Regional and branch distribution of FDI as the main factors of Russia’s investment attractiveness



In this paper we consider Russia’s investment attractiveness in the terms of regional and branch distribution. The aim of the article is to analyze the FDI inflows during 2010–2016 period, estimate changes of FDI during the given period and find out what impact the regional and branch factors have on foreign investors decisions.

Keywords: FDI, investment attractiveness, regional distribution of FDI, branch distribution of FDI

Russia is divided into 9 federal districts: Central, North-West, South, Volga, Ural, Siberian, Far East, North-Caucasian, Crimea. According to the data of Russian Central Bank, the Central Federal region is the most attractive region for FDI. In the period 2008–2013 552,024 million dollars were invested into the region, it equals 67 % from the whole number of FDI in Russia during that period. Moscow, St. Petersburg and Moscow district still remain the most popular cities for investment. The regions, on the territory of which there are oil natural resources, can be also provided with constant cash flow. These regions are Siberian, Far East and Urals regions [1].

According to the data, provided by the Central Bank, FDI’s distribution is uneven [1]. The main part of FDI goes to the regions, which are located next to Europe. That is why making Russian Far East an attractive region for FDI has become one of the most important tasks. European investors prefer to put capital into European region of Russia, due to three close location and being easy to manage. On the other hand, investors from such Asian countries as China and Japan, are more interested in investing into Far East and Siberian federal regions. The most attractive districts are still near-border districts, such as Zabaykalsky krai, the Jewish autonomous region and Amur region, where every year the amount of Chinese investment is growing rapidly.

Table 1

Regional distribution of FDI in Russia in 2011–2016 (million dollars)

Region	Unit of measure	2011	2012	2013	2014	2015	2016
Central Federal region	mn dollars	235 082	161 132	193 685	146 370	133 949	137 673
North-West Federal region	mn dollars	16 240	20 772	20 649	16 503	14 418	22 971
South Federal region	mn dollars	2 420	2 254	2 821	2 152	2 458	2 100
North-Caucasian Federal region	mn dollars	222	144	67	184	581	388
Volga Federal region	mn dollars	5 261	5 252	5 936	5 025	6 556	3 351
Ural Federal region	mn dollars	21 027	22 997	15 742	16 966	14 753	10 683
Siberian Federal region	mn dollars	4 975	4 162	14 965	4 147	4 179	7 342
Far East Federal region	mn dollars	8 228	7 527	7 817	8 248	10 576	11 595
Crimea Federal region	mn dollars	no data	no data	no data	3 140	901	757

*according to the data of the Central Bank of Russian Federation

From the table 1 we can see the uneven distribution of FDI in Russia according to the region throughout the 6 years. 2017 is not included, because there only exist data for the 1st quarter of 2017, including it to the table may lead to confusion and misunderstanding.

First, let us analyze the level of attractiveness of various regions for foreign investors. As said above, the biggest amount of foreign capital goes to the Central Federal region, where such large cities as Moscow, Voronezh, Yaroslavl, Ryazan and others are situated. In 2011 the FDI amounts 235 082 million dollars, during the past 6 years this number remains the biggest one. The Central Federal region is the most attractive region, according to Annenkova’s research in estimation of regional FDI appeal. It has high scores in 4 coefficients, they are laboring, consuming, financial and manufacturing. Moreover, its geographic position is one of the most important reasons of its investment appeal [2, p. 36].

The next region in a row is Ural Federal region which took the 2nd place in the period of 2011–2012 with FDI number 21 027 and 22 997 million dollars accordingly. However, the situation has extremely changed, and now the North-West Federal region is placed the 2nd in a list with FDI amount 22 971 million dollars in 2016. The North-West Federal region is a perspective region for foreign investment, especially in the field of real estate, where demand exceeds supply. But development of the region is uneven, mostly because the central city -St. Petersburg- appeals most of the regional FDI. The region’s commerce field is also a hot point for FDI.

The Far East Federal region, Siberian Federal region, Volga Federal region and South Federal region are the regions with average level of investment appeal. The last three regions are the centers of recreational tourism and natural spots, moreover, commerce is one of the perspective spheres for investment. The only disadvantage is geographic position.

The outsiders among the federal regions are the North-Caucasian Federal region and Crimea Federal region. Mostly due to the geopolitical reasons these two regions are the least appealing for the foreign investors. North-Caucasian Federal region has unstable political situation, it is the region with high level of risk. However, the Crimea Federal region has belonged to Russia since 2013, so the data of FDI is certainly limited.

The next step is to analyze the changes in FDI according to the regional distribution. It would be wrong to say that investments to the regions rapidly decrease throughout the given period, because some of the regions return to the initial numbers and some of them grow sufficiently. For instance, the FDI to the Central Federal region have a sharp decrease by 2016, the loss of FDI amounts 1.5 times less than in 2011. It may be explained by aggressive foreign policy of Russia, which as a result caused European sanctions.

The same picture we can see in the Volga and the Ural Federal regions. While the initial amount of FDI was rather low, it amounts 5 621 million dollars, it changes to 3 351 million dollars. In 2015 the number of capital prevails the initial number, but a year later it decreases rapidly. Unlike the Volga Federal region, the capital flows to the Ural Federal region sharply decreased during the last 6 years, from the initial number 21 027 million dollars in 2011 to 10 683 million dollars in 2016. The rapid decrease may be explained by sanctions that Russia imposed to the European countries and the USA, as a political answer to the actions from their side. It is necessary to say that the Volga Federal region is characterized by constant developing of such industries as commerce and construction. The most attractive for investment cities are Kazan, Nizhniy Novgorod, Perm, Samara and Ufa, while Perm is one of the 10 most attractive cities fro investment in Russia. Foreign investors are not only interested in commerce and office areas, but in hotel service and storage real estate as well.

However, during the given period of time the investments into several regions have increased remarkably. These regions are the North-West Federal region, the Siberian Federal region and the Far East Federal region.

The situation with FDI in the North-West Federal region has changed according to the political relations of Russia with other countries. In the period of 2011–2012 we can see the instant increase of FDI into the region, from 16 240 million dollars in 2011 to 20 772 in 2012. But since then the number of FDI has started to fall down and reached the lowest mark in 2015–14 418 million dollars in 2016, it is even lower than in 2011. However, in 2016 one can notice a surprisingly different change in FDI into the region, it reaches the point of 22 971 million dollars, which exceeds the initial number in 2011. This situation may be explained by the fact that during the last two years there happened several large transactions in the commerce field. The North-West region has two main cities, which are centers for investing foreign capital, they are St. Petersburg and Kaliningrad. Despite the fact that the risk level in St. Petersburg is rather high, investors still find it attractive due to the high yield out of investment and the decrease of capitalization rate for high quality objects of commerce real estate. Kaliningrad, due to its geopolitical position and the status of special economic zone, is considered one of the most reliable region for investment after Moscow and St. Petersburg. Many Moscow, St. Petersburg, Polish and Turkish construction companies have head offices in the city, this fact may implicitly prove the level of investment appealing of Kaliningrad.

The Siberian Federal region, in its turn, is characterized by unstable commerce development. Despite the fact that the Siberian Federal region is rather attractive for the foreign investing, there exist some administrative laws that prevent cash flows from abroad. However, investment climate in the region gradually changes to the best, so the numbers of FDI during 2011–2016 period prove it. Started from 4 975 million dollars in 2011, the FDI to the region reach the peak in 2013 with amount of 14 965 and rapidly decreased by 2014 with the loss of more than 10 million dollars. It may be explained by the concern of the investors due to the geopolitical situation. In 2 years one can notice a gradual increase which amounts 7 342 million dollars, and prevails the initial number in 2011 in 1,5 times.

The Far East Federal region is a region of special concern for us, due to the fact that its geopolitical position favors increase of FDI. Nowadays the Far East Federal region, on the one hand, faces the problem of constant migration of population to the western part of the country or abroad, on the other hand, it is presented as potentially investment-attractive region. The Russian government implies new policies to persuade citizen of the region not to migrate to other regions. One of such policies is to supply a sector of land for free on special conditions. Another way is to develop tourism area, with the aim to appeal more foreign tourists as well as future investors. The level of investment attractiveness of the region is characterized as unstable. Some of the territories are potentially favorable for FDI, but the risks still remain rather high. There are several main reasons of FDI lack to the region:

1. High construction and labor price
2. Climate features
3. Geographical isolation
4. Undeveloped infrastructure
5. Low purchasing power
6. Lack of population

Despite all the factors mentioned above, one can notice the gradual increase in the FDI to the region from 8 228 million dollars in 2011 to 11 595 million dollars in 2016. The largest part of the FDI to the region contains capital from Asian countries, such as China, Malaysia, Korea etc. This FDI distribution may be explained by the boarder closeness of the investor country (as for China), or the existing areas for future investing and developing (as for Malaysia).

To understand the specifics of branch distribution of FDI in Russia, it is necessary to mention that Russia is a country with source-based economy. Due to the lack of high-developed producing and manufacturing technologies, Russia has no other choice but to imply 2 solutions: one is to sell the natural resources abroad, another one is to attract foreign companies, which have enough capital for manufacturing the given resources. Despite the fact that Russia found the way out of the economic crisis and is solving the problems, caused by sanctions, the country is still viewed as a place to digest out-dated technologies. According to Trofimenko, foreign investors are hardly interested in the Russian oil, wood and metallurgic raw materials, only small part of the foreign investing companies may find it profitable. Due to the formal and informal barriers, which exist in the country, Russia is placed further than the other countries in the manufacturing FDI. Trofimenko states that foreign companies are mainly interested in retailing foods on the territory of Russia, for instance, FDI into such industries as brewing, service industry and bank industry. However, FDI may stimulate distinctive branches, creating competition with national companies [3, p. 100].

Below we presented data about FDI branch distribution in Russia in 2010–2016.

Table 2

Branch distribution of FDI in Russia in 2010–2016 (million dollars)

	2010	2011	2012	2013	2014	2015	2016
Mining operations	10 683	16 762	15 535	26 155	16 339	17 435	32 384
Manufacturing	21 341	25 345	32 375	51 750	26 741	32 013	34 058
Wholesale and retail distribution	21 809	42 295	42 517	43 903	32 353	37 998	32 126
Financial activities, insurance	51 268	109 351	28 690	31 102	31 625	18 714	14 124
Information and communication	5 555	5 891	5 623	5 305	3 072	2 466	1 701
Real estate	7 523	7 672	7 637	7 732	7 722	5 789	5 226
Construction	5 859	5 303	6 756	5 771	4 812	2 078	1 983
Production and distribution of energy, gas, steam and air conditioning	2 144	3 297	4 000	2 831	3 251	1 120	1 143
Transport and storage	1 301	4 653	3 237	2 899	3 607	2 262	3 697
Agriculture, forest culture and fishing industry	548	667	656	934	598	671	446
Scientific research and developments	4 771	660	205	255	231	151	306
Other kinds of economical activity	4 190	7 233	9 145	8 685	11 056	9 974	7 455

* according to the data of the Central Bank of Russian Federation

* * such sectors as water supply, hotel service, education and medical care were not included in the table due to the minimal or negative numbers of FDI.

As we can see from the the Table 2, the most attractive sector for investing in 2010 is finance activity, insurance, wholesale and retail distribution and manufacturing. As stated earlier, these sectors may be the source of high revenues in a short period of time, that is why investors consider them in the first place.

It is hard not to notice the rapid decrease of FDI in some sectors during the period of 2010–2016. FDI into financial activity and insurance doubled by 2011, but since then it fell 14 124 million dollars in 2016. It may be explained by decreasing oil price, as a result the unstable position of Russian ruble. Investors cannot take high risk of putting capital into unstable economic sectors, that is why nowadays financial sector still did not return its place in the rank of the most attractive sectors for investing. Despite the fact that in Central and North-West Federal region the real estate sphere is ranked one of the first in attracting FDI, the whole FDI number to the industry is relatively low, and it reduced from 7 523 million dollars in 2010 to 5 226 million dollars in 2016.

More extreme decrease we may notice in construction sector with the fall from 5 859 million dollars in 2010 to 1 983 million dollars in 2016. Investing into construction sector is limited due to several reasons. First, the administrative laws limitations, which creates unbearable conditions for the foreign investors. Second, the problems of construction sector within the country, such as unfair high prices for flats or low customer’s ability. All the above reasons make the construction sector lose its positions in the attractiveness for FDI.

As well as construction sector, information and communication has also suffered from political and economical restrictions, which result in rather distinctive loss of FDI, with almost 5 times less than in 2010. The reason may lie in inability of the Russian side in accepting fast changes, new technologies, high-tech equipment. Comparing with American and information and communication development, Russia is probably in the state of America 15 years ago, which makes it very difficult to step forward and apply advanced technologies.

Production and distribution of energy, steam and gas sector faced double reduction of FDI, from 2 144 million dollars in 2010 to 1 143 million dollars in 2016. The FDI into this sector reached its maximum in 2012 with the amount of 4 000 million dollars, but political and economic crisis made it difficult to increase the number.

Scientific research and developments sector is the least attractive sector among all the described, it accepted 4 771 million dollars in 2010, since then the number of FDI reduces almost in 10 times, ending with 306 million dollars of FDI in 2016. The rapid decrease of FDI into this field is rather simple to explain: it is more efficient for a large scientific research centre or company to attract professional specialists to work at their base, than to invest capital into undeveloped sphere of economy and possibly do not get any dividends.

However, one cannot say that during the unstable economical situation in Russia FDI into all fields faced extreme decrease. Almost half of the mentioned above industries show a distinctive increase in FDI, which is also reasonable.

Mining operations FDI tripled during the given period of time, from 10 683 million dollars in 2010 to 32 384 million dollars in 2016. Such an extreme increase may be explained by the high and fast revenue and low investment risks. But the distribution of FDI in this sector is also uneven, the most part of FDI is transferred to the fuel-power power complex, but FDI to the other natural resources mining is gradually decreasing [4, p. 3].

Manufacturing and wholesale and retail distribution, in their turn, have faced almost equal increase of FDI by the end of 2016 with the number of 34 058 million dollars and 32 126 million dollars accordingly. Throughout this period, however, these two sectors faced uneven changes. The FDI to manufacturing reached it peak in 2013 with 51 750 million dollars, because during that time Russia was urgently needed capital from the outside. The FDI to wholesale and retail distribution doubled in 2011 with the number of 42 295 million dollars, and remain almost stable during three years. In 2014 the number of FDI to the sector started to decrease gradually, but still the number is 1.5 higher than the initial amount of FDI in 2010.

One can notice that agriculture, forest culture and fishing sector attract as little as the research sector. The number of FDI slightly changes throughout the given period of time, it starts from 548 million dollars in 2010 and ends with 446 million dollars in 2016. The unattractiveness of the sector is caused by high risks of investing, it is also more profitable to invest into short-term projects rather than in long-term one, however, short-term investment are not appropriate for the sustainable development of the country.

On the whole, while analyzing the FDI in such large country as Russia, it is important to take its size and regional specifics into consideration. The main factors that influence on the FDI regional distribution is geopolitical position, the economic development of the region itself, administrative laws of the regions and the others. During the given period of time some of the sectors faced the decrease in FDI, some of the sectors, on the opposite, showed a positive movement in FDI. The branch distribution of FDI in Russia still happens according to the source-based considerations and the possibility of receiving high profit in a short period of time. It is necessary to open such sectors as agriculture, education, medical care to the foreign investors, to make it less risky to invest for a long time.

References:

1. The Central bank of Russian Federation official website http://www.cbr.ru

2. A. Annenkova Estimation of investment attractiveness of the Central Federal region, Economic analyses: theory and practice, 36 (243) — 2011
3. A. Trofimenko, FDI in Russia: problems and perspectives, Economical sciences, 106 (02), 2015
4. T. Naumova, The role of FDI in the Russian economy’s development, Questions of economic theory: macroeconomics. 2015