Russia’s investment future

Vladimir Putin addresses the conference, hosted by VTB Capital (Ria Novosti)

After finally gaining acceptance to the WTO, Russia is using the momentum to boost its profile in the international community. It hosted the Asia-Pacific Economic Cooperation meeting in Vladivostok in September and is now aiming to join the Organisation for Economic Cooperation and Development in a few years.

Speaking at the fourth annual Russia Calling investment forum hosted by VTB Capital this week, President Vladimir Putin said that investment is key for the growth of the economy. “I hope that the [WTO accession] will have a positive influence on the moods of investors and pave the way for long-term projects,” he said, addressing the audience in Moscow.

Russia, whose economy grew 4% during the first eight months of 2012, became a WTO member in August after nearly 20 years of negotiations.

“Growth is possible only with the help of investments,” the president said.

In 2011, foreign direct investment flows into Russia grew by 22% to reach $53 billion, the third-highest level ever recorded by the UN Conference on Trade and Development, or Unctad. It said that foreign investors were motivated by the continued strong growth of the domestic market and affordable labour costs, coupled with productivity gains.

Now, being a member of the WTO requires further liberalisation measures for trade and investment, and that will likely have implications for FDI flows into the country.

For example, foreign banks may now establish majority-owned affiliates, and the threshold of foreign participation has been raised to 50%, Unctad said in its World Investment Report 2012. Still, even though the country has allowed the establishment of branches of international banks, they must be registered as Russian entities, have their own capital and be subject to supervision by the Russian central bank.

Putin also noted that the country will continue to support the Russian Direct Investment Fund, which was established by the Russian government in 2011. It was set to be capitalised during the next five years with $10 billion from the state.

The fund was set up as part of a broader initiative to modernise Russia’s economy, including efforts to improve the investment climate, promote the development of innovation-driven industries and transform Moscow into an international financial centre.

Meanwhile, as the economic outlook in Europe and the US remains feeble, a Chinese sovereign wealth fund said at the forum that it sees more opportunities for cooperation with neighbouring Russia.

Jin Liquin, chairman of the supervisory board of China Investment Corporation (CIC), said in the same panel session that he is encouraged by Russia’s low public debt — around 10% of GDP — and by the Russian government’s focus on non-oil, non-gas sectors as it seeks to diversify its economy.

“We should probably be prepared for a protracted weak economy in the eurozone,” Liquin said. “When you look at the US economy, the recovery is a bit weak. Against this background, I would focus very much on the Chinese economy and the Russian economy, and our cooperation.”

He pointed out that the two countries can do more in investment in non-oil sectors in Russia, as demand will likely weaken in the years to come due to the efforts to promote renewable energy and explore shale gas in the US and the rest of the world.

Another key area of cooperation, he said, will be to use the Russian rouble and the Chinese renminbi to settle bilateral trade, to help mitigate foreign exchange risks and reduce the cost of transactions, although the US dollar will continue to be an important international reserve currency, he noted.

The cooperation is already underway. Last year, CIC agreed to invest $1 billion along with the Russian Direct Investment Fund in a Russia-China Investment Fund. At least 70% of the fund’s investments will have to be made in Russia, Kazakhstan and Belarus, and its initial focus is set to be on agriculture, consumer products and green energy, rather than natural resources.

Linquin said he is happy with the Russia-China Investment Fund and that he believes the two countries can do more business together.

VTB Capital, the organiser of the forum, is the investment banking arm of VTB Group. Since its establishment in 2008, VTB Capital has executed more than 280 capital markets deals on the Russian and CIS market, attracting more than $115 billion worth of investments. Headquartered in Moscow, it has operations in London, Singapore, Dubai, Hong Kong, New York, Paris, Vienna, Kiev and Sofia.

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