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Russia's Political Woes Aren't Stopping Investors

By Wendy SloaneSpecial to The Christian Science Monitor / February 10, 1995



MOSCOW

DESPITE an impressive list of problems - the war in Chechnya, international financing delays, and privatization reversals - Russian officials and Western venture capitalists expect foreign investment here to be strong in 1995.

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``In any historical process you have a couple of steps forward, a step backward, and zigzags along the trend line,'' says Peter Charow, director of the American Chamber of Commerce in Moscow. ``But I don't think the process in Chechnya spells doom for democratic reforms.''

Part of the lure for investors is that Russian state-owned firms are still available at low prices. Last summer, Russia's largely untapped market became one of the most fashionable for foreign investors. But because of economic and political uncertainties, direct foreign investment dropped last fall to 1/10th of its $500 million monthly rate during the summer.

Still, Alexander Gorokholinsky, head of the Russian Economics Ministry's international investment department, says he expects as much as $2 billion to be invested in Russia in the form of charter capital this year. That's up from $1.2 billion last year.

``We cannot perceive any negative manifestations, either on the part of companies or individual investors,'' Mr. Gorokholinsky says. ``All concluded projects are continuing, and not a single company has canceled a single contract.''

Most foreigner investors, while aware of the risks of doing business in Russia, still think more about the millions of dollars they could make than the millions they could lose.

``Look at the number of people employed here by Hewlett-Packard, Bayer, Rank Xerox, and other people, and tell me the investment climate is bad,'' says Bruce MacDonald, director general of BBDO Marketing in Moscow. ``I'm not buying it.''

One step that could encourage investment was the firing late last month of Vladimir Polevanov. The controversial chairman of the State Property Committee suggested renationalizing the petroleum and metals companies and described foreign investment as a ``threat to national security.''

His successor, former Federal Bankruptcy Agency chief Sergei Belyaev, was appointed Wednesday. Investors hope he and other government reformers can regain influence from hard-liners who oppose giving up state control and push through pro-investment legislation.

``Polevanov's sacking shows that Russia's leadership considered his moves to be mistakes and is trying to mend the situation,'' says Vadim Ivanov, deputy director of the reformist Institute of Economics of Transition Periods. ``This is a favorable event capable of improving the prospects for foreign investment in Russia.''

Russia needs foreign investment badly. The Kremlin's crackdown in Chechnya has hurt the Russian market, and consequently talks with the International Monetary Fund (IMF) over a $6.25 billion standby loan ended inconclusively on Monday.

But even if Russia gets the loan, which would demonstrate confidence and thus help reenergize Russia's stock market, obstacles to making the economy attractive to foreign investment keep cropping up.

Reformers suffered a setback Feb. 8 when President Boris Yeltsin allowed the Moscow municipal government to set its own prices in selling state enterprises and receive up to 51 percent of the sales. Critics say the plan could give Moscow the authority to unilaterally renationalize enterprises already sold.

And chaos erupted in the stock market last week when the Central Bank demanded that all foreign companies obtain investment licenses. But on Wednesday, the government passed a draft resolution to prevent such future demands.

Investors also jumped when it became known that the oil giant Komineft had secretly issued shares and distributed them among its old shareholders in May 1994, leaving investors unclear of what percentage of the oil company they actually owned.

Similarly, the huge Krasnoyarsk aluminum smelter last October deleted from its books a 20 percent shareholding of the London-based commodities firm TransWorld Metals. The move was later declared illegal.