Investors have a singularly conservative value system. Also, contrary to the prevailing opinion, their primary concern is labor not natural resources

Our rating aims to classify Russian regions from the point of view of the direct (or strategic) investor. Accordingly, the success of the whole effort depends on how faithfully the investor’s value system is reproduced. To this end we conduct annual interviews of bankers and entrepreneurs, both Russian and foreign (see Information and Methods). They invested in Russia millions of dollars and their opinion is thus worth considering. These  practical experts serve as our target audience when we fine-tune our rating technique.

These people are very conservative.  For all the fundamental change that has occurred in the Russian economy in the last three years, their preferences changed but slowly and not essentially (Chart 1). Which means that they are not likely to get scared by the ghost of possible cataclysms and came for good long while. Both before the 1998 crisis and now, regions are of interest to investors primarily as a source of skilled labor and a consumer market.

Infrastructure and production potential are still very important, although the latter’s role in investment has decreased. Activity is seen primarily at enterprises with badly worn machinery and outdated technologies. Their investment projects are for the most part depend on a loan rather than a direct investor.

Therefore, a strategic investor, when he comes to a region, prefers to bring his own projects. By the way, such investors typically operate in the corporate system of their own market institutions and set little store by the region’s institutional potential; recently, however, strategic investors began to show some interest in its availability.

The post-crisis decline in the importance of a region’s financial potential for the investor can be explained, on the one hand, by individuals and enterprises being short of financial resources, many  still paying out their debts.  On the other hand, with the centralization of the fiscal system regional authorities gradually cease to be financial contractors of investors. The budget, nonbudget funds and securities of many Federation members can no longer act as the investor’s pledge or guaranty. He must be self-reliant to an ever greater extent.

As it turned out, would-be investors are not particularly concerned about two investment factors still retaining a certain illusionary significance for some.

Interest in a region’s own investment potential is steadily falling. It appears that an investor comes to a region with his own mature and well-proven technologies and is not inclined to invest in a stagnating local research and technological sphere.

The survey destroyed the myth of the investor attractiveness of Russian natural resources. For one thing, all the more or less efficient enterprises and mineral deposits have already been divided, and new investors find access difficult.  Second, more accessible and cheaper-to-operate resources can be found elsewhere. As far as risks are concerned, economic recovery and the consolidation of state power can explain altered expert judgments. Recent years saw a decline in importance of financial, economic, and political risks and, on the contrary, a rise in the importance of risks associated with the “subjective factor” – criminal and, particularly, social risks.

We have destroyed another myth, which was built up in the late 1980s. Environmental risk is the least of investors’  concerns. It appears that this is due to the state’s indifference towards the environment and the want of an environmental policy. It is only logical, then, that there is no, or likely to be in the future, an effective system of fines and charges for polluting the environment.

Finally, legislative risk is of top importance for investors. Although for all practical purposes the investor’s legal framework  has already been completed on the federal level, legislative efforts in the field of investment are still picking up speed in Russian regions.  The point is, not only are regions starting strongly to differ in the subject matter of investment legislation, but investors in some Federation regions find it difficult to make sense of  complicated and inconsistent laws,  which are open to different interpretations by authorities and investors.