Volume of foreign investment is increasing again

newsletter 08/11/2016

Domestic economy becomes attractive not only for investors from Russia, but also for foreign businessmen

After a long-time break caused by sanctions, rouble devaluation and oil prices fall, foreign investment is back to Russia. What are the reasons for foreign capital inflow? Why does foreign investment play such an important role for the economic development?

Foreign capital enters the domestic market through various ways, depending on strategic goals of investors. The importance of foreign direct investment (FDI) is explained by its key role in provision of developing markets with advanced technologies and management systems. FDI is connected with long-term investor’s control over business activity of the recipient company in another country, which means it is aimed at long-run cooperation instead of instantaneous profit, thus giving quality to the economic growth.

In the June 2016 Newsletter, Information agency Credinform reported about reduction of investment volume to the country’s economy as of year-end 2015 to the lowest level since 2002. In the second quarter of 2016, after the long-time break, FDI begins to demonstrate indicators comparable with pre-sanction.

Foreign direct investment to Russia according to the Bank of Russia, $ bln, for the period from IQ 2012 to IIQ 2016Picture 1. Foreign direct investment to Russia according to the Bank of Russia, $ bln, for the period from IQ 2012 to IIQ 2016

As the diagram shows (see picture 1), the volume of FDI in the IIQ 2016 amounted to $ 7,1 bln, which exceeds data for the whole 2015 ($ 6,4 bln) and is comparable to pre-sanction figures. Some experts suppose the return of the Russian capital from offshores to the national jurisdiction is at the back of FDI inflow growth, as a result of the economy deoffshorization measures and tighten the anti-offshore legislation in the world. Undoubtedly, a revival of the foreign business interest takes place. Various investigations record growth of optimism concerning business in Russia among European entrepreneurs. Businessmen observe high potential and large volume of the Russian market, as well as its positive development despite of unsatisfactory economic situation.

One of the results of foreign investment is establishment of the Russian companies with foreign capital participation. According to the Information and analytical system Globas-i® of Credinform agency, currently 41 071 legal entities with foreign participation are registered in Russia. 32 832 of them are majority owned by foreign investors. Most of companies with foreign participation – over 70% - are registered in Moscow, Moscow region, Saint-Petersburg and Leningrad region.

Location of companies with foreign participation by the subjects of RFPicture 2. Location of companies with foreign participation by the subjects of RF

Speaking about activity types, the most investment-attractive companies are engaged in wholesale, construction, renting and own or rented immovable property management. The table 1 contains Top-10 of activities of the Russian legal entities with foreign participation.

Table 1. The most popular activity types of the Russian companies with foreign participation

Activity type Number of companies Share, %
1 Construction of residential and non-residential buildings 1 787 4,35
2 Non-specialised wholesale trade 1 233 3,00
3 Renting and operating of own or leased real estate 1 182 2,88
4 Business and management consultancy activities 1 018 2,48
5 Buying and selling of own real estate 981 2,39
6 Renting and operating of own or leased real estate 956 2,33
7 Other transportation support activities 646 1,57
8 Management of real estate on a fee or contract basis 591 1,44
9 Computer programming activities 550 1,34
10 Other financial service activities, except insurance and pension funding n.e.c. 512 1,25

By the projections of experts, the year of 2017 can be bright for Russia in terms of increase in foreign investment inflow. The country’s economy becomes more attractive and convincing than markets of other countries. At the same time, net capital outflow, which is formed mostly by repayments of the private sector’s external debts, reduced to $10,5 bln in the first half-year, i.e. almost in 5 times compared to the same period of 2015. It also counts in favor of easing of the situation. Relief or lifting of sanctions can be a significant impetus for foreign investment, but even in the current conditions the Russian economy offers enough sectors free from limitations and having substantial growth potential at reducing level of risk and instability.