Foreign Investment Declines 45% in H1

Foreign direct investment plummeted an annual 45 percent, the most on record, to $6.1 billion in the first six months of the year as the economy contracted at a record pace, the State Statistics Service said Friday.

Overall foreign investment, including credits and flows into securities, fell 30.9 percent from a year earlier to $32.2 billion. The service began collecting the data in 1999.

“Given the pressures on the credit market and uncertainties in the financial sector both in Russia and globally, it would have been surprising to see a pickup in FDI volumes in this period,” said Vladimir Tikhomirov, chief economist at UralSib Financial. “I wouldn’t be surprised to see it lower in the third quarter, too.”

Foreign investment in stocks and bonds dropped 25 percent to $862 million compared with the same period last year, the statement said. Portfolio investments jumped more than sevenfold on a quarterly basis, as recovering oil prices helped the MICEX Index rally about 23 percent in the period.

Other foreign investments, including loans from foreign banks and Russian companies’ foreign divisions, were down 26.5 percent in the first half at $25.2 billion, the data showed. Still, the second quarter saw almost double the $8.7 billion of the first three months, Tikhomirov said. “The market started to unfreeze somewhat for Russian companies,” as they sought to restructure their loans with foreign banks, Tikhomirov said. “It shows it was easier for some to attract loans in the second quarter than in the first.”

Investment in the retail industry, which received the most funds in the first six months of 2008, dropped almost 41 percent to $8 billion.

The country risks losing competitiveness as foreign investment dries up and the global economic crisis prompts the government to raise its stakes in corporate stocks. State ownership of corporate stocks reached 45 percent at the end of 2008, the Institute of Contemporary Development said in a February report.

More than half of the stock market is controlled by the state, a setup that investors should approach with caution, according to Troika Dialog.

Russia’s manufacturing industry received the largest amount of investment in the first six months, according to the State Statistics Service. Foreign investors brought $9.2 billion, including stock and bond purchases.

The Netherlands was the largest foreign investor in Russia in the first six months, followed by Cyprus and Luxembourg.

PepsiCo, the world’s second-largest soft-drink maker, and Pepsi Bottling Group said on July 6 that they plan to invest $1 billion in Russia over three years in anticipation of a resurgence of consumer demand.

“Though assets are cheaper, the fact that FDI is falling sharply means that companies aren’t rushing to use this drop in price,” said Natalya Orlova, chief economist at Alfa Bank.