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. Last Updated: 07/27/2016

Direct Investment, Exports Tumble

Two high-profile summits with the world's largest financial powerhouses and a pledge by both the United States and the European Union to designate Russia's economy a free market has done little to boost the nation's bottom line.

Investment and trade figures for the first half of the year show that Russia continues to be a net exporter of capital; foreign direct investment remains miniscule; most foreign money entering the country is in the form of loans; and the overall trade surplus is falling.

The figures, published Monday by the State Statistics Committee, known as Goskomstat, show that while total foreign investment rose 25.2 percent to $8.4 billion in the first six months of the year, direct foreign investment shrank by 25.4 percent to just $1.9 billion. And of the $8.4 billion, three-quarters came in the form of loans and corporate bonds, half of which should be repaid in less than one year.

In addition, the committee said exports in the period dropped 7 percent to $46.7 billion, while imports rose 5 percent to $20.5 billion, giving Russia an overall trade surplus of $26.1 billion, down 14.7 over the first half of 2001. It also said energy resources accounted for 56.1 percent of total exports to non-CIS countries.

"The picture is very sad," said Yevsei Gurvich, an economist with Moscow's Economic Expert Group. "Russia still lacks long-term money and foreign investments," he said, adding, "the most important thing about the latter is not the money itself but mainly managerial experience and technology, which Russia needs most."

Alexei Moiseyev, an economist at Renaissance Capital, agreed that at present, inward financial flows are less important than "expertise and equipment, which is what Russia needs most."

Moiseyev also said Goskomstat's numbers could be misleading. "There were several projects announced this year that have not yet led to real investments," he said.

One such deal was Dutch beer behemoth Heineken's agreement in February to purchase St. Petersburg brewer Bravo for $400 million. And a month later, global mining and resources giant Anglo-American agreed to pay $252 million for a 68.5 percent stake in leading paper producer Syktyvkar Forest Enterprise.

"But what worries me more is the significant increase in corporate debt," Moiseyev said.

Russian companies have issued a total of about $2 billion in Eurobonds between January and June.

"From one point, this is good, because it allows companies to expand production." Moiseyev said. "But as far as corporate governance and transparency, Russia remains weak, and this might lead to corporate insolvency in the future," he added.

Niclas Sundstrom, Russia analyst at Citibank group in London, said federal authorities should take more control over corporate debt issues. "I think it would be a very good idea if the Finance Ministry, as a part of debt-management reform, would more actively monitor the private sector," he said.

Economists polled said the considerable outflow of money is also a troubling sign, reflecting not only economic reality but also the lack of good investment opportunities and low productivity. However, if reforms continue, productivity will increase and capital will come in, Sundstrom said.

One largely untapped source of investment is the savings Russians notoriously keep under their mattresses, which are estimated to be in the range of $80 billion.

"Russia's savings ratio is 33 percent to 35 percent of gross domestic product, but domestic investments make for only about 10 percent of GDP," Sundstrom said. "The banking sector is often criticized for not transforming savings into investments, but [in a way] it does, though it is mostly transforming domestic savings into foreign investments instead of local investments," he said.

Another development not reflected in Goskomstat's numbers is the increased interest foreign investors are showing in Russia.

Citibank has seen recently "quite a significant pickup in interest from serious foreign direct investors," Sundstrom said. "In our experience, it takes 18 to 24 months for this interest to transform into real money," he said.

"A lot of people are waiting for Putin to be re-elected and will start to commit resources after that," he added, referring to the presidential elections scheduled for March 2004.

In terms of accumulated foreign investment by countries, Germany leads the way, having invested a total of $7.2 billion in Russia in the last decade, followed by the United States' $5.4 billion and Cyprus' $4.8 billion.

Oddly, Goskomstat figures show that in the first half of 2002 alone, Russian investments abroad totaled $10 billion, with the United States accounting for just over half of the total -- $5.6 billion -- roughly equivalent to all the money invested in Russia by Americans in the last decade.

However, analysts were quick to point out that this figure was most likely due to Goskomstat methodology, which counts trade credits as investments. For example, Goskomstat, using so-called "double accounting," counts the money companies prepay for goods as an investment even if the goods are not received.

The European Union remains Russia's top trading partner, accounting for 37.6 percent of all trading volume, down from 38.4 percent in the same period of 2001.

Although Russia's total bilateral trade volume with the EU was unchanged at $25.3 billion, its traditional trading partners lost market share to fellow union members -- namely the Netherlands, which saw its trade turnover with Russia jump by 60 percent to $3.9 billion.

Trade with Germany, for example, dropped 7 percent to $6.6 billion, while trade with Italy fell 3.8 percent to $4.5 billion. Turnover with Britain was down 16 percent to $2.1 billion, with Finland trailing close behind at $2 billion, which was 13 percent lower than in the year ago period.

Trade turnover with fellow CIS nations was $11.4 billion, while with Central and East European countries it amounted to $8.6 billion. Trade with China, the United States and Japan totaled $3.8 billion, $3.1 billion and $1.2 billion, respectively.