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. Last Updated: 07/27/2016

Western Companies Slash Investments 70% in Q1

Foreign companies have drastically scaled back operations in Russia amid uncertain economic times, with foreign investments in the first quarter plummeting a whopping 70 percent against the same quarter last year, the State Statistics Committee said.

First quarter foreign investments totaled $1.5 billion while capital outflow surged to $1.57 billion, a jump of 450 percent, the committee said. As a result, negative capital outflow amounted to $70 million in the first quarter of 1999.

This spells a sharp turnaround from earlier years when Russia posted a huge inflow of foreign investments that contributed to a large positive capital account balance.

In 1998 foreign investments shrank to $10.1 billion, of which direct investments totaled $2.2 billion. But only in the last quarter of 1998 did capital outflow exceed capital inflow and Russia returned to the pattern it followed until 1996, when positive trade balance outweighed capital outflow.

The trend is continuing in 1999 and neither foreign companies nor analysts expect any changes in the next two or three years.

With that in mind, 60 percent of Western companies have put investment plans on hold as sales keeping falling and 30 percent have completely scrapped investment plans, reported the Economist Intelligence Unit, a supplement to The Economist magazine, in a survey of 75 Western companies operating in Russia.

The dismissal of the government of Prime Minister Yevgeny Primakov last month only has added to the uncertainty, analysts said. "Western companies have just realigned their strategies in the wake of crash, but government crisis will definitely force them to come out with new assumptions," said one state economist who asked not to be identified.

"Now they will sit back another two or three months to just watch what the new government will do," he said.

Roughly half of all Western companies operating in Russia have slashed their payrolls, the Economist survey found. About two-thirds of them laid off Russian employees and 42 percent laid off expatriates.

However, expansion continues in some branches of industry, namely agriculture, food, textiles and paints industry. Out of $600 million in direct foreign investments in the first quarter, almost half - $271 million - was made in the food sector. Nonferrous metals and fuel followed on the list. Together, the three areas made up for 84 percent of total direct foreign investment in the first quarter.

Swiss food giant Nestl? is among the companies continuing to invest in Russia, opening this week an $8 million line to produce Nesquik chocolate drink at the Rossiya factory in Samara. Soft drink producers also continued to expand their production facilities.

But overall prospects for foreign investments in Russia remain bleak.

"I expect another contraction of about 30 percent on a yearly basis in 1999," said Mikhail Delyagin, head of the Institute of Globalization, a left-leaning economic research center.

Most firms surveyed by Economist Intelligence Unit expect sales to recover to pre-crisis levels in three years.

Government statistics put accumulated foreign investments at $26 billion.