Could There Be a Common Investment Policy for All Regions of Russia?

25.07.2013

Russian regions differ significantly in terms of the development of their infrastructure. Obvious regional differences are unlikely to allow us to speak of a single investment climate in Russia and equal conditions of work for foreign companies in different Russian regions, and, consequently, the effectiveness of universal measures to attract foreign investors.

Typically, both Russian and international sources speak about investment attractiveness, offer average data for a particular country, and, thus, shape a single consolidated picture of the investment climate. A similar strategy is shared by legislators, who create regulatory mechanisms to improve the investment climate in Russia as a whole. The problem of differentiation of regions is pointed out by experts and researchers [1], but is not properly reflected in the measures taken to improve the investment climate. Meanwhile, Russian regions differ from one another by a number of factors, so that the same measures can lead to opposite results in different regions.

Let us start with the basics – human resources – both skilled and unskilled, which are necessary for the development of any investment project. According to official data from the Federal State Statistics Service (Rosstat), 17% of the entire Russian population is concentrated in Moscow and St. Petersburg, and the surrounding regions [2] (this is less than 1% of the territory of the Russian Federation). Most of international companies are located in the same area. According to statistics, half of all organizations with foreign capital who conduct business in Russia are concentrated in the Central Federal District. Moscow and the Moscow Region accommodate one third of all the international companies in Russia [3] . At the same time, a number of Russian regions are experiencing a large-scale outflow of human resources. One expert from an international consulting company operating in St. Petersburg expressed concern about the labor situation in Russia [4] :

"The situation with staff is very bad. Even if someone here is able to work, someone still has to train them. We have very poor special education, mid-level professional education. And even having the technique here ... they can bring the equipment here, but they will have to bring [employers] together with the equipment to do something."

Another obvious factor influencing the distribution of foreign investment in Russia is closeness to borders. The number of foreign companies in the Russian regions who have foreign neighbors is higher than in Russia on average. For example, Finnish companies prevail in the Northwestern region (of the 500 Finnish companies operating in Russia, nearly 400 are located in St. Petersburg and the Leningrad Region). Russian-Chinese cooperation is far better developed in Siberia and the Far East than in all the other Russian regions. Experts tend to explain this by simple circumstances: foreign companies who do business in Russia prefer to keep their social and professional contacts in their native countries. The importance of keeping cross-border cooperation networks may, among other things, also indicate that operations in the Russian market are still associated with certain risks. When entering the Russian market, foreign investors prefer to keep one foot in an economic environment that is more familiar and predictable to them, though perhaps less advantageous financially.

Some Russian regions remain out of reach for investors. This may be due to the weak development of the infrastructure in the regions, and the fear that Russia’s territories are so vast. I refer again to the words of the expert:

"Finns are mainly in the Northwest. They see Russia and the Leningrad Region, as an outstanding territory in the Northwestern Federal District. If they are advanced Finns, they see Central Russia. But any territory beyond the Urals seems to all of them a kind of very big virgin terrain, which frightens them, it's scary [in their perception], it is very dangerous to go there. And very, very few projects emerge beyond the Central Federal District and the Northwestern Federal District."

Russian regions differ significantly in terms of the development of their infrastructure. When we talk about infrastructure, we have to understand that it is not only and not so much about the lack of luxury hotels and chic restaurants in the Russian provinces. This is more about a lack of the basic conditions that are necessary for the development of business. For example, transport connections with the Siberian and Far Eastern regions are very poorly developed. Often, there is a lack of roads between neighboring communities. Connection to the electricity networks is one of the biggest problems. According to the World Bank's famous Doing Business rating, Russia permanently comes last in the world in terms of electricity supply [5].

Such obvious regional differences are unlikely to allow us to speak of a single investment climate in Russia and equal conditions of work for foreign companies in different Russian regions, and, consequently, the effectiveness of universal measures to attract foreign investors.

[1] See for example the study into the business climate, carried out in 2011 by the Russian Union of Industrialists and Entrepreneurs. Shmeliova, Elena. 2012. Klimat meniaetsia k luchshemu in Rossiiskaia Gazeta, February 7. ( Published April 14, 2013 http://www.rg.ru/2012/02/07/shohin.html ).

[2] Chislennost’ naseleniia. 2011. Chapter 3.1 in Regiony Rossii. Sotzial’no-ekonomicheskie pokazateli (Published May 3, 2013 http://www.gks.ru/bgd/regl/B11_14p/IssWWW.exe/Stg/d01/03-01.htm ).

[3] Organizatzii s uchastiem inostrannogo kapitala. 2011. Chapters 13.11 – 13.12 in Regiony Rossii. Sotzial’no-ekonomicheskie pokazateli (Published May 3, 2013 http://www.gks.ru/bgd/regl/B11_14p/IssWWW.exe/Stg/d01/13-11.htm ).

[4] Expert interview obtained on condition of anonymity during the research project "International Cooperation and Contracting: Legal, Social and Institutional Aspects of the Investment Climate in Russia", financed by the Foundation for Development and Support of the Valdai Discussion Club.

[5] Doing Business in Russia, 2012 (Published May 2, 2013 http://www.doingbusiness.org/data/exploreeconomies/russia )

The author is a laureate of the Valdai Club Foundation Grant Program . 

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.

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