Faced with the perceived corruption and underhand dealing of its legions of bureaucrats, it is perhaps unsurprising that the Russian Government has found it difficult to attract the levels of foreign investment required to spark renewal and regeneration of its failing economy. Unfortunately the high risk of doing business in Russia, which includes perceived anarchy within the bureaucracy, poor infrastructure and the lack of a clear legal framework, has resulted in only limited investment by foreign companies. That needs to change if Russia is ever to reach a situation where it has the technology and capital necessary to tap into the wealth of natural resources available.
A scheme announced by the Russian Government earlier this year might help in persuading investors to abandon their traditional view of the Russian political system. What the Russian Government is effectively offering to do is provide insurance against itself.
Guarantees totalling $200 million are on offer in an attempt to convince foreign lenders that doing business in Russia will be free of interference from corrupt officials. If a claim is made against a guarantee and the Russian Government fails to pay within 15 days, the World Bank will underwrite any claim. Thereafter, the Russian Government would be in the uncomfortable position of being in default to the World Bank.
This is an exciting opportunity for Russia to promote some of its once famous, but now ailing industries such as timber and coal (at which the scheme is aimed) and attract badly needed foreign investment.
The World Bank, through The Multilateral Investment Guarantee Agency (MIGA) has been extremely successful in the promotion of direct investment into emerging economies and this is the latest in a string of projects that span the world.
Examples of projects in 2002 include a $79 million guarantee to cover an equity investment by Orascom Telecom Holdings in Pakistan Mobile Communications Ltd. The guarantees are for an initial 5 year period, renewable up to 15 years. A $20 Million guarantee was provided to cover part of a $223 million investment by AES Horizons Ltd in the Maritza East 1 power station in Bulgaria. In the Ukraine a $19 million guarantee was issued to Raiffeisen Zentralbank Österreich AG to cover a $20 million shareholder loan to JSCB Raiffeisen bank Ukraine, a Kiev based bank and in Peru the MIGA provided Banque Sudameris S.A of France with a guarantee of $58.4 million to cover a shareholder loan to Banco Wiese Sudameris to allow it to expand its operations in Peru and support Peruvian companies with financing. This provides only the briefest sample of projects that would not have happened had it not been for World Bank involvement.
Similar schemes to the one in Russia were undertaken in Albania and Bosnia. A significant amount of investment was attracted into those regions as a direct result of those schemes.
The work of the World Bank in this way not only promotes foreign investment, but encourages local investment, growth and job creation. Guarantees from the World Bank also require strict adherence to set social and environmental standards which encourages social responsibility.
The work of state export credit agencies should not go unnoticed in this regard. For example, Denmark’s Eksport Kredit Fonden offers limited cover in Russia; the Export-Import Bank of the United States of America also offers cover in some circumstances, but only if this is specified in a Special Buyer Credit Limit endorsement, an Issuing Bank Credit Limited endorsement, or a Country Limit of Liability endorsement.
In the UK the Export Credits Guarantee Department, the UK’s export credit agency announced that it would resume political risk insurance cover for Russia earlier this year. The well timed announcement by Patricia Hewitt, Secretary of State for Trade and Industry was made immediately before Tony Blairs’ visit to Russia in October 2002. The announcement should provide a stimulus for British investment, as compensation would be available for losses sustained under ECGD backed projects.
The ECGD’s involvement with backing British investment in developing countries does not end with Russia. For example, ECGD backing is available for most Latin American countries (with the exception of Ecuador and Surinam).
The measures taken by the World Bank and the UK government appear to indicate increasing confidence in the Russian economy as a whole. In 2001 Russia’s GDP increased by 5.1%, with a $50 billion trade surplus and for the period from January to November 2002 GDP increased by 4.2%. The British Embassy in Moscow has estimated that Russia’s debt burden should have fallen to 45 per cent of GDP by the end of 2002.
The Government Agency Trade Partners UK is enthusiastic about the outlook for British-Russian trade, although it concedes that the Russian market is not one for the novice. There is much work that needs to be done to remove layers of bureaucracy and restructure businesses, many of which have traditionally been conservative and inefficient. There is also an added incentive for Russia to speed ahead with business reform. It aims to join the World Trade Organisation by the end of 2003 and the Working Party on The Accession of the Russian Federation has agreed what it itself has described as an ambitious schedule for progress on Russia’s accession.
It remains to be seen how much of an incentive the measures taken to date will provide to UK companies considering investment in Russia.
For more information please contact Anthony Hobkinson at
[email protected]
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