Foreign Investment Falling in Petersburg Published: March 2, 2011 (Issue # 1645) Foreign investment in St.

Petersburg s economy has fallen for the third year running. The construction industry has suffered most, while food manufacturing has seen growth of 11.5 percent. In 2010, foreign investors injected $5.2 billion into the city, 5 percent less than 2009, according to the Committee for Investment and Strategic Planning, citing figures from Petrostat. Investment has been decreasing since 2008, when it fell by 6 percent. In 2009, there was a further 7-percent drop. Foreign direct investment was down 55 percent to $538.1 million, of which $408.8 million was made up of contributions to the charter capital of Russian subsidiaries (30 percent lower). Loans from parent companies were down 80 per cent to $127 million. According to preliminary data from the Ministry of Finance, foreign direct investment in Russia was one-and-a-half times lower last year, at between $12 billion and $14 billion. St. Petersburg s share of overall foreign direct investment fell from 21.7 percent to 10.3 percent, while the share of loans rose from 75.8 percent to 89.6 percent. The volume of trade credit dropped by 21 percent to $1.8 billion, while other loans rose by 53 percent to $2.8 billion. The largest fall was in investment in construction by 80 percent. Foreign developers in St. Petersburg are mostly concerned with commercial property, which has yet to recover from the crisis, notes Mikhail Vosiyanov, general director of YuIT-Lentek. Investment is needed at the launch of new projects, of which there weren t any last year, he added. Oleg Barkov, general director of Hansa SPb Development, estimates the number of companies with foreign capital in the residential construction industry at 5 to 7 percent, and at 20 percent in commercial developments. By his estimate, investment in commercial property stayed at the same level as in the previous year, twice as low as in 2008. Last year turned out to be harder than 2009, when ongoing projects that could not feasibly be abandoned were being completed and there was still hope of a quick recovery in the economy. By 2010, that hope had been lost, said Barkov. Investment in food production, however, rose by 11.5 percent. This was influenced by the traditionally high trade credits from Belarus for import deliveries of Belarussian produce to Russia, says Dmitry Kumanovsky, head of the analytical division of Lenmontazhstroy. Moreover, Danone has created a unified supply chain with its new asset, Unimilk, which has a factory in St. Petersburg, Kumanovsky said. France and Belarus lead the list for foreign direct investment, with 34.3 percent and 11.6 percent respectively. The volume of investment in vehicle manufacturing was affected by deferred consumer demand, the launch of the Hyundai factory and a second shift at Nissan s plant, and also by the opening of components manufacturing plants, which have reduced reliance on imports, said Kumanovsky. Last year saw the main share of the investment into the opening of the Hyundai Motor Manufacturing Rus factory, with the company pumping roughly $500 million into the project, a spokesperson said. The Leningrad Oblast has fared considerably worse than the city, with foreign investment totaling $637 million, half as much as in 2009, according to Petrostat. Foreign direct investment in the region increased by 14 percent to $381 million, while loans fell by a factor of six to $150 million. In 2009, foreign investment rose by 30 percent in comparison with 2008.

2010 saw the launch in the region of Gestamp s pressing plant ($60 million investment), Atria s meat processing plant (70 million euros), and H+H s aircrete systems manufacturing plant (40 million euros). The main investments in these factories were made in 2009, however. Looking forward, Denis Demin, head of the analytical division at BFA, predicted that foreign direct investment this year is unlikely to reach the level of 2009, as after the completion of major projects initiated before the crisis foreign companies will be more circumspect concerning long-term spending.

Investment in Special Zones Hits $4.7 Billion MOSCOW Russia s 16 special economic zones have attracted 207 residents and 144.9 billion rubles ($4.7 billion) investment in the more than four years since they were created, the company tasked with developing them said Friday. The zones, created in 2005 to encourage investment and innovation, have fallen far short of the government s expectations. President Dmitry Medvedev eliminated the dedicated state agency overseeing them in October, handing its functions to the Economic Development Ministry. Critics have cited the zones lackluster performance as evidence that the state will face an uphill battle in creating an innovation hub in the Moscow region town of Skolkovo. The State Duma has given preliminary approval to two laws creating a special legal status for the project. But the state-run company Special Economic Zones, known in Russian as OAO OEZ, said it was reorganizing to work more effectively since the reshuffle, assuming new duties like working with investors in addition to overseeing construction. The current model is much more conducive to development of the zones, said Dmitry Sulima, a spokesman for the company. The zones are divided into four types, specializing in technical innovation, industrial production, port logistics and tourism. A total of 8.84 billion rubles ($286 million) was invested in the zones infrastructure last year, the company said Friday in its 2009 annual report. The zones had 207 residents at the end of 2009, employing 3,900 people, the report said. A counter on the company s web site listed 223 residents as of Sunday. Yury Zhdanov, the first director of the zones agency, said in 2005 that one zone in the Lipetsk region would need 1.8 billion rubles of infrastructure investment to create 5,800 jobs by 2010. According to Friday s report, the project is already nearly three times more expensive costing the regional and federal budgets 5.15 billion rubles. Lipetsk Governor Oleg Korolyov told reporters in January that the zone had created 1,500 jobs, or roughly one-quarter of the target. Slow growth has led economists to push for changes in the law to facilitate the creation of new zones and increase the amount of funding from regional and municipal governments. The technical innovation zones, such as those in Dubna and Tomsk, have been called by government officials Silicon Valleys in the making, but experts have said they don t encourage innovation.

Vladislav Surkov, the Kremlin s first deputy chief of staff, has cited their poor performance to argue for the creation of Skolkovo. The general economic climate is so unfavorable to innovation that creating closed zones would not be able to change the conditions for innovative activities, the Institute for the Economy in Transition said in a report last year. Residents of the zones don t have substantial economic incentives to engage in technical innovation, the report said. The Economic Development Ministry s latest project is a special economic zone to develop resorts and tourism in the North Caucasus. Alexander Khloponin, the presidential envoy to the North Caucasus Federal District, told Medvedev in March that the law on special economic zones should be changed because they are ineffective and do not generate tax revenue. Investor in Russian Real Estate Plans IPO Published: May 18, 2010 (Issue # 1574) MOSCOW Norwegian fund Storm Real Estate, which invests in Russian real estate, may become a public company. Depending on the economic conditions over the next 12 months, the fund may list on Oslo s stock exchange, the company said in its first quarter report. The company is giving no details of the deal. Storm Real Estate was founded in November 2008 (previously, it was called Eastern Property and E-Star Property) to invest in Russian real estate, and is managed by Storm Capital Management. Eastern Property planned to raise about $350 million to acquire commercial real estate in Moscow and St. Petersburg, promising specifically to purchase Silver Tower (135,000 square meters) in Moskva-City, business center Hermitage Plaza (31,600 square meters) near Moscow s Mayakovskaya metro station and a warehouse complex (61,000 square meters) on Simferopolskoye Shosse in Moscow. So far, Storm Real Estate has raised about $90 million, and currently owns two business centers: Gas Field (16,000 square meters) on Ulitsa Obrucheva in Moscow and Grifon (7,000 square meters) on Ulitsa Dostoyevskogo in St. Petersburg. A listing would allow [the fund] to attract new investors and, accordingly, resources to develop the company. Besides, it will give it the opportunity to determine its capitalization, said Artyom Tsogoyev, managing partner at Moscow Central Real Estate Exchange. Demand for the developer s stock, including for investors in Russia, is currently modest, said Ivan Manayenko, a department head at Veles Capital. He did not rule out that Storm Real Estate would carry out the listing for a specific investor who demonstrates the necessary requirements.

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