The Swiss bank Credit Suisse does not rule out a complete halt of foreign investment in Russia. Analysts call geopolitics the main risk factor.
Investor sentiment has been undermined by new red-line talks, including the expansion of NATO’s infrastructure to Ukraine.
“As emphasized by the United States and its allies, the escalation of the conflict with Ukraine will lead to the imposition of severe sanctions, which, in our opinion, will close the country to foreign investment. Although this risk is minimal, its consequences are extremely negative for Russian asset prices,” says the global review “2022 Economic outlook: the great transition”, available to RBC Investments.
However, Swiss bank experts remain optimistic and do not expect tough sanctions, although they note that work on the agreement will be completed by the end of the first quarter of this year. Until then, in their view, “Russian assets will trade at a substantial risk premium, and companies will delay their investment decisions.”
“Unfortunately, historically, it so happened that for quite a long time, more than 20 years, the bulk of current investments are funds that our large companies divert to offshore accounts, and then bring them here as investments,” drew attention Doctor of Economics, Professor Alexander Safonov. From this point of view, nothing fatal will happen.
In addition, attention should be paid to the fact that foreign investment has always come to the Russian Federation when it was beneficial in terms of domestic consumer demand for the products that were created as a result of these investments. An example is the food sector – such giants as Coca-Cola, Pepsi-Cola, and others have come. And they are unlikely to change their position, because for them this is a serious market for sales and making money. These are transnational corporations that have a very serious influence in the world.
The second example is the automotive industry. It began to develop precisely against the background of the growth of domestic incomes of the population. And these companies left, for example, Chrysler, now Honda is going to leave our market – the demand for their products is extremely low.
I would like to note that we did not see any serious investment investments associated with technological super-breakthroughs during this entire period. This is quite understandable, since Western companies were initially absolutely not interested in creating technological clusters in Russia that would form leadership in the industry. They have always been more focused on China, where there was a cheap labor force in sufficient quantities.
I think that to a greater extent this is not a geopolitical problem for foreign investment in the Russian Federation, but an internal one.
SP: What is it?
— This is the state of the economy and consumer demand. If the economy shows a high growth rate and, accordingly, ensures a high marginality of investments in the country, and consumer demand contributes to obtaining sufficient Cash Flow, then geopolitical factors of influence will not have. Let me remind you that all major investments have recently been related to the oil and gas sector. This is the construction of both the Power of Siberia and both Nord Streams, but these projects have been completed and there is no special need for such investments.
In addition, we have quite a lot of money within the country, which is also demonstrated by the data of the federal budget, which collected 22% more money than planned in 2021, these are the indicators of our major banks – Sberbank, VTB, Alfa-Bank. We would have to deal with our money, they would have supported the development of the economy to a greater extent.
In order for these investments to be of a breakthrough nature, a lot needs to be done. And from the point of view of protecting property rights, and reducing borrowers’ expenses for servicing loans, and improving the quality of state planning, budget planning. We need to solve our problems, and investments are already the second stage, after we create an economy that will demonstrate the profitability of investments.
“SP”: – Prime Minister Mikhail Mishustin announced that the budget for 2021 was executed with a surplus. Do I understand correctly that this is money that can be invested in the development of the economy without waiting for foreign investment?
– Certainly. Not only in the economy, but also in increasing consumer demand. We have one of the problems connected with the fact that we are largely limiting the pace of economic growth due to low consumer demand within the country.
“SP”: – Why are we limiting it, and not increasing it?
— The inflation paradigm. The complexity of the control system. We need to learn how to manage and contain inflation, and at the same time increase the efficiency of the same investments within the country.
If we take, for example, the history of special economic development zones, of which about 24 were created, only three or four of them, according to the Accounts Chamber, showed effective development, while the rest did not. It is a question of quality of management. If the projects are still brought to perfection, while the effectiveness of investments is monitored both in terms of the cost of investments and their strategic importance, then we will really achieve a lot.
Deputy Director of the HSE Development Center Institute Valery Mironov recalled that foreign investment in the Russian economy has declined sharply since 2014.
— The minimum was reached in 2020, when we were forced to cut oil production under the OPEC agreement. Investments that went into the oil industry fell, and they accounted for a significant share. This is now much lower than it was before 2014.
“SP”: – Do we really need foreign investment, given our budget surplus?
– Theoretically, they are needed. On the one hand, we have large internal reserves and significant company profits that are underused for investment. On the other hand, foreign investment brings new technologies that make it possible to enrich the experience, because it is impossible in the modern world to develop everything. Somewhere we are weaker than other countries, so there is a mutual exchange.
It is possible to replace Western investment with Chinese, but China has so far been cautious about investing in Russia. Chinese investment may intensify if relations between Russia and China become closer.
There is hope for the restoration of Western investment, because the ongoing negotiations should lead to some result in a fairly close period of time. According to HSE experts, the first agreements can already be expected by the end of the first quarter, although now the situation looks like a stalemate. But the dialogue continues and there is interest.
Now the question is in the positions taken. In an ancient parable, two ladies were arguing over one orange. The sage asked one what she wanted to do with the orange, she replied that she would squeeze the juice and give the child a drink, and the second replied that she needed the zest to bake a cake. He offered one to take the zest, the other juice, and everyone made up. When the question is not about positions, but about interests, then if they are clarified in negotiations, then the result will be normal.
Everyone, including the Americans, is interested in their own security, including in the regions closest to them, and Russia wants to guarantee its own security. I think the issue will be resolved and investments will resume, because in terms of share price-to-earnings ratio, our shares and companies are undervalued. They need to be bought and invested in our investment projects, only high risks are stopping us for now.