Page 75 - IFR Opportunities in Russian capital markets

CHAPTER03
ifrintelligence reports/Opportunities in: Russian Capital Markets
The state entered in 2006 as a major source of investment and is set to play the leading role in 2007 (see below). The reforms to the power sector and the massive US$118bn spending programme announced by United Energy Systems are big set piece state-funded investment projects, but nearly every infrastructural sector – roads, rail, ports, navigation systems, etc – now has a large state investment programme.
Many of these are grouped under the title of ‘national programmes’ and funded by the State Investment Fund (see Chapter 1) but the oligarchs have also been roped into the effort and are investing in the same sectors as the state under the Kremlin's public-private partnership scheme.
Aton Capital highlights the potential of infrastructure, as the Kremlin turns to dealing with the transport bottlenecks and rebuilding the physical underpinnings of the economy.
"We believe the next several years will witness large-scale investments in Russian infrastructure assets, as the country effectively needs to rebuild itself in order to sustain the economic growth of recent years", says Aton.
Sources of investment capital
For most of the last decade, retained earnings have been by far the biggest source of investment capital available to growing companies. However, after three years of fast growth the banking sector is playing an increasingly important role, although it is still only stepping off square one (see Table 3.25).
Foreign investors have also become a major source of investment capital, providing almost as much as the entire Russian bank sector in 2005 and 2006. And there is still plenty of growing room: Russia has received a cumulative per capita FDI of US$61 between 1989 and 2005, compared to the CEE (Central and Eastern Europe) average of US$2,714, according to the EBRD (European Bank for Reconstruction and Development).
Table 3.25: Sources of investment financing, 2005, 2006 (%)
Q1-Q3 (% total) 2006 2005
Source: state statistics service
Investment pitfalls
Investment has been booming, but this is not to say that Russia has become a safe place to invest. Fitch identifies the main dangers for investment as:
0 The state has been increasing its ownership of the economy and creating national champions. Its relatively poor track record in managing companies suggests that rent-seeking could increase while corporate governance, competition, efficiency and output growth could weaken;
0 A draft law has been tabled that would limit foreign investment to 50% of companies’ shares in seven designated ‘strategic’ sectors (natural resources extraction, natural monopolies, weapons, nuclear, space, aerospace and special equipment);
0 The state has shown itself to be aggressive in the pursuit of its goals and liable to skate over the law. The Yukos affair increased the uncertainties of doing business. A more recent example was the pressure from state authorities on the foreign companies owning the Sakhalin II oil and gas project under a production sharing agreement that persuaded them to sell 50% plus one share to Gazprom. The impact on investors’ confidence of the Yukos affair is clearly visible in the investment statistics in 2004 and 2005;
0 Assassinations as a business tool made a reappearance in 2006. The daily slayings of the 1990s had largely disappeared over the last six years. Among those killed were figures from banking, oil, the media and Andrei Kozlov, the first deputy chairman of the CBR, who was trying to crack down on money laundering;
0 Corruption remains pervasive. According to Transparency International’s Corruption Perceptions Index, Russia’s score and rank improved only marginally to 121st (out of 163) in 2006 from 126th (out of 158) in 2005, which is the worst of any investment-grade country.
68
Own funds 45 48 Loans from enterprises 6 8 Budget and off-budget funds 18 19 Bank loans 9 7 Other 22 19 o/w foreign financing 7 5