Russia’s growing economy presents “massive opportunities” for foreign investors across an increasingly diverse range of industries, according to The Great Transformation: Russia’s Return to the World Economy, a report published today by Heriot-Watt University’s Centre for Economic Reform and Transformation.
The authors, Professors Mark Schaffer and Paul Hare, do not expect foreign investment to be put off by the Yukos affair, which they believe is “essentially a domestic quarrel”.
Whilst they believe it demonstrates that the implementation of business law and regulation in Russia still falls short of Western standards, the report argues that taken as a whole the “existing business conditions are fair and getting better” for larger firms and foreign investors. Indeed, they suggest that rather than being a deterrent, the Yukos affair may in fact present opportunities for foreign investors if Russias oligarchs respond by “cashing out.”
Russias 144 million strong population, its “role as a gateway to the rest of the CIS” and its strong domestic growth ensures it is of “major interest to foreign investors in its own right”. Its growth over the last six years is roughly comparable to adding the equivalent of two Hungarys to the size of its domestic economy. This has begun to, and will continue to, drive substantial inflows of investment, with 2003 expected to be a record year for foreign investment. The UK is one of the largest investors in Russia, along with the USA, Germany and the Netherlands.
Economic prospects for Russia are better now than they have been at any time since the transition to a market-type economy, exemplified by Moodys decision to upgrade Russia to investment status. Structural change in Russia has been more substantial than is often appreciated and market-type reforms have regained renewed momentum under President Putin. This is expected to underpin higher levels of foreign investment in the years ahead.
The paper recognises, however, that there remain significant shortcomings in the business environment. These are driven more by poor enforcement than inadequacies of the legal framework, and need to be addressed as Russias reform programme advances.
While oil and natural resource deals have dominated the headlines, there has been much foreign investment elsewhere in the economy, notably in the food & drink, tobacco, telecoms and transport sectors.
In particular, the food processing sector can be hailed as a model for transformation of the wider economy. The number of firms operating in the sector has tripled since the early 1990s, with the majority now profitable. Foreign investment has been instrumental to this evolution. Significantly, foreign investors have not simply brought in foreign brands, but have also purchased and built up Russian brands.
Against this generally positive background, the Report notes that levels of foreign investment have been relatively low, despite the recent pick up in volumes. It expects this turnaround in foreign attitudes to Russia to continue with prospects for “far higher levels of investment in future” and big changes in its regional spread. Industrial restructuring in the currently lagging manufacturing sector presents massive opportunities for foreign investors; notably the automotive, aircraft, steel industries and a number of high technology branches hold “great promise”.
In the coming years, mergers and acquisitions in Russia are expected on a large scale as the country moves from its current “vertically integrated establishment” business model to that of a more standard market economy.
Professor Schaffer is Director of the Centre for Economic Reform and Transformation at Heriot-Watt University. Graduating from Harvard University in 1982, Professor Schaffer holds degrees in economics from Stanford University (MA, 1985) and the London School of Economics (MSc, 1983 and PhD, 1990). He is also a Research Fellow of the William Davidson Institute at the University of Michigan, a Research Associate of the Centre for Economic Policy Research in London, and a Research Fellow of the IZA Institute for the Study of Labor, Bonn. He has previously worked for the IMF, the World Bank, EBRD, the United Nations, and the Department for International Development of the UK Government.
In 1985 Paul Hare became Professor of Economics at Heriot-Watt University and was successively Head of Economics (1985-90), founding director of the highly successful and internationally recognised Centre for Economic Reform and Transformation (1990-1997), and Head of the School of Management (1997-99). Since 2001 he has been Director of Research in the enlarged School of Management and Languages. His research on Eastern Europe and the former Soviet Union has appeared in over 150 academic publications.