Foreign investors shun Russia despite growth, BP deal

Western investors are still shy about injecting cold hard cash into Russian business despite a host of optimistic forecasts and British Petroleum's head-first dive into the country's turbulent market with a multibillion-dollar oil deal.

Moscow's invitations to invest in Russia have mostly fallen on deaf ears; for many foreigners, the Eastern European applicants to the European Union appear much riper for investment.

Foreign direct investment in Russia stood at 3.7 billion euros in 2002, less than 1 percent more than the previous year, according to official estimates published last week by the state statistics committee.

This is a "great disappointment for Vladimir Putin's government," said Alexei Moiseyev, an analyst with the Renaissance Capital group.

But BP's announcement two weeks ago that it would spend $6.75 billion over four years to launch a joint venture with one of Russia's fastest growing oil producers signaled that the country's shady investment climate was becoming stable enough to attract strong bidders.

The investment - the single largest made by a foreign company in Russia - is set to create the third-largest Russian oil and gas business with Tyumen Oil Company, or TNK, in which BP will hold 50 percent.

And the deal was greeted in Russia as a landmark move that could turn the tide on investment in the country, but reports of fraud and shady dealings immediately suggested that those sighs of relief were premature.

Many analysts believe that the $6.75 billion BP is set to invest may never make it onto Russian territory, stored instead in offshore holdings and doing little to boost Russia's investment climate.

Moiseyev agreed, saying that while the BP deal could prompt more investments in Russia's oil industry this year, such investments were unlikely to be reflected in official statistics because they would be realized offshore.

Moreover, they would simply compound the overwhelming dominance of Russia's oil industry.

"No country dependent on a sole source of income - oil in this case - has ever seen a substantial influx of investment to any other sector of its economy," Alfa Bank analyst Chris Weafer added.

Foreign investment is unevenly divided among Russia's industries, with the energy, steel and agro-business sectors taking the biggest share, with increasing focus on its rapidly growing consumer market.

The manufacturing sector has so far failed to attract the investment it needs to modernize, despite relative stabilization of the economy and the legal system and an average GDP growth of 5 percent annually in the past three years.

Nevertheless, "the BP deal is a high profile and substantive way of confirming that Russia is now 'open for business,'" said Niclas Sundstrom, an analyst with Schroder Salomon Smith Barney.

The deal emphasizes that "Russia's investment climate has moved on, and it is now increasingly ready for large, strategic investments," he said in a recent research report.

Yet Moiseyev warned that even if business confidence returns to Russia, the Eastern European countries poised to join the EU are far better placed to compete for investment.

The removal of customs barriers and the prospect of membership in the euro zone are likely to be much stronger inducements than any efforts Russia has made, he added.

The Czech Republic earned $468.9 per head in investment in 2001, Poland got $135.8 per head and Hungary $65 per head, while Russia netted just $27.7 per head, beating only Ukraine's $13.3 per head.

Whatever success Russia achieves in reducing fiscal and bureaucratic obstacles, it will take membership in the World Trade Organization to make it truly attractive to investors, Moiseyev noted.

Talks about Russia's accession to the WTO have been bogged down by discussions over liberalization of the country's financial services, telecommunications and transportation sectors.