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 INVESTMENT
STATEMENT |
Investment Statement by the Governor of Primorskiy
Krai
Mr.Sergei M. Darkin
Regional potential of the investment opportunities
in Russia
Dear Ladies and Gentlemen:
This presentation will include the following sections:
1. Phases of Russian investment market formation
in 1991-2002.
2. System risks to foreign investments in Russia
in 1996-2002.
3. Main factors of the Russian Far East investment
attractiveness and
prospects for its increase.
The investment situation in Russia and its eastern
regions was aggravating during 1991-1998. By 1998
as compared with 1990, the investments in the fixed
capital had reduced by five times. After 1998, the
situation began to change. In 2002, the investments
will make up 29-30% of the 1990 level in Russia
at large and 27-28% in the Russian Far East. After
a long crisis, Primorskiy Krai also succeeded in
changing the situation to the best. In 2002 the
investments will make up 22 % of pre-reform investments.
As is seen in the diagram, this year's dynamics
of the investment rate in Primorye is higher than
that in Russia. There are several reasons for that,
the primary one being the qualitative improvement
of the social and political situation in the krai,
as international investors marked during the APEC
Investment Mart in Vladivostok.
Despite a sharp decrease of capital investment volumes,
the investment base of the Russian economy proved
to be maintained. During 1990s, investments made
up 14-15 % of the GNP cost. If we size up the investment
component in currency, the 2001 rate of investment
made up 28% of the Russian GNP cost. This is appropriate
to the level of industrial economy and testifies
to the fact that the absolute decrease of investment
was related to the reduction of general produce.
The international and national investors' activity
was rather high. It manifested itself in a positive
trade balance that made up 17.5 % of the GNP in
1999, 20.1 % in 2000, and 13 % in 2001.
While analyzing the opportunities for the Russian
regions, it is necessary to note that there were
only sporadic elements of the investment market
in the early 1990s. Market rules and investment
mechanisms were just being established in 1991-2001.
This process has not been finished yet, but we may
make some conclusions. To reach this goal, Russia
has seen four phases: first - 1991-1995; second
- from 1996 till mid-1998; third - from August 1998
till late 1999; fourth - since 2000 until now.
The first phase of 1991-1995 was characterized by
deep changes in ownership relations. Political and
economic changes inspired some optimism in foreign
investors. Investment resources were directed to
enterprises that were able to shift from a state
sector to private ownership. A favorable structure
of foreign investments was formed. Over 70 % of
the investment constituted direct capital resources
concentrated in commodity and service branches.
In 1995 direct foreign investments amounted to 72.1%
in Primorskiy Krai economy.
At the same time, capital-intensive and primary
productions, controlled by the government, faced
investment shortage. Basic industries faced rapid
deterioration and functional depreciation of assets.
Production equipment, as old as 15 years and more,
amounted to 65-70%.
At that period, of wide use were "tied"
investment credits and loans that were attracted
on a security of the state and local government.
This mechanism was considered as a form of government
support. Most of the managers believed that in the
future these sums would be written off. The number
of international suppliers of technical equipment
and services on account of "tied" credits
was usually limited. Prices were above the average
world prices. Economically a receiver of such investment
loans is at a disadvantage except for the cases
when payment and guarantees are provided by the
budget that secures all the risks.
At that phase the efforts of the government agencies
for establishing
-A favorable investment climate were aimed at
-Removing political restrictions on entrepreneurship
-Establishing legal protection of private property
-Establishing a system of governmental guarantees
and preferences to foreign investors.
-Unfortunately, the political situation did not
make it possible to solve completely any of these
tasks. But even the imperfect legal base established
at the time gave an impetus to investment practice.
The second phase (from 1996 till mid 1998) is characterized
by an active development of the stock market. At
this period, Russian enterprises tried to solve
economic problems with the help of international
investment resources on the security of stocks.
As a result, by 1997 the volume of stock exchange
transactions had increased eighteen fold as compared
with 1995. From the direct investment market, foreign
investors flooded to the portfolio investment market.
In 1997, about $ 54 billion of foreign investment
was placed in the Russian market, including 85.4%
of portfolio investment. A powerful impetus was
given to the stock market development. Thus according
to the volume of trade, Vladivostok stock exchange
was among the five largest stock markets in Russia
in 1997. At the same time, there grew economic risks
due to inefficient use of investment credits. Stocks
of many enterprises turned unmarketable in the secondary
market.
At that period, the efforts of governmental agencies
were aimed at
-Providing stability of the political power as a
guarantor for market transformation irreversibility;
-Developing market institutions and mechanisms of
transforming savings into highly efficient investment;
-Liberating foreign trade and currency control.
The third phase (from August 1998 till late 1999)
is characterized by a sharp decrease of international
capital mobility in the Russian investment market.
The most dramatic recess was in knowledge-intensive
and manufacturing branches. Actually, in 1999 there
was no financing the real sector of economy from
the national budget and non-budget funds, stock
market, direct foreign investors, bank capital.
In 1999 the volume of foreign investment in the
Russian market was reduced by 9.5 times as compared
with 1997. Most of the regional stock exchanges
closed down.
At that period, a "critical" level of
long-term liability deficit was observed in the
regional banks. A low level of capitalization has
not made it possible for them to effect investment
up till now. In the regional financial markets,
short-term bank credits (with the term less than
one year) make up over 90 %. They are usually given
on highly liquid securities.
-At that phase, to establish a favorable investment
climate, the efforts of governmental agencies were
aimed at
-Developing rules and procedures of restructuring
banking system;
-Developing mechanisms of the governmental agencies'
meeting commitments to finance investment programs;
-Displacing quasi-money from turnover;
-Increasing requirements of the corporative management
quality, including protection of minor stockholders'
rights
-Introducing a balanced approach to monetary policy;
maintaining foreign currency stability, and removing
a -threat of "shocking" price increase
on power and transportation service.
The fourth phase (since 2000 until now) is characterized
by stability increase of investment market and positive
tendencies of investment rate. The mobility of direct
foreign investments is stabilized. Cycling of world
prices on raw materials redirects regional investors
from primary markets to the production of consumer
goods and capital-intensive output. A mortgage market
is being established.
Nowadays a key problem that restrains the foreign
investment inflow is non-developed investment tools.
No more than 10 "investment titles" of
Russian companies and no more than 15 types of corporate
bonds can be considered liquid. Regional stock market
is virtually out of function.
Therefore, to establish a favorable investment climate,
the governmental agencies at every level aim their
efforts at:
Amending legal basis through simplifying regulating
and coordinating procedures, issuing licenses and
specifications for marketing investment projects;
Introducing notifying registration of foreign investments
(including foreign currency operations concerned
with capital movement);
Organizational support for establishing indemnification
funds by securities market professional participants
and self-regulated organizations which could compensate
foreign investors' losses due to infrastructure
institutions fault;
Enhancing rapid transition to international standards
in accounting and investment project management.
Summing up the analysis of Russian investment market
phases, it is necessary to point out to the following:
During the ten years of reforms Russia succeeded
in establishing the basis of investment market whose
tools and rules meet international requirements;
Managers, capable of managing investment resources
professionally, have been trained;
A mechanism of controlling system risks, both on
the national and regional levels, has been introduced.
The last factor is crucial in selecting the market
for foreign investments. Therefore, I am going to
enlarge upon this point.
While making evaluations of system risks influencing
international capital mobility, experts presuppose
that
1. These risks have identical influence on every
subject of economy no matter what region it might
be located in.
2. 70% of efforts to reduce risks is made by regional
authorities, with only 30% made by the federal government.
According to international experts, in 1995-1997
the level of system risks lowered virtually up to
"standard" mark. This brought the 1997
highest inflow of foreign investments in the 1990s.
It made up about $ 12 billion, including $ 5.33
billion of direct investments. Then from 1997 till
2000 there was a period of risk growth. Under those
conditions, the volume of foreign investments, primarily
direct ones, decreased. The turning point came in
late 2000. System risks have been reduced since,
which immediately had an impact on foreign investment
rate.
Most of forecasting and rating evaluations are published,
as a rule, before the next fiscal year, which makes
it possible for investors to adjust their assets
management strategy. In 2002, the lowest risk level
characterizes foreign affairs investment for foreign
investors in Russia. The highest risk level is related
to macroeconomic regulation and branch structure.
Political risks are characterized by the greatest
fluctuations. In 1998, it was estimated by experts
as "critical". In 2002, it was reduced
to the "standard" level.
In planning risk management, the most important
thing is complex evaluation of its various types.
During 1996-2002. most parameters of the legal risk
were considered by international experts as high.
The greatest legal risk is noted for relations that
characterize enterprises with various forms of property
as equal before the law. In 2000-2002, there has
been a tendency to reduce legal risks such as nationalization,
introduction by regional authorities restriction
on factor and goods mobility, and uncontrolled unemployment.
To mention as an instance, one of the strategic
goals of Primorskiy Krai development in 2003-2010
is determined as Forming Economy Open to Regional
Cooperation. We have started to carry it out. In
2001-2002 the Krai authorities annulled all local
laws and bylaws restricting freedom of competition
and production factors mobility. At present, rules
and procedures for people to transfer consumer goods
via border, as well as food, fish, metal export,
have been regulated. This resulted in sharp reduction
of the shadow export volumes that ruin law-abiding
business.
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It is in 1997 only that
international experts considered it as standard;
in the other years it was estimated as high. Analysis
of the evaluations proves that about 70% of political
risks are characterized by the following three parameters
- political course stability, government stability
and possibility of the government interference in
the private business. Before 2001, international
experts evaluated them as critical. The most alarming
are the risks of government interference in private
business. To reduce them, a special program under
the control of the RF President has been developed
and adopted. The greatest risks are characteristic
of the parameters concerned with the attitude to
non-residents at market segments. Within the period,
this parameter is evaluated as critical. It refers,
first and foremost, to banking and insurance business,
fishing, metallurgy, power engineering.
The levels of foreign affairs risks to foreign investors
in Russia in 1996-2002 depended upon whether the
international community can employ various political
and economic sanctions against the governments violating
rights of personality and using force for solving
domestic and foreign problems.
During this period, except for 1996, foreign affairs
risks were considered as standard. However, most
experts are anxious about the risk involved in case
army is used for solving domestic problems. This
level is evaluated as critical. I think, given the
terrorist acts, and Moscow hostage seizure in particular,
these evaluations will change. I believe, if there
is threat to national integrity of the country,
the army cannot and must not cool it.
Within the period 1996-2002 only the 1997 situation
was evaluated as standard. This made it possible
to attract the largest volume of direct foreign
investments ($ 5.4 billion) during all the period
of market reforms. The following three parameters
comprise about 50% of macroeconomic risks. These
are
Steady economic growth,
Steady investment rate,
Money amount regulation.
They are major indicators international creditors
take into consideration when making decisions of
providing investment loans to Russia. One of the
main possibilities to reduce this group of risks
is restructuring regional economies. Today over
60% of all investments goes to primary (raw material)
sectors, which is one of reasons for disproportions
in region development.
· Primorskiy krai was one of the first to
embark on the service economy strategy. Today about
60% of the gross regional product is comprised of
the service sector. This is conditioned by the following:
· Primorye is the Russian Far Eastern center
of science, innovations and advanced technologies.
Over half of all Russian Far Eastern scientists
work here.
· Primorye is the territory of education,
culture, and creativity. Today virtually every school-leaver
can continue studies either at the university or
in college. Primorskiy krai is on the top list of
the Russian regions, given a number of university
and college graduates per ten thousand people.
· Primorye is the Russian and European transportation
gate to the Pacific Rim countries. International
transportation corridor projects are being carried
out on Primorye territory. The two continents, Europe
and Asian Pacific region, will be connected by a
transportation network. Views on the world transportation
development, place and role of the Russian Far Eastern
territory in this process are given in my presentation
at the APEC Investment Forum in September 2002.
The lowest risk was marked for the parameters characterizing
the cost and quality of labor force. This can be
accounted for by the fact that we have maintained
the system of professional training and retraining.
In the period under consideration this risk was
regarded inconsiderable, which is important for
high tech investments.
However, it is noteworthy that there are a number
of problems requiring concerted systematic efforts.
These are, first and foremost, disproportions in
the growth rates of pay and labor productivity.
During 2001-2002, wages and salaries have increased
by 46 % in Russia, whereas labor productivity grew
by 13 %. On the one hand, pay growth leads to additional
costs of production; on the other hand, it provides
for stability and high dynamics of domestic demand.
The latter task is a priority in Primorye today.
During 2001-2002, wages and salaries have increased
by 1.3 times in the krai. This rate is 2.8 times
as much as that in Russia. This has provided for
the stable demand for service production that is
not taken out of the region (housing construction,
public transportation, social services, education,
health care, etc.). By and large, it has provided
competitive enterprises with orders and facilitated
social stability.
For the structure and level of foreign economic
risk to foreign investors in Russia in 1996-2002.
The analysis shows that it was only in 1997 that
the evaluations were characterized as standard.
International debt risks are regarded as critical
within the period under consideration. Within the
whole period, the exchange rate risk has been evaluated
as high, which reduces Russian economy attractiveness
for extended import. Before 1998 most experts evaluated
exchange rate risks as disastrous. One of the reasons
for this evaluation was the government decision
to allow non-residents to buy rubles and put them
into government bonds. This resulted in default.
To sum up the analysis of system risk parameters
in Russia in 1996-2002 we must note the following:
During 2000-2002, 14 system risk parameters out
of 38 have been reduced to the standard level, and
15 have been removed from the critical zone;
There have been developed tools efficient enough
to curb inflation;
as a result of Gross Domestic Product restructuring,
the service sector has increased, which has led
to reducing special subject and foreign economic
risks;
Investment attractiveness of regional economies
has increased due to general reduction of system
risks.
Finally, in February 2002, Moody's, Fitch, Standard
and Poors International Agencies raised Russia's
rating from "stable" to "positive".
In connection with the abovementioned, I will dwell
upon the positive investment trends originating
from regional economies. One of the first investigations
of territory investment attractiveness was conducted
in 1969. It was based on the methods developed by
Harvard School of Business. The assessment of Russian
regions investment attractiveness was made both
by Russian and foreign institutions, the French
Center of Foreign Trade for one.
Among the 8 federal districts of Russia, the Far
Eastern region is of special importance. It covers
36% of the territory of Russia. It is the only district
that fully coincides with the economic region. Therefore
an investor deals with the historically developed
production and infra-structural complex. The potential
cost of regional natural resources is $ 22-25 trillion.
The Russian Far East holds a decisive superiority
in a number of them over other regions of the world.
It can boast by 10% of the world forest yield, 22%
of diamonds, 8% of coal.
However, the investment potential is not defined
by the natural resources only. The region has comparative
advantages, such as:
Stable dynamics of domestic demand;
High level of labor capital endowment, which enhances
productivity;
High export rate in the gross regional product.
According to 1994-2002 GRP dynamics per capita.
The Russian Far Eastern region is second-best after
the Central federal district. In 2002, the gross
product per capita will make up $ 2420 in Russia,
$ 2401 in the Russian Far East, $ 1654 in Primorye.
It is noteworthy that in Primorye the GRP growth
per capita is highest in 2002 of the last five years.
Our main objective is to maintain this growth in
2003-2005 and to increase the rate by 6 or 7%.
The evaluation of the GNP in foreign currency does
not fully reveal possibilities of the Russian economy.
Given the purchasing power parity, the index of
the Russian GNP physical volume reached $ 1 trillion
in 2001. It is $ 6870 per capita, which makes about
20% of the USA rate. In 2001, the rate of comparative
prices was 23% of the USA rate. This means that
Russia is a cheaper country as compared with developed
economies. This factor gives additional advantages
for placing capital-intensive investments, requiring
qualified labor force.
On January 1, 2002, the book value of the fixed
assets was estimated at $ 612 billion. In the Russian
Far Eastern federal district, the enterprise fixed
assets are estimated at $40 billion. One of the
key problems of Russian business is the low level
of business capitalization. The assets market price
is 10-12 times undercharged, according to experts.
For example, in 1990, there were over $72 thousand
of fixed assets per person employed in Primorye
economy; today there are about $10 thousand. It
is more than an average in Russia ($ 9.4 billion)
and is one of our competitive advantages.
The Russian Far Eastern regions have also advantages
of such indicators as degree and rate of capital
consumption. The Russian Far Eastern federal district
gains the lead. While in 2001 the non-depreciated
fixed capital made up 45 % in Russia at large, it
was 61% in the Far Eastern district.
This can be accounted for by the fact that in the
1980s the development of the Russian Far Eastern
territories was one of the priorities of the federal
government policy. At the time, the rate of labor
capital endowment was one of the highest in Russia.
In 1990, there was about 38 thousand-dollar equipment
with a low degree of wear and tear per worker in
Primorskiy krai. The krai was a large center of
sea instrumentation, navy ship repair, and aircraft
industry. We managed to maintain the major fixed
assets of the enterprises. Nowadays we are witnessing
the establishment of holding companies, as well
as financial and industrial groups.
One of the ranking indicators of the region investment
attractiveness is the volume of foreign investments
per resident. The Central federal district was a
leader. In 1999, the Russian Far Eastern district
took the leadership. This is accounted for by large
investments into Sakhalin oil deposits. In the last
two years the leadership is taken over by the North-Western
federal district. What conclusion can we make? Russia's
investment market is getting more and more competitive.
Regions behave like "quasi-companies"
striving to develop to the most, and take advantage
of their resource markets. This means that a foreign
investor has something to select from and to work
with.
Until 1997, Primorskiy krai was considered by investors
as one of the most attractive ones. It headed the
list of Russian Far Eastern territories. In 1998-2000
it lost this competitive position. The situation
was changed for the best not earlier than last year.
According to 2002 forecast, the volume of direct
foreign investment per capita in Primorye will make
up $ 42.6. It is 1.3 times as much as an average
in Russia.
During the APEC Investment Mart in Vladivostok,
experts from the Primorskiy Center for Strategic
Planning surveyed participants from 13 countries
as to the parameters of investment attractiveness
of Russia and Primorye. Russia got one high mark
- on "political predictability". Primorskiy
krai got two marks - on "labor force quality"
and "resource accessibility". Low-rated
was Russia's banking system and capital quality
in Primorye. On six parameters the marks ranged
from "good" to "satisfactory".
In general, the survey showed that the reform goals
(nationwide and in a certain region) are estimated
positively by foreign investors. Fright and incredulity
are gradually changed by the desire to develop partnership
relations. This is well proved by the fact that
during the investment mart and after it there were
signed protocols of investment intentions for over
$ 180 million. We regard it as success.
What is the reason for the change of the situation?
There are several points. Let me touch upon only
two of them. Diagram 16 shows dynamics of production
capacities employment in 1999-2002. This parameter
makes a considerable impact on the first cost of
goods and services and, consequently, on the price
competitiveness of Russian enterprises, both in
domestic and foreign markets. As the diagram shows,
there formed a positive growing trend of production
capacities employment in 2002. It exceeded 60%.
At the same time, the rate of production capacities
excess liquidity remains rather high - 40%, both
in the country and in the krai. This leads to increase
of credit risks. On the other hand, under the condition
of growing domestic demand, excess capacities will
facilitate the increase of production volumes with
minimal capital expenditures. In this respect Russian
enterprises are attractive for foreign investments
related, first and foremost, to consumer goods production.
Another factor I would like to draw your attention
to is providing industries with orders (diagram
17). This parameter influences the company economic
stability in the market. In August 2002, this indicator
was equal to 6.8 months in Russia at large, 6.1
months in the Russian Far East, and 6.5 months in
Primorye. As a former manager of a big company I
am especially pleased with this indicator. I know
how difficult it is to accumulate a backlog of orders
in the unstable market context. A six-month backlog
is an indicator of stability, and, therefore, investment
inflow.
Ending my presentation, I would like to say that
Russian Far Easterners are courageous and ambitious
people. Our slogan is "Today must be better
than yesterday, and tomorrow must be better than
today". We were and have been open for cooperation
and fair partnership.
Thank you for your attention.
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