Lowering regional risks is the most realistic way to win over the investor

Investment risk: competition is getting sharper

During the past year, regions stepped up their competition to create the best investment climate in their jurisdictions. The most successful were Moscow city and Moscow oblast, Tatarstan, and Kraznodar krai, which joined the top ten of absolute leaders both in potential and risk (Table 2 and Table 11).

Top ten. The most bitter struggle for joining the “gold ten” was among the least risky regions, because all regions are initially equal in terms of investment risk and any region, even a small one, can overtake Moscow. That is exactly what happened this year,.php">Novgorod oblast becoming leader for the first time.

 During the rating project years (since 1996), 21 regions have been among the leaders, but regulars are Moscow, Tatarstan, and Belgorod oblast (six times each), Kaliningrad and Novgorod oblasts (five times each), and St. Petersburg (four times); see Table 4.

The ten regions leading by investment risk rank were left by Saratov and Moscow oblasts, Bashkortostan and the Nenets autonomous district (Table 2 and Table 4). They were replaced, after a 12-month interval, by St. Petersburg and Yaroslaval oblast; Vologda and Orlov oblasts were first-timers in this group.

Most dynamic. In the past year, the most spectacular success in bringing down their investment risk rank was achieved by Smolensk oblast and the Republic of North Ossetia – Alania, and the biggest.php">“failure” was the Nenets autonomous district (Table 3). Smolensk oblast decreased its social, financial, and criminal risks. The decline in social risk occurred, in particular, due to a more than double decrease of wage arrears, compared with Russian average, per worker and growth in the purchasing capacity of the population.

North Ossetia significantly decreased its economic, political, legislative, and criminal risks. The republic improved all the components of economic risk. Besides, during 2000-2001, it passed a package of statutory acts regulating investment activity.

In the Nenets autonomous district, on the other hand, there was a surge in criminal, social, and economic risks. In the last year, the share of murders and murderous assaults in total crime more than doubled, and economic crime rose by more than one-third.

Risk factors. Minimum political risk is found in Tatarstan, Chukotka, and Orel oblast, where regional leaders enjoy unquestionable constituency support (Table 5).

The ten most socially quiet regions, topped by Moscow, includes only Center and Northwest regions. The list is closed by ethnic minorities of the Federation and of long-suffering Primorskii krai (Table 6).

Primarily extractive regions with a firm economic base represent the ten regions with the minimum economic risk. Unlike them, Moscow, Novgorod oblast, and North Ossetia, which are in the lead in terms of this risk, are developing on a totally different base, which has been restructured and adapted to the market economy (Table 7).

Heading the ten top regions with the minimum financial risk are, by right, Moscow and St. Petersburg, the largest financial and banking centers of Russia (Table 8).

The distribution of regions by criminal risk rank once again highlights the problem of Russia’s eastern regions and ethnic regions, where attempts to bring down crime have been failing for dozens of years. One exception are compact districts with predominantly rural population – the Aginsk, Buryat, and Koryak districts (Table 9).

Regions leading and “lagging” in environmental risk are listed in Table 10.

The most complicated situation is now in the realm of legislative risks, which are of greatest concern for investors. There are two conflicting trends in regional law making. On the one hand, in a number of regions, investment legislation is not updated in good time, lagging behind the dictates of the times and the general Federal legislative field. In other words, the investor’s statutory framework is formally in place, but its application is increasingly difficult. Some of the regions in which the basic investment and investment activity statute has not been updated since the pre-crisis years are Volgograd, Perm, Moscow, Ulyanovsk, Sverdolovsk, and Chita oblasts, and Stavropol krai, Udmurtia, and Tyva.

On the other hand, a number of regions see superfluous law making, which may turn into petty regimentation and excessive tutelage of investor activities. Former leaders of Volgograd, Orenburg, and Kaliningrad oblasts, the Republc of Maii El, and some other areas pursued this practice, during their last years in office. Characteristically, the evolution of a statutory framework is from the creation of conditions for attracting outside investors toward the predominant backing of own “revived” businesses.

Investment Potential: Moscow’s Lead is Immutable

In contrast to the essentially more dynamic investment risk, regional potential changes much less. Moscow has been an unquestioned leader in every kind of potential except for natural resources,. Its share of the total Russian potential is from 8% (production potential) to over 40% (institutional potential). This suggests the immense impact that Moscow has upon all Russia, the capital city playing the role of a change generator.

The last year revealed a disturbing tendency in the Russian economy: a decrease in the share of the majority of the most economically advanced regions in the aggregate potential of Russia. Among the top twenty regions leading in potential, a decrease was recorded in thirteen (Table 11). Among them are Bashkortostan, Sverdlovsk, Samara, Perm, Chelyabinsk, and Rostov oblasts. Thus, there is a trend toward the weakening of the so-called reference points of the economic framework of an area, which are critical for the security and integrity of a sparsely populated country of this size.

Top ten. During the rating project years, a total of 17 regions have joined the top ten by investment potential, of which four (Moscow city, Moscow and Sverdlovsk oblasts, and St. Petersburg) are old-timers (Table 13). Samara oblast was five times among the ten, and Nizhni Novgorod and Perm oblasts, Krasnodar krai, and the Khanty-Mansi autonomous district, were four times each.

Dynamics. Kaliningrad, Kaluga, and Nizhni Novgorod oblasts (Table 12) achieved the highest promotion in the rank of potential. The advance of Kaliningrad oblast was long expected and predicted on account of the appointment of a new governor. Labor and financial potential figures appreciably improved there in the last year. Kaluga oblast at long last started to restore its fairly high innovation and labor potentials and build up its institutional and production potentials.

The greatest downgrading of potential was recorded in Dagestan and the Republic of Komi. Household income and retail turnover are growing too slowly in Dagestan, which affects the republic’s consumption potential in significant ways. The labor potential of the Republic of Komi continues to slide down, which is largely due to out-migration from the region.

Factors of investment potential. Since a region’s labor potential rank is determined by its working population and its educational level, the regions that proved to be leaders by this potential were ones that have a large population, a developed research and educational complex, and rich cultural traditions (Table 14).

Practically the same regions are also leaders in consumption potential (Table 15). Yet among them, Krasnoyarsk krai and the Khanty-Mansi autonomous district supplanted Irkutsk and Chelyabinsk oblasts, where household incomes are high but labor is less skilled.

Table 16, Table 17, Table 18, Table 19, Table 20, Table 21 show the distribution of regions leading by other kinds of potential.