PLEKHANOV RUSSIAN ACADEMY OF ECONOMICS
INTERNATIONAL BUSINESS SCHOOL
COURSWORK IN NATIONAL ECONOMY
FOREIGN INVESTMENT IN RUSSIA
Student: Leontyeva E.
Group: 5302
Supervisor: Piastolov S.M.
Moscow
2009
Contents
Introduction. 3
1. Essence and Classification of Foreign Investment5
1.1. Essence of foreign investments. 5
1.2. Classification of foreign investments. 5
1.3 Role of foreign investments in economy.8
2. Situation with foreign Investment in Russia today. 9
2.1. Conception of an investment climate.9
2.2 Investment climate in the main regions of Russia.10
3. Structure of foreign investment in 2000-2009 12
3.1 Structure of foreign investment by its kinds in 2000-2009. 12
3.2 Structure of foreign investment by industry in 2005-2007. 15
4. Risks in the sphere of international entrepreneurship. 17
4.1. Main methods of risk assessment and management.17
4.2. Main types of risk. 18
4.3 Peculiarities of business risks in Russia. 19
Conclusion. 21
Endnotes. 23
Bibliography. 24
Appendices. 25
Introduction
One of the most important factors of the development of economy is investments, i.e. long-term investments of capital with the aim of creating a new manufacturing machine or perfecting and updating it for the purpose of gaining profits.
Today Russian economy does need foreign capital inflow. This is caused by virtually full discontinuance of financing from the state budget, lack of funds in enterprises, significant wear of equipment installed in enterprises and a number of other reasons.
One can hardly believe that foreign investments alone can raise the economy of our huge country. On the other hand they may serve as a stimulus, a catalyst for development and growth of domestic investments. Especially this is true in case of direct investments as not only funds but also many years’ experience accumulated by investor companies in the world market come to Russia with them. Foreign investments can also help to temporarily ease monetary difficulties of the government, albeit by means of increasing foreign debts which means by growth of the country’s dependence. Finally growth of foreign investments is an indispensable concomitant of Russia’s “building’ into the world cycle of capital flow and will facilitate the country’s integration into the world economy and finding an optimal “niche” in the world division of labor.
In the last decades capital flow in various forms has been gaining in importance in the world economic relations. If earlier certain countries as a rule were either exporters or importers of capital, now the majority of them at the same time export and import capital. From early 90-ties mobilization of foreign investors has become the most important trend in the international politics.
Development of mutual relations with Russia for European companies who have faced the problem of oversaturation of national markets is an excellent opportunity to expand the scope of their activities and support competitive ability. Strengthening of Russia’s positions as an important economic platform has been reflected in the growth of interest shown to it by Western transnational corporations.
Nevertheless Russia has faced serious problems which if one approaches their solution rashly may bring about major social and ethnic conflicts on its whole territory. Russia has lost competitiveness in many industrial sectors and the majority of Russian enterprises remain ineffective due to lack of capital and not ready for international competitiveness either.
In order to overcome these difficulties Russian politicians should concentrate on the creation of a stable macroeconomic climate which implies reduction of inflation, support for the private sector and minimization of the impact of the economic crisis on Russian economy. As never before it is important exactly now to stabilize and strengthen Russian economy having increased competitiveness of domestic enterprises, in particular, by encouraging cooperation between Russian and foreign companies. It is right now when the economic crisis endangers capital investments in many developed countries, when investments which seemed to be reliable are under threat there is a chance to attract investors to own economy.
The revival of the real sector of Russian economy can be achieved by means of restructuring industry, obtaining advanced experience and technologies, conversion of military-industrial establishment. These actions will require rational macroeconomic and financial leadership by the state and foreign investments.
The purpose of the present paper is to study the notion “foreign capital”, its essence and its main basic forms.
When writing this paper I set myself the following tasks:
1. to consider main problems of attracting foreign investments into Russian economy, state of foreign investment activities in Russia, and also basic forms of investments;
2. to consider which investor countries are more active with respect to Russia, what is the share of each of these counties in the total volume of investments;
3. to study region-wise allocation of foreign investments in Russian Federation, which regions are leading in the quantity of foreign investments invested in them;
4. to describe investment climate in the main regions of Russian Federation;
5. to consider main risks in the field of international entrepreneurship.
All the tasks mentioned above have been studied and dealt with. In the paper one can find answers to many questions concerning investment activities in Russia.
In the course paper I’ve written what quantity of foreign investments fall on a certain economic sector, given statistics of basic forms of foreign investments received into the economy of Russian Federation for certain time-periods. I’ve also indicated the volume of foreign investments received as per the kinds of economic activity, the quantity of investments main investor countries invest into the economy of Russian Federation
At present the subject of the course paper is topical as the investment policy of our state is acquiring higher and higher priority day by day.
1. Essence and Classification of Foreign Investment
1.1. Essence of foreign investments
Today the economy of no country can develop stably without active participation in the world economic relations. Along with the international trade international flows of investment capital are gaining more and more importance on the basis of effective cooperation between countries.
One can speak about foreign investments when foreign capital is invested into the assets of national companies and states.
Lately the problem of attracting foreign investment capital into Russian economy has become very topical. Foreign investments are considered to be one of the most important conditions for stabilization and growth of the country’s economy. It is first of all due to the fact that financial recourses of companies are limited and under the conditions of Russian reality it is quite difficult to cover their lack by attracting additional national capital (various credits, loans, etc.) because of a number of objective and subjective reasons, such as high profit rate to the capital being invested, high level of taxation, etc.
Mobilization of foreign investments into the country gives a number of advantages, namely:
1) the country gets an opportunity to additionally finance major investment projects;
2) foreign investments encourage, give a new impetus to the development and growth of domestic investments;
3) along with financial resources many year’s experience gained by an investor country in the world market comes into the country;
4) the inflow of foreign capital into innovational projects allows a recipient country get access to the newest technologies, technical equipment and advanced methods of organization of production;
5) in case a country experiences temporary monetary difficulties, to solve them albeit foreign debt of the country-recipient increases;
6) growth of foreign investments facilitates country’s integration into the world economy which in its turn ensures its stable economic development.
1.2. Classification of foreign investments
Foreign investments can be classified by the following signs:
1) real, financial and non-material
depending on the assets into which the capital is invested. Real investments
are investments into a long-term project associated with purchase of existing or new manufacturing entities of real assets abroad which directly or indirectly participate in the production process. Financial investments
areacquisition of securities or monetary assets, i.e. this is investment into financial property, purchase of debt rights for the participation in the business of other firms. Nonmaterial investments
are purchase of concessions, trademarks and other nonmaterial rights.
2) by the patterns of ownership of investment resources into: public, private
(non-governmental) and mixed investments
. State investments
are the funds of state budgets directed abroad by the decision of government departments or intergovernmental organizations. These funds can be given as state loans, credits, grants, relieves. Private (non-governmental) investments
are the funds of private investors invested into investment mediums located outside territorial boarders of the country. Mixed foreign investments
are investments made abroad jointly with a state and private investors.
3) Depending on investment mediums: direct foreign investments
, portfolio investments
and other investments
. Direct foreign investments (DFI)
are investments of foreign investors which give them the right to control an enterprise on the territory of another state and to take an active part in managing it. Portfolio investments
are investments of foreign investors associated mainly with investing into securities with the aim of getting or increasing profits in the form of interests, dividends or difference in market-prices. They also include investments of foreign investors into obligations, bills of credit, other debt liabilities, government and municipal securities. Other investments
are bank deposits, trade credits, credits of governments of foreign countries, credits of international financial organizations, other credits, etc. /1/
Division of foreign investments into direct, portfolio and other investments is widely-spread one in the economic literature therefore this classification should be considered in more detail.
As far as direct foreign investments are concerned their characteristic feature is their allotment for manufacturing purposes, long-term, ability to ensure for the investor management control over an enterprise.
Direct investments have a priority importance as they substantially impact national economy and international business in whole. The significance of DFI is in: 1) its ability to make investment processes more active by virtue of its inherent multiplicative effect; 2) its ability to promote general socio-economic stability, encourage production investments into resource base; 3) combination of transfer of practical skills and qualified management with mutually beneficial exchange of know-how making international market entry easy; 4) in the activization of competitiveness and encouraging the development of small and medium enterprises; 5) in its ability to speed up the development of sectors and regions provided correct organization, encouragement, allocation are ensured; b) in promoting growth of employment and raising the level of population’s incomes, expanding a tax base./1/
Direct foreign investments: a) are a good additional source of means for renewal and expansion of fixed capital, realization of investment projects and programs which ensure revival and upsurge of economy, saturation of domestic market with competitive goods and services; b) are a source of means for introduction of progressive technologies, know-how, modern management and marketing methods; c) being directed to specific objects are often supported by training of personnel who make an effective use of new technologies, market mechanisms, international contracts, etc.; d) help to gain and consolidate experience of functioning of market economy, “rules of game” inherent to it which results in the inflow of foreign capital, makes an investor confident that invested funds will return with enough profit and speed up an investment climate in the country which is favorable as for foreign so for home investors; e) speed up the process of integration of the economy into world economy, development of effective and integration processes, favor the use of advantages of international division and cooperation of labor, finding niches in the world economy and market; f) unlike loans and credits they do not have a heavy incidence on the foreign debt and even help to get means to pay them off.
Basic methods of portfolio investment include: a) purchase of securities on the markets of other countries; b) purchase of foreign companies’ securities in own country; c) investment of capital into international investment (unit) funds.
Mobilization of foreign portfolio investments is also quite an important task for Russian economy. With the help of foreign portfolio investors’ means the following economic tasks can be solved: 1) replenishment of Russian enterprises’ own capital by floatation of Russian joint-stock companies’ shares among foreign portfolio investors; 2) accumulation by Russian enterprises of borrowed current assets for the realization of specific projects by floatation of Russian issuers’ debt securities among portfolio investors; 3) replenishment of the federal budget and the budgets of Russian Federation’s constituent territories by floatation of debt securities issued by appropriate authorities among foreign investors. 4) effective restructuring of Russian Federation’s foreign debt by converting it into agency pass-throughs (government bonds) with their subsequent floatation among foreign investors. /1/
Other investments fall on the main share and make about 57% of investments’ volume. This group of investments (by challenge subjects) is public investments. States are major capital exporters. Export of official capital is done in the form of economic, technical and military assistance to the developing countries; the role of the state as a guarantor of private capital export increases. In many countries there are governmental organizations which insure private investors. The state takes part in the activities of international financial institutions (IMF, World Bank and its group, EBRD. /2/
1.3 Role of foreign investments in economy.
Foreign investments play an important role in the development of economy of any country, including Russia. Mobilization of foreign investments is an objective necessity.
They are called forth by:
а) international division of labor;
b) development of international relations;
c) integration of national economy into world economy
Foreign investments promote/3/:
1. acceleration of economic and technical progress;
2. implementation of new forms of management;
3. renewal and modernization of manufacturing machine;
4. activization of competitiveness;
5. development of small and medium size enterprises;
6. training of personnel meeting the requirements of market economy;
7. expansion of country’s export potential;
8. replacement of import substituting production;
9. creation of new jobs, raising the level of employment, relieving social tension;
10. raising competitiveness of domestic manufacture;
11. solving the problems of reforming economy.
2. Situation with foreign Investment in Russia today
2.1. Conception of an investment climate.
The investment sphere requires the creation of certain conditions for successful implementation of an investment process.
A set of political and economic conditions which are formed in the country for investing temporary spare cash with the aim of receiving profits in future is called an investment climate.
The factors influencing an investment climate are:
а) Macroeconomic (dynamics of GDP, level of inflation and interest rates, share of savings in GDP).
b) Regulatory-legal (quality and stability of legislative base, correspondence of federal and regional legislation, policy of central and local authorities, protection of rights of property, protection of investors’ interests, level of monopolization in economy, openness of economy, level of compliance with law and order, administrative barriers for entry into investment market, level of corporate management).
c) Taxation (quality of taxation system and level of a tax burden).
d) Information support (building of an information support system, completeness and accessibility of information on investment opportunities in the country on the whole, on companies in particular, topicality of information, confidence in an information source, holding of advertising information campaigns in mass media, organization of investment exhibitions, presentations, seminars, investment missions).
e) Unpredictability, non-transparency of the country to investors. Investors understand it as absence of clear, in the form of formal procedures, generally accepted rules of conducting business in world and national markets of capital.
е) debts on foreign liabilities to international economic and financial institutions.
The factors indicated can have both stimulating and braking influence on an investment activity. E.g. reduction of the real volume of GDP has an impact on industrial production, causes as a rule its downswing, unstable state of economy in the country on the whole and as a result of this – decline of investment activities.
High level of inflation negatively affects enterprises’ investment capability as depreciation of amortization, increase of effective rate of profit taxation takes place. Inflation also results in the need to raise remuneration of employees and increase in demand for circulating assets. As a result possibilities for investment out of own means of an enterprise get narrower. High interest and tax rates worsen conditions for investments into the real sector. Under the conditions of increase of GDP, low level of inflation, low interest rates and rise in populations savings investment activities develop actively. For the last years a tendency for improvement of investment climate has taken shape in our country – political stability has been achieved, there has been increase in GDP and industrial production, level of inflation has fallen, a number of legislative acts ensuring activization of investment process has been adopted, tax reform has been carried out, etc. All this has resulted in the increase of investments volume in Russia for the last 8 years. But in 2009 growth rate of foreign investments in Russian Federation considerably has slowed down this being explained by expanding world economic crisis.
2.2 Investment climate in the main regions of Russia.
Regions with most favorable investment climate are mainly located in the European part of the country. The regions of North-Western, Central and Privolzhsky federal okrugs are notable for their particularly favorable climate. Almost one third of investment potential of the country is concentrated in them, and investment risk per region here is even lower than average Russian one. As we advance more to the East and South of Russia investment climate gradually worsens: the general potential decreases and the risk increases. In the Far Eastern federal okrug the average investment risk of the region is almost 1.5 times higher and in the Southern federal okrug it is 1.6 times higher than in the North-West of Russia.
Regions of the first three abovementioned federal okrugs dominate also among the leaders on investment risks. For all the years when assessment by a rating system has been done the first ten regions by risk level have been made up by 90% from the regions of North-Western, Central and Privolzhsky federal okrugs. Only 10% of the leader regions are from Southern okrug, the rest okrugs have not been able to raise their leaders of the All-Russian level.
By potential the superiority of the European three of okrugs is not so significant although here also 60 % of all leader regions belong to the above listed okrugs.
Altogether according to rating assessments 33 regions have been among the ten leaders by potential as well as by risks during all the years, 20 of them being again from Central, North-Western, and Privolzhsky federal okrugs
If representation frequency of regions of each Federal okrug among the leaders is to be taken into consideration here the first place goes to North-Western okrug followed by Urals, Central and Privolzhsky okrugs. But Far Eastern okrug has never been represented in the list of leaders: by all appearances neighboring China as an investment phenomenon is not an authority for us and even not an example.
The investment nucleus of Russia revealed in the last rating located between Moscow and St.Petersburg for the time being does not possess enough stability of a favorable investment climate. Its centre shifted to North-West to St.Petersburg because Moscow and Moscow Region lowered their investment attractiveness. Tver Region has fallen out of it and Leningrad Region has sharply increased the risk. At the same time the investment climate has considerably improved in Volgograd and Yaroslavl regions. /4/
In order for this wave of investment attractiveness to move further to the periphery subcentres should form there – regions with minimum investment risks should arise.
In the first place Tatarstan which already had minimum risk in 1998 and 1999 ratings as well as Krasnodar and Perm Territories, Bashkortostan, Nizhy Novgorod, Rostov, Samara and Tyumen regions can lay claim to the role of such subcentres. /4/
3. Structure of foreign investment in 2000-2009
/10/
3.1 Structure of foreign investment by its kinds in 2000-200
9
The situation with foreign investment changed significantly in the XXI century. An important break-through was British Petroleum’s decision to invest US$6.7 billion in Russia’s petroleum industry in 2003. Since then, the total amount of the investment grew steadily with very high rates.
Total foreign investment for 2004 was US$40.5 billion, with consumer goods and services and construction receiving the largest shares among the economic sectors. In 2005 the figure rose to US$53.6 billion, with the heaviest investments coming from Luxembourg, Cyprus, the Netherlands, Germany, Britain, the United States, and France (see chart 2). Foreign direct investment for 2005 was US$13 billion. Increases of 42 percent in overall investment and 44 percent in foreign direct investment, compared with the same period in 2005, were reported in the first half of 2006 (see chart 1). Moreover, by the end of September 2006 the amount of investment was 35323 mln $./5/
A very important issue is a change in target industry structure. The main matter is constant increase of investment in manufacturing structure and high decrease of investment in 2005 in resource extraction. Also there is increase in investment in wholesale and retail trade and repair sphere. This trend shows that the character of the investment was changing. There was a shift from resource-extraction oriented investment to investment in manufacturing, which was certainly better for the economy, as manufacturing sphere gives more opportunities for further development and makes the economy more competitive.
In January-September 2007, According to the estimates of the Federal Service of State Statistics the volume of foreign investments inflow into
The foreign direct investment (FDI) volume for the same period increased by a factor of 1,9 and made 19,6 billion USD. Loans received from foreign joint enterprise owners increased by a factor of 4,4 – up to 9,7 billion USD — and became the basis of FDI growth.
Foreign investors’ contributions to the share capital of Russian companies increased by a factor of 1,5 and made 9 billion USD.
At the same time, the share of FDI in the total amount of foreign investments inflow decreased from 29,1% in January-September 2006 to 22,3% in January-September 2007.
The amount of other investments increased by a factor of 2,7 and amounted to 66,7 billion USD in January-September 2007, and their share in the total amount of investments for the same period grew from 69% in January-September 2006 to 75,9% in January-September 2007.
The volume of portfolio investments went up 2,3 times compared to the corresponding period of last year to 1,5 billion USD, that is 1,8% of the total amount of investments.
Source:
www.rosgosstat.ru
Great Britain was the leader of investment inflow into Russia raising up investments by a factor of 3,8 (vs. January-September 2006) up to 20,7 billion USD, followed by the Netherlands (17,2 bln USD), Cyprus (11,9 bln USD), and Luxemburg (8,1 bln USD). The major foreign investors kept their ranking: Cyprus (19,8% of the total amount of cumulative foreign investments), the Netherlands (18,2%), Luxembourg (15,3%), Great Britain (12,2%). These countries provided for 65,5% of the total amount of cumulative foreign investments, including 72,3% of the total amount of cumulative direct foreign investments and 60,5% of other investments. /6/
Actually, the amount of the attracted Foreign Investment in 2007 in Russia was a record. The total amount of cumulative foreign investments in Russian economy amounted to 120,8 billion USD at the end of September 2007, that is 52,2% growth to the level of the end of September 2006. /7/
As of the end of 2008 (see appendices №1) accumulated foreign capital in Russia made 264.6 billion USD which is by 19.9% more compared to the previous year. The highest specific weight in the accumulated foreign capital falls on other investments made on the return basis – 51.6% (by the end of 2007 – 50.2%), the share of direct investments made 46.3% (46.7%), portfolio investments- 2.1% (3.1%).
Main investors in 2008 were Cyprus, The United Kingdom (Great Britain), the Netherlands, Germany, Luxemburg, France, the Virgin (British) Islands. The share of these countries made 77.0% of the total volume of accumulated foreign investments, 79.4% of total volume of accumulated direct foreign investments.
In 2008 Russian economy received 103.8 billion dollar foreign investments which are by 14.2% less than in 2007. In the first quarter of 2008 17.3 billion USD foreign investments came (by 29.9% less than for the corresponding period of the previous year), in the second quarter – 29.3 billion USD (by 18.0% less), in the third quarter – 29.2 billion USD (by 6.1% more), in the fourth quarter – 28.0 billion USD (by 15.2% less).
Russia saw an inflow of $54.7bn in foreign investment in the first nine months of 2009, 27.8 percent less than in the same period a year earlier. As reported earlier, the flow stood at $12bn in the first quarter of 2009, 30.3 percent below the previous year’s respective figure, at $20.2bn in Q2 (a decrease of 31.2 percent), and at $22.5bn in Q3 (a decrease of 22.9 percent).
Repaid foreign investment which Russia had received earlier stood at $50.6bn for 9M of 2009, 5.3 percent above the 9M 2008 figure. Of the total, some $12.1bn was repaid in Q1 (down 15.3 percent), $19.7bn in Q2 (down 1.2 percent), and $18.8bn in Q3 (up 36.2 percent from the previous year’s figure).
Accrued foreign capital in the Russian economy reached $262.4bn, up 4.4 percent from 2008, with the largest share claimed by the ‘other repayable investment’ category (55.7 percent against 50.7 percent as of the end of September 2008), with the proportion of direct investment at 39.7 percent (46.9 percent in 2008) and that of portfolio investment at 4.6 percent (2.4 percent).
From January to September 2009, the countries making the largest investments in Russia were also Luxembourg, the Netherlands, Cyprus, Germany, the UK, France, the United States, Ireland, British Virgin Islands, and Japan, together accounting for some 83.7 percent of the total accrued foreign investment./10/
3.2 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/
4. Risks in the sphere of international entrepreneurship
4.1. 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/
4.2. 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
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Appendices
№1. RIA Novosti 2008 kjkjkljR