August 24th, 2016


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According to the recent statistics provided by the Russian Federal Statistics Service, foreign direct investments (FDI) in Russia have dropped in the first half of 2016 by 4.3% APR. In fact, shallowing of the investment inflow has continued for more than two years. Hunger for superprofits sharks of capitalism perceive the expropriation of Yukos in the mid-2000s as an isolated case, which does not affect the overall investment climate in the country. They continued actively flirting with the Putin’s regime, and only economic sanctions, entered by the Western governments in 2014 in response to the annexation of Crimea and support of separatists in Donbass, have forced transnational corporations to slow down its expansion on the Russian market.

Russia’s overall investment climate quickly turned from positive to negative. Russia was among the top three recipients of FDI with a record US$94 billion in 2013. This precipitously fell to only US$21 billion in 2014 and US$4.8 billion in 2015.

In 2014 just 178 new foreign investment projects worth US$13 billion were launched, compared to 396 projects worth US$23bn in 2011. Russia’s second biggest European investor (after Cyprus), the Netherlands, decreased its investment from US$5.7bn to US$1.23bn in 2014. Even though weak currency usually attracts foreign investors, as ruble weakened, FDI kept collapsing.

Ernst & Young sees the following issues negatively influencing the investment climate: inconsistent and selective law enforcement, non-transparent decision-making procedures, and corruption.

Historically, the main industries for FDI inflows in Russia have been wholesale and retail trade, banking, manufacturing, and the mining sector (mostly extraction of oil and gas). Surprisingly the mining industry takes only the 4th position –explained largely by the tough governmental restrictions in the sector. However, despite Western sanctions, it remains attractive and transnational corporations interested in joint projects.

The ongoing sanctions against the energy, defense, and banking sectors, coupled with the weak oil market, have pushed the Russian government to look for alternative investors. What has emerged is the so called ‘Asian pivot’ – directly appealing to potential investors in Asia, specifically China. At the G20 summit in November 2015 Putin said that approximately 90 percent of investments in the Russian market came from Asia this year. This is only partially proven by the statistics – in previous years inflows from China never exceeded US$450m, and in 2014 they reached $1.3bn. Most of this is focused on the Russian Far East, the geographically closest region to the Chinese mainland. China has a broad sector focus and invests in the oil industry, transport infrastructure, highways, ports and airports. Furthermore, it is aiming to increase investment in Russia four-fold by 2020.  Nevertheless, even with this increase, the Central Bank of Russia reports that China occupies 5th place of FDI net inflows in 2014 after Cyprus, the Bahamas, British Virgin Islands, Switzerland and France. In 2015 China didn’t even reach the 5th place – its inflows dropped to US$571m – less than those from Ireland. Thus, ‘Asian Pivot’ has not been as successful as Putin wanted it to be.

Photo by Gennady Alexandrov / WWF Russia

Photo by Gennady Alexandrov / WWF Russia

In current conditions of low oil prices, that without an influx of foreign investment remains the only significant source of foreign currency in the country, it is essential to be open to foreign businesses, have a transparent decision-making system, clean the law enforcement of corruption, and improve relations with the West. The idea of autonomy, independence of their own market and import substitution, planted by the Kremlin, in the 21st century – the century of global integration – condemns the most of the 146 million Russian population to poverty.

17 Aug 2016

A Mortgage from Putin

German Gref (right) and Vladimir Putin / Photo by

German Gref (right) and Vladimir Putin / Photo by

Vladimir Putin rarely acts as an advertising agent, but the current economic crisis and the fear of political instability it provokes are forcing the president to recur to unorthodox methods of state support for key segments of business on which the regime’s financials are based. During his meeting with the head of Sberbank—Russia’s major bank, 51 percent of which is owned by the state—Putin suggested that Russian citizens should take out mortgages without waiting for interest rates to go down.

There could be many reasons for such promotional activity, the chief among them being a slowdown in nominal wage growth, an upturn in inflation since July, and a rise in the unemployment rate. These factors are already affecting the banking sector and could potentially lead to a balance-of-payments crisis, the holding back of wages and pensions, and other systemic problems. Analyzing Putin’s aforementioned statement, Russian economist Sergei Aleksashenko notes that while the numbers of mortgage loans have been increasing, their amounts have been steadily diminishing.

As of the summer of 2016, the growth of Russia’s mortgage market has been mostly caused by measures of state support, the repeal of which, according to the Russian Finance Ministry, will inevitably lead to an increase in mortgage rates and a lower demand for mortgage loans. Essentially, Sberbank is the only bank that shows decent mortgage figures, whereas such key players in the Russian banking sector as VTB24, Gazprombank and Rosselkhozbank, not to mention smaller banks, demonstrate an almost two-fold decrease in the volume of  mortgage loans. >> Read more

10 Aug 2016

The Hard Labor Market

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According to official data from the Russian Federal Statistics Service (Rosstat), Russia’s unemployment rate had been decreasing during the period from 2010 to 2014. Data from 2015 shows, however, that this trend has changed—the official unemployment rate demonstrated a minor but symptomatic increase of 0.5 percent and reached 5.8 percent. According to calculations of the Russian Ministry of Labor, in 2016, Russia’s unemployment rate could amount to 6 percent, and the situation is not expected to change significantly in 2017.

It is clear that in Russia official data concerning the population’s employment and unemployment rate can be considered only partially objective. The country’s shadow labor market where people are listed as either formally unemployed or employed for a minimal salary in one place while they are actually getting paid in cash somewhere else without declaring their income is just too big.

Rosstat claims that as of June 2016, the economically active population in Russia reached 76.9 million people (or 52 percent of the country’s overall population,) with 4.2 million of them being officially unemployed and another 30 million being employed in the shadow sector of the economy and not paying taxes, according to President Putin’s statement. In 2013, Deputy Prime Minister Olga Golodets declared that the “sectors that we can see and that are clear to us employ a total of 48 million. It is anyone’s guess where the others are employed, what they are busy with, and how”. Despite the president’s order to deal with this situation, it seems that no specific measures have yet been taken on the state level. Most likely, the government simply >> Read more

3 Aug 2016

Barefoot Toward an Empire

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AvtoVAZ plant / Photo by

The news of the suspension of production at the major Russian car manufacturer AvtoVAZ in Togliatti, on the Volga River, neither comes as a surprise nor dominates the front pages. Considering the current economic situation this is quite logical: AvtoVAZ is not the first car maker in Russia to recur to this option. The Ford Sollers plant in Vsevolozhsk, the Volkswagen plant in Kaluga, Peugeot, Citroen, Mitsubishi, and other automobile manufacturers have suspended production at one time or another. It is obvious that even Putin’s KGB friend Sergei Chemezov, the current CEO of the Rostec state corporation that controls more than 700 machine building and defense plants in the country, including AvtoVAZ, cannot force Russia’s drastically impoverished population to buy new cars. It is also clear that the problem lies not with AvtoVAZ itself—whose Lada cars are world-famous for their low price and their simplicity—but with the overall crisis in the Russian economy that is suffering because of low oil prices and Western economic sanctions imposed in response to the military aggression against Ukraine.

Despite the assurances by Putin’s press secretary in early 2015 that “the fall in sales will be followed by a rapid growth,” the situation so far is the opposite. According to the Russian Auto Dealers Association, the automobile market has lost 40 percent of its model range in the last two years—and that is not the limit. Even the once-popular and inexpensive Ford Focus dropped out of the top 25 models sold in Russia, and the top rankings are now held by the cheapest cars that are two decades behind the 2016 European economy-class vehicles in terms of quality and technology. Even the sales of these “naked” cars are >> Read more