Yugra was put on short investment rations

05.09.2011 — Analysis

In 2010 Yugra - the main oil-bearing province of Russia faces a dramatic decrease in direct foreign investment. It must be admitted that the inflow of capital from foreign countries was not impressive during the previous year. Experts explain this situation by the insufficient openness of the industry and by the desire to develop through its own funds. The problem is that the regional economy keeps on stagnating due to the shortage of investment. The columnist of RusBusinessNews has found it out that such situation cannot be deemed as typical of Russia: investors prefer to commit their capitals, finding regions with more appealing business environment.

Direct foreign investment in Russian regions decreased by 7.4% in 2010 as compared with 2009. The decrease hit all federal districts; however, the Ural Region was hit hardest. Yugra pulls the federal district down to the bottom. The experts of the National Institute of Systemic Research of Enterprise Problems explain the decrease in direct investment in the oil-bearing province by the speculative capital that came to the region, which, actually, means a lot of disadvantages, as portfolio investment does not create additional jobs and does not bolster development of infrastructure and advanced technologies. The outflow of the foreign capitals, which was demonstrated by the Russian stock market in summer 2011, was a spectacular example evidencing unreliability of portfolio investment.

Anastasiya Sosnova, an analyst of Investcafe, thinks that the decrease in direct investment was caused by the policy pursued by the Russian government authorities that drove out Shell from Sakhalin and are very cautious about development of strategic field by foreign companies. However, foreign investors are not interested in small-scale operations. Today's world has very few ambitious projects to offer, and, therefore, large multinational companies turn their attention to the Arctic shelf and other strategic oil and gas reserves of Russia. Nevertheless, no serious joint work has been done so far.

Alexander Pasechnik, the director of the Analytical Department of the National Energy Security Fund, notes that the political uncertainty in Russia has a strong impact on the behavior of foreign investors: President Dmitry Medvedev and Prime Minister Vladimir Putin have not decided yet which of them will head for the elections in 2012. In the meantime, investors want to know what is going to happen in Russia in the next few years. The lingering pause, which is explainable from the perspective of the ruling tandem, together with absent accomplishments regarding the struggle against corruption, results in capital outflows from Russia and reduced inflow of foreign investment.

By the way, experts do not tend to exaggerate the role of political risks: When big profits are at stake, foreign corporations can forget both about corruption and about instability. Alexander Pasechnik assumes that the year of 2011 can become pivotal in relationships between Russian and multinational oil-and-gas companies: The cooperation between Novatek and Total is teething as they intend to build facilities for gas liquefaction on Yamal; recently Rosneft and ExxonMobil have signed the agreement for joint development of the Arctic shelf. However, this breakthrough has nothing to do with Yugra: There are northern gas-bearing areas on the agenda; the thriving days of those that are located southward are in the past, and no new projects are ahead.

The traditional reserves of hydrocarbons, which were discovered during the Soviet time, are coming to an end in Yugra - the other reserves are problematic. Production of viscous oil needs investment, technologies and interest from the regional authorities. Alexander Pasechnik thinks that the main problem in development of clayish reservoirs is even not in technologies and equipment that Russia does not have (if required, oil companies can engage foreign service companies they have well-established relationships with), but in lack of interest from the part of oil producing companies that prefer to invest in more profitable fields worldwide. It means that the economic stagnation in Yugra will give way to degradation, for it takes years to launch new production fields.

To keep on developing, the region should either diversify its economy, or find ways to spark interest of oil-producing companies in production of viscous hydrocarbons. Neither of the processes has been started in the region so far. Natalia Zubarevich, the director of the regional program of the Independent Institute of Social Policy, states that not only foreign direct investment in Yugra is decreasing (it has never been high), but also Russian investment. The decrease in investment in fixed assets, which started in the recession year of 2008, was not overcome in 2010.

Experts point out the following trend: In Russia there are regions that could be interesting to foreign investors due to skilled labor availability and favorable business environment in Russia rather than due to their raw materials. For example, the Kaluga Region and a number of other centrally located areas demonstrate an increase both in the percentage and in the amount of direct foreign investment. N. Zubarevich believes that the crisis compelled foreign investors to revise their priorities in allocation of capital in Russia: Now they are much more interested in the regions that have more adequate investment policy.

The institutional barriers and absence of benefits for business resulted in the situation when the oil-producing and investor-appealing region of Yugra was put on short investment rations. That is why the budget investment that went down almost by 30% as compared with 2008 has no effect on the economy of this constituent entity of the Russian Federation. According to Natalia Zubarevich, "budget investment can boost economic growth, if it is aimed at development of infrastructure projects, while being protected from large-scale misappropriation. However, Russia will not be able to take advantage of China's experience because of total corruption and low-quality state administration".

The situation in Yugra proves the expert's statement very clearly. The attempts to launch and deploy the production of pure quartz concentrate in the region resulted in inappropriate expenditures of money and criminal charges filed against the General Director of Polar Quartz, OJSC, Alexander Mitrofanov. No impressive results have been achieved by the regional government in the project of a gas-and-oil cluster, as they failed to reconcile diverse interests of the market participants and to mobilize them to accomplish the task that is important for Russia.

Experts argue that the crisis can be overcome only through investment and increased effective demand of the population. In addition to decreasing investment, Yugra demonstrates a drop in the population's incomes: they have decreased by 16% against 2008. If these trends prevail, stagnation and, later on, degradation of the economy of the Russian oil-bearing region are inevitable.

Vladimir Terletsky