In 2000 once again, the expectations of a boom in foreign investment did not come true. However, investors were quick to respond to change in investment climate

It is common knowledge that practice is the criterion of truth. If investors have come to a region, it means that its climate suits them. Some hotheads go so far as to suggest that ratings be replaced by a collation listing direct investments that have materialized.

Of course, there must be a relationship between climate and investment, but it should not be so univocal. First, every investor chooses optimal conditions for himself, and they may not be like those of a hothouse. Second, emulating the masses may not be good policy. Take for instance one of the broker’s rules: never buy stock that everybody buys, for it is likely to be already greatly overvalued. Lastly, there is no such thing as credible statistics; investments may not be considered by government agencies, there have been instances when tax evasion schemes were formally registered under the guise of investment, etc.

The volume of direct foreign investment (DFI) grew by a mere 4% in 2000. Of a total of $4.4 billion, exactly one-third was absorbed by Moscow (Table 23), which gained revenge for the paltry 18.5% of DFI it got in 1999. For the first time, Krasnodar krai was second best, with 21.7% of DFI, which was due to the active contribution of foreign capital to the development of this “southern gateway” of Russia.

The top ten regions got over 82% of the total DFI. The remainder was split up “fairly” among 79 regions, of which 15 never saw any of it. This picture, with some variations, is reproduced in this country every year.

The year 2000, at last, saw serious growth of investments in the economy – by 17%. Their allocation proved to be more equitable, with Moscow getting a mere 13% of the total (Table 24 and Table 25). Yet here too we witness a lop-sided distribution of investments: the top ten regions accounted for 53% of the total volume. The distribution of domestic investments shows an obvious bias toward the export-oriented primary sector. Investments are channeled mainly to high-risk regions whose economy is resource oriented (type 2C).

Therefore, the investment policy of domestic investors objectively tends to worsen the investment climate in regions and throughout Russia. This is not to say that we are not to invest in raw materials, but merely that we need to invest in other industries as well. The fact is that in the meantime, basic assets in “economic core” regions with a high percentage of process industries are rapidly becoming obsolete; it certainly looks as if we are going to face “problem 2003” ahead of time.

By contrast, foreign investors are more sensitive to investment climate and are quick to respond to change in it. They prefer low-risk regions (Chart 7). They monitor even more closely not just the climate itself but its tendencies that are to say they play for lead. For example, the amount of DFI per head directly depends on the dynamics of a region’s investment climate (Chart 8).