risk can be subdivided into: long-term risk connected with development in future and short-term risk which depends on the factors linked to the market. /9/

 

Main types of risk

Table 5 Main types of risk

 

CRITERIA	RISK TYPES
By method of measurement	Absolute losses. Relative losses (in per cent to a certain base)
By type of calculation	Calculated risk determined at the design stage. Current risk determined in the course of project implementation.
By time factor	Long-term risk. Short-term risk.
Relative to enterprise	External risks of business environment
Depending on risk factors	Market. Commercial. Currency. Credit. Production and other.

 

  While determining the level of risk depending on the size of losses several areas are usually singled out:

  а) no-risk area, to which zero losses correspond or even negative (surplus of profits over the expected ones);

  b) area of admissible risk is an area within which given kind of entrepreneurial activity retains its financial viability i.e. there are losses but they are less than expected gains (profit of payments); limits of this area correspond to the level of losses equal to calculated profits; 

  c) critical risk area is an area characterized by the possibility of losses which exceed the size of expected gains and reach the size of monetary receipts i.e. the sum of expenditures and gains;

  d) catastrophic risk area is an area of losses which exceed receipts and in their maximum may reach (or exceed) the size of own capital or property of an entrepreneur.

  There are various methods to assess business risks – theoretical (on the basis of logical reasoning), empirical (on the basis of extrapolation of previous trends) and applied methods which in their turn are divided into statistical (on the basis of loss statistics studies), expert (e.g. on the basis of generalizing opinions and experience of businessmen and specialists) and analytical-calculated (on the basis of economic-mathematical models).

  Nowadays one of the most prevailing versions of assessing risk levels (especially country-wise) is an assessment carried out by specialized rating agencies which calculate also the so-called investment ratings.

  Investment ratings is understood to be the assessment of the capability of a borrower (country, firm, etc.) to meet his engagement on timely payment of principal sum of the debt and its interests in accordance with terms and conditions of an agreement.

  There are several authoritative rating agencies in the world – “Standard and Poor’s”, “Moody’s” and others which rate countries and individual economic entities – companies, banks, etc. But it should be noted that these ratings assess credit risk of a country not business risk therefore their rise can hardly result in considerable inflow of foreign investments especially direct ones.

   Independent ratings are the ratings given to individual countries. They play an important role in assessing investment risks concerning all economic entities of the country. Here no economic entity situated on the territory of the country may have the rating exceeding the rating of this country. This fact raises the importance of independent ratings still more. /9/

 

  4.3 Peculiarities of business risks in Russia

 

  The analysis of the comparatively short (a little more than a decade) experience of implementing joint projects with the participation of foreign investors in Russia has made it possible to reveal a number of specific risks inherent in Russian economy with which not only foreign investors but also Russian participant should recon. These risks are connected with such factors external to joint ventures as instability and imperfection of legislative base, high level of monopolization of certain segments of economy, instability of the financial-credit system, certain vacuum in the field of objective packaged information on the state of development of industrial and other enterprises. In Russia in many cases tedious bureaucratic procedures remain: negotiations between potential partners sometimes last for 1-2 years, signing and approval of contracts take 2-3 months, endorsement and acquisition of a license take 2-3 more months. Very often these procedures are so complicated and intricate that it allowed some specialist to speak about a new type of risk - “bureaucratic” one.

  Besides Russian enterprises do not pay enough attention to revealing and forecasting organizational risks connected in the first place with the quality of management which is caused by inadequate training and lack of experience of Russian managers, by their ignorance of risk and investment projects efficiency assessment techniques accepted in the West, by lack of a management team that ensures continuity when changes in the top management staff of an enterprise take place. As a result such cases happen when a viable project actually went to pieces because of the illness of a director and inability of his deputies to properly manage the project. A reliable and competent team of managers could prevent such cases.

  While setting up a joint venture in Russia special attention should be paid to analyzing and assessing its stability. The point is at present the Russian market of raw materials and components is monopolized to a considerable degree making possible the price dictate of suppliers. There are facts when after a positive decision on the participation of a foreign investor in financing of a project the prices of partner companies were increased many times. In order to minimize such risks small enterprises can stock materials and components whose market is monopolized. Large enterprises can undertake certain organizational legal measures (e.g. stipulate in the agreement certain conditions and strict sanctions for their non-compliance) to prevent sudden increase of prices

  For successful implementation of investment project in Russia it is important to ensure effective interaction and support of local (regional) authorities. This may ensure getting local tax allowances, real guarantees on return of funds, etc.

  All these and other risks inherent in Russian economy are to a large extent due to the transition stage being experienced by the country and with the lapse of time will soften or disappear at all. But even today implementation of a set of organizational measures at the joint investment project elaboration stage makes it possible to minimize these risks. As the experience of the foreign investors successfully operating in Russia shows spendings on the elaboration of such measures are paid off well in the course of the project implementation.

  Overcoming all these difficulties will facilitate to solve one of the main tasks Russia is facing – the task of raising competitiveness of the Russian economy on the basis of overcoming its falling behind in the investment-technological field. The solution of this task presupposes active mobilization of foreign direct investments. /9/

Conclusion

  Under the present conditions investments become the most significant strategic recourse for the development of industrial production which is caused by their special role in economy and contradictions taking shape between the need to develop industrial complex and existing conditions and possibilities for mobilization of investment resources for these purposes.

  At present there is an increase in Russia of inflow of foreign investments. Nevertheless in absolute figures foreign investments remain small and clearly do not satisfy the demands of Russian economy. This is explained by unfavorable investment climate in the country on the whole and towards foreign investments in particular. Latest federal legislative acts often are aimed at limiting foreign investments which though can be regarded as protective measures for domestic investors. 

  Complexity of working under Russian conditions forces foreign investors to invest money not directly but through Russian mediators (mainly banks), which know Russian markets. Poor development of direct investments leads to the situation when industrial enterprises do not receive necessary investments, sharing of advanced technologies is made difficult.

  Poor development of direct investments gives rise to low competitiveness of Russian manufacture, further reduction of the share of Russian market taken up by goods of Russian make.

  Certainly world economic crisis also makes a negative impact on the level of foreign investments to Russian Federation. Slowdown of growth rate of Russian economy spoils the investment climate.

  As world experience testifies a well-thought-out policy of mobilizing foreign capital is the most direct and effective enough way of crisis management, the lever to accelerate socio-economic development of the country.

  Having studied the problem of mobilizing foreign investments into Russian economy we may make up the following conclusions:

  1. Mobilization in a large scale of national and foreign investments into Russian economy has as its long-term strategic object creation in Russia of a civilized socially oriented society with a population having a high level of life quality.

 2. Foreign capital can bring into Russia the achievements of scientific-technical progress and advanced managerial experience. Therefore integration of Russia into world economy and mobilization of foreign capital are a necessary condition to build a modern civil society in the country. Therefore our state faces a complicated and delicate enough task: to attract foreign capital into the country and without depriving it of own incentives direct it using measures of economic regulation to achieve public objectives

  3. Under the complicated conditions of world economic crisis it is necessary to do everything possible so that to prevent a large-scale economic recession and reasonably command all the capital available in the country including foreign one.

  4. One can say that a new tendency is being shaped in the structure of the main countries investing capital into Russia. The new group of leaders includes one highly developed country (Great Britain), one developed country (The Netherlands) and two states granting preferential terms of taxation to investors (Luxemburg and Cyprus).

   5. The study has shown that there is a severe problem of branch-wise “distortion” in mobilizing foreign investments. At present foreign investors in Russia guided by investing into those branches which ensure guaranteed export or quick turnover of the invested funds (oil extraction, extraction of other natural resources, trade and catering, food industry). Foreign investments do not go into those branches which mostly need them, and are of priority for the development of Russian economy (agriculture, machine building, and production infrastructure). A considerable gap in the present investment policy of Russian Federation is obvious and it manifests itself in the lack of clear-cut priorities in attracting and encouraging capital investments into high-technology branches which are the main motive power of world economy today.  

  Traditionally about one third of all capital used to come from countries and territories with off-shore regimes. Regional misbalance of investments remains to be a problem which is connected with considerable differentiation of regions by the level of investment risks and investment potential. A foreign investor is present in those regions of the country where domestic financial resources are concentrated (the city of Moscow – leader on attracted investments, the city of St-Petersburg), which possess considerable reserves of raw materials (Tyumen, Sakhalin regions, Krasnoyarsk Territory), which have developed infrastructure and comparatively high purchasing capacity of the population (Sverdlovsk, Chelyabinsk, Omsk regions).

  Thus, the study carried out on the basis of theoretical evidence and analysis of statistical information has shown the need to improve Russia’s investment policy as positive sides of foreign investments considerably surpass negative ones.

 

Endnotes

1) Киселева Н.В., Боровикова Т.В., Захарова Г.В. и др. // Под ред. Подшиваленко Г.П., Киселевой Н. В. Инвестиционная деятельность: Учебное пособие / – М.: КНОРУС, 2005. – С. 84-86.

2) Подшиваленко Г.П., Лахметкина Н.И., Макарова М.В. и др. Инвестиции: учебное пособие. – 2-е изд., перераб. и доп. – М.: КНОРУС, 2004. – С. 35-40.

3) Романчикова О.В. К определению социально-экономической эффективности прямых иностранных инвестиций // Вопросы статистики, 2006, № 2.

4) Видяпин В.И., Добрынин А.И., Журавлева Г.П., Тарасевич Л.С. Экономическая теория. – Изд. испр. и доп. – М.: ИНФРА-М. - 2006. – 672 с.

5) Об иностранных инвестициях в январе-сентябре 2006 года, срочная информация по актуальным вопросам , Федеральная служба государственной статистики, www.rosgosstat.ru

6) “Foreign investments into economy of Russia in January-September 2007”. http://portal.economy.gov.ru/

7)  “Russia Attracted Record Foreign Investment in 2007” (Update1), By Alex Nicholson, www.bloomberg.com 

8)  “Foreign investments into economy of Russia in January-September 2007”, http://portal.economy.gov.ru/

9) Зубченко Л.А. Иностранные инвестиции: Учебное пособие. М.: ООО «Книгодел», 2006. – С. 7-25, 121-130, 141-146.

10) Показатели к данному разделу взяты с официального сайта Федеральной службы государственной статистики www.gks.ru

 

Bibliography

 

1. Michael Burda and Charles Wyplosz, Macroeconomics: A European text, 2nd ed., Oxford, London, 1997

2. The Economist Magazine, 10 November 2007

3. Miriam Elder, U.S., “Russia Sign 800 page WTO Deal”, Moscow Times, Nov. 20, 2006

4. Journal article by Barbara Peitsch; OECD Observer, Vol. a, 1995. P 24

5. Vitaly Glinkin, Investment Climate in Russia, Financial Times Business Recorder (June 11, 2007).

6. Wikipedia, the free encyclopedia, www.wikipedia.org

7. Федеральная служба государственной статистики, www.rosgosstat.ru

8. “Foreign investments into economy of Russia in January-September 2007”, Министерство Экономического Развития и Торговли Российской Федерации, http://portal.economy.gov.ru

9. “Russia Attracted Record Foreign Investment in 2007” (Update1), By Alex Nicholson, Bloomberg, www.bloomberg.com 

10. Риа Новости, “ Putin says Russia to remain attractive to foreign investors”, www.rian.ru 

11. CNBC’s Morning Call: Investing in Russia, Interview with Daniel Yergin (CNBC television broadcast June 11, 2007), http://today.msnbc.msn.com 

12. Michael Burda and Charles Wyplosz, Macroeconomics: A European text, 2nd ed., Oxford, London, 1997

13. The Economist Magazine, 10 November 2008

14. Miriam Elder, U.S., “Russia Sign 800 page WTO Deal”, Moscow Times, Nov. 20, 2006

15. Journal article by Barbara Peitsch; OECD Observer, Vol. a, 1995. P 24

16. “Russia Attracted Record Foreign Investment in 2007” (Update1), By Alex Nicholson, Bloomberg, www.bloomberg.com 

Appendices

№1. RIA Novosti 2008  kjkjkljR