Putting Domestic Investment to Work to Drive Expansion
On June 17, 2016, within the scope of the 20th St. Petersburg International Economic Forum, a panel session was held under the title ‘Putting Domestic Investment to Work to Drive Expansion’, in which representatives of Russia and the USA took part.
At the session, there was talk about mechanisms capable of increasing the inflow of savings by Russian citizens on the domestic market and investment tools. The session was moderated by Deputy Chairman of the Economic Council under the President of the Russian Federation Alexey Kudrin, whose speech provided some statistical data.
Over the last 15–16 years, according to Mr. Kudrin, domestic investments had grown in nominal terms, but in real terms that were falling. This indicates that there is a shortage of investments to boost growth, Alexey Kudrin announced.
Oleg Buklemishev, Director of the Centre for Economic Policy Research, Faculty of Economics, Moscow State University, believes that there is no shortage of investment resources in Russia. Nor is there any marked deterioration in the institutional part that might explain an investment pause. “In my opinion, the main reason that investments are falling at the moment is the absence of optimism on the part of the business community,” Mr. Buklemishev stated.
The shortage of investment demand was covered by First Deputy Governor of the Central Bank of Russia Sergey Shvetsov. There is not enough competition on the domestic market. “At the same time, we have a weak infrastructure. It is expensive to invest in Russia, as any investor has to build the infrastructure and protect its investments. And here we cannot ignore the quality of the judicial system,” the economist added.
One more reason for the drop in investments was mentioned by Chairman of the Executive Board of the Moscow Exchange Alexander Afanasiev. Interest rates on bank deposits are still high and the investments are well protected, so, from the point of view of the investor, there is no sense in taking investment risks. In addition, there is no tradition of investment in Russia. In order to cure the situation, Mr. Afanasiev recommended equalizing the tax conditions and the level of protection for all products of the financial market.
President of Sistema Mikhail Shamolin spoke about another aspect of the problem. Owing to the high bank interest rates, loans are too expensive. In order to invest in some project, anticipated returns of at least 20–22% a year are needed. Very few projects meet this criterion.
One more investment problem was mentioned by member of the Board of Directors of the O1 Group Dmitriy Mints: “The biggest problem in this country is the absence in the long-term perspective of institutions with money and private investors. Yet even if there is money to invest, it’s not really clear how to get it back.”
“There is no one problem concerning investment. The problem lies in the development of the economy as a whole, that is what is holding back investment,” stated Chairman of Severstal Alexey Mordashov. “One could take the traditional road and invest in the strongest industries. Take metallurgy – that’s strong. But we are not going to invest a lot there, as there’s no market. It is not profitable to invest in growing capacities because nobody needs the capacity. In all sectors in which we are traditionally strong, there is excess and stagnation,” Mr. Mordashov said.
In that case, the head of Severstal noted, one might invest in developing sectors. In housing, for instance. But the economic crisis means the population has no money to buy housing.
At the same time, Acting Governor of Ulyanovsk Region Sergei Morozov is not experiencing any problems in raising investments: in 2015, the Region received in the order of RUB 92 billion. Sergei Morozov believes the basis of this success is precise goal-setting, quality state governance and advanced legislation. For instance, the regional legislation of the Ulyanovsk Region allows returns of 30% on investments.
Managing Director of Siguler Guff & Company Drew Guff also looks at the Russian market with optimism. “The sanctions themselves did not exert any influence on us because they were mainly directed against specific persons with whom we do not do business anyway. Even so, the sanction climate does, of course, effect long-term investments, which we do engage in. Capital has started to contract,” Mr. Guff said.
Alexey Kudrin summed up the discussion. He noted that Russia found itself in a situation with many unfavourable factors. To overcome them, Mr. Kudrin proposed lifting administrative barriers, unleashing privatization, controlling competition, reducing the bank rate and inflation, and preserving the cumulative part of pensions.