Low Inflation Doesn't Mean Investor Trust

The Russian government is expecting growth in investment activity this year. At least, this is the conclusion that can be drawn from a recent report from the Economics Ministry.

According to the ministry, the Russian economy will receive 430 trillion rubles ($7.7 billion) for investment from various sources, including the budget and companies' private financial resources. This is 1 to 2 percent more than total investment in 1996.

It is not the first year that the Russian authorities have counted on higher investment in the country. After the start of reforms, there were high hopes for foreign investment. But very soon afterward, it became clear that Western money was not making its way very quickly to the politically unstable, and legislatively backward Russia.

People soon came to understand that Russian investors, big and small, should be the main source of capital for the economy. But with inflation rates rising to several hundred percent a year, it made no sense for investors to put their money in anything other than quick financial and trade operations.

1996 did not bring fundamental changes to Russia's investment market, even though inflation was reduced. Moreover, the lowering of the Central Bank's refinancing rate from 180 percent to 48 percent was not enough to convince holders of capital to switch from the treasury market to investment.

In the last months of 1996, inflation was strictly held to 1 to 2 percent -- but the general volume of investment, according to the State Statistics Committee, fell by 18 percent in comparison to 1995.

The idea of competitive financing of most prospective investment projects failed to take hold last year. According to a government plan, the state would participate in high-yield projects with 20 percent of the investment share, which would be a kind of guarantee for the remaining 80 percent to be made purely on a commercial basis. It was not that businessmen did not invest money by following the state's lead, but that the state itself set aside a relatively modest sum of money for the project and only had a 5 percent share in the projects.

This year, the government proposes to stimulate investment by setting aside money in the budget for development. (Curiously, one of the 11 conditions of the Communist Party for supporting the 1997 budget was working out what has been referred to as the development budget.)

According to the Economics Ministry, the development budget could, under its direction, raise private investment by domestic and foreign sources in prospective projects by a minimum of 10 percent. The development budget will be used to provide credits, on a competitive basis, for export operations. The budget also includes money to put certain industries in good financial order.

The money for the development budget in 1997 looks relatively modest -- 26.4 trillion rubles. But the government is once again counting on private money to flow after state money.

There is some worry, however, that even if the budget for development is realized and inflation drops to 10 to 15 percent -- as the government promises -- an investment boom will not take place. Banks will not give money to factories because they do not believe that most are capable of selling what they produce. And this problem is far more difficult to solve than beating down inflation.

Mikhail Berger is economics editor of Izvestia.