Emerging Markets Roundup: Russia

THRESHOLD RISES FOR FOREIGN INVESTMENT IN THE NATURAL RESOURCE SECTOR

 

By Kim Iskyan

 

Russia’s parliament is set to approve long-awaited amendments to legislation on foreign investment in certain strategic sectors.

 

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Easing requirements for natural resources investment

The legislative change will lower the threshold for foreign entities buying into Russian natural resources companies. Previously, 90% of such entities were required to obtain government approval; now one out of four will be permitted to buy into these domestic companies without official approval. The changes will mark a small but significant liberalization in the Russian government’s attitude toward foreign investment in the extractive industries.

 

Prime minister Vladimir Putin in mid-October met with the heads of a range of multinational firms to tout Russia’s attractiveness as an investment destination. A few days prior, Germany’s Siemens pledged to invest €1 billion in Russia to produce wind and gas turbines, trains and other equipment.

 

Putin is fighting the current outflow of investment capital, though, as Russia’s central bank has increased its forecasts for capital flight in 2011 by $20 billion, to $70 billion. Earlier this year, monetary authorities had forecast total outflows for 2011 of $35 billion. Global economic concerns and domestic political uncertainty are the key factors behind outflows, which are up from $32 billion in 2010.

 

In late October rating agency Moody’s downgraded its view on the entire Russian banking sector from “stable” to “negative”.The rating agency warned of the possibility of a liquidity squeeze, lower asset quality and reduced credit growth.

 

Russia’s central bank appeared to downplay the risks, though, in its decision to keep rates steady in a meeting a few days later, pointing to strong GDP growth of 5.1% in the third quarter [this forecast was updated in November to 4.8%], and continued progress in bringing down inflation, which stood at 7.2% year-on-year as of the end of October.

 

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