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. Last Updated: 07/27/2016

Small Band of Russian Pioneers Heads West

While most domestic and foreign investors scour Russia for the next bargain buy, a tiny but powerful group of Russian companies is looking much further afield for profit and growth.


Figures show declared direct investment abroad by Russian firms is minuscule compared with the amount invested at home, and analysts detect no sign this will change dramatically yet.


But economic analysts and company spokesmen nonetheless point to some important sectors -- mainly energy and automobiles -- where export companies are beginning to at least test the waters. It is a sign, they say, of a corporate desire to appear to be active abroad and of some concerns about the home front.


"The worrying thing is that these companies have not got confidence in the domestic market," said Russian equities analyst John-Paul Smith of Morgan Stanley in London. "Things grind very slowly."


Dominant Russian oil group LUKoil announced this month it was going West for the first time, investing $240 million over the next three years to build a filling station network across the United States. The first station opened in Virginia in July, several have since been added and 100 more will be completed by the end of the year.


"LUKoil will continue to invest in the construction of 2,000 more filling stations in 14 other American states in the next five years," said company spokesman Dmitry Dolgov. "The company is driven by its desire to be a commercial success in the West."


GAZ, Russia's second largest carmaker, says it is examining a variety of projects abroad and already assembles cars and vans in Ukraine and Moldova.


"As for our investments in Western countries, we have some ideas but it is premature to disclose them," said GAZ's export department chief Vladimir Antonov. "We would like them to be well thought-out."


Gazprom, the world's largest gas company and still a monopoly at home, is also spreading its wings. But company spokesman Anatoly Kotov said Gazprom tends to prefer joint ventures to direct solo investment outside the former Soviet Union.


Official figures show declared Russian direct investment abroad was just $7 million in the first quarter of this year compared with $32 million in the same period in 1996. By contrast, direct investment in Russia was $855 million in the first quarter of 1997, almost double the figure a year ago.


"Direct investment abroad and portfolio investment abroad is extremely small going by these numbers," said Alasdair Breach of the Russian European Center for Economic Policy, which compiles the figures with the Central Bank.


"These figures show only what's legal, what has been possibly exposed to tax and foreign exchange hurdles," he said.


The LUKoil deal alone will boost the figures significantly once it filters through, and it is anybody's guess how much capital flight money or illegal funds is being invested overseas.


One senior economic analyst in Moscow said models for emerging markets show countries tend to be closed and inward-looking to begin with. Then banks branch out abroad, followed by manufacturing and other industries.


In Russia, the big energy firms -- LUKoil and Gazprom, for instance -- have proved powerful enough to look abroad at the same time as banks or even before. Several Russian banks have set up branches in the West.


In addition, companies have first concentrated on the "near abroad" -- states that once belonged to the old Soviet Union -- before moving further overseas. Most traditional Russian manufacturing industries are in no shape to compete in the West.


The senior analyst, who declined to be identified, said Gazprom was involved in real estate across East Europe as well as in distribution networks. This was often a debt-for-equity substitute for nonpayments in the ex-East bloc.


"There is quite a lot going on in the near abroad," said Morgan Stanley's Smith.


"It is logical partly because they see a potentially big market and partly they are re-establishing vertical integrated structures seen in Soviet times," he added.


Very few manufacturing companies are in a fit state to produce competitive goods for markets abroad and face pressure on or close to their own turf from foreign companies, such as South Korea's Daewoo Group or General Motors of the United States.


It seems the behemoths of Russian manufacturing industry are for now too specialized, secretive or busy coping with the post-Soviet market economy to look beyond their own borders.


Add to that the rich pickings still to be found in Russia, and it is small wonder Russian investment abroad is in its infancy. Indeed, capital flight money is starting to flow back and people are not taking money abroad as much.


"Anyone with capital here is buying up cheap [Russian] companies," Breach said.