Private investment has become the Russian government’s most longed-for dream. Unless investment triples from its current level, the economy will not see the 3% growth demanded by President Vladimir Putin. For officials, that means the national goal will not be fulfilled, and the government will not meet its KPIs.
Conditions for investment in Russia are good right now, the government insists: inflation is at historic lows, there is a budget surplus, the ruble is stable, and the country’s position in the international Doing Business rating is improving.
In practice, however, the government’s incessant attention to the investment climate is paradoxically adding to investor doubts and holding back investment activity. Despite the favorable macroeconomic conditions, the overall economic situation is becoming less and less predictable.
Investors are worried about whether the siloviki will make trouble for them, whether tax rates will change, and when the rules and conditions will finally stop changing. So long as these questions remain unanswered, investment in Russian projects remains a lottery with dubious prospects of winning for those who do not enjoy a special relationship with the state.
Spending the surplus
Economic growth is impossible without new capital investment, Finance Minister Anton Siluanov has been repeating for years. The government’s task, therefore, is to create an environment conducive to investment and support investors. But in the current cycle, the government is in danger of missing its KPI: under the Economic Development Ministry’s forecast, the Russian economy should be seeing 3% annual growth by 2021. The Finance Ministry has already drawn up the budget based on these figures.
The forecast does note that such rapid acceleration — this year, GDP growth may not exceed 1% — is conditional on making the Russian economy more competitive and on investment. The government KPI for investment is that it should make up 25% of GDP. The only explanation of where this accelerated growth will come from is some vague words about structural changes and improving the investment climate. It seems the forecast is based on a hypothesis that private business will start to invest in development and increase production, rather than saving.
The basic conditions for this hypothesis are in place: organizations have amassed more than 20 trillion rubles ($311 billion) on their books, according to estimates by the Accounts Chamber and the State Statistics Service. Growth in profits should mean companies are more willing to invest, but in recent years, the proportion of profit used for capital investment has declined. In the first half of this year, investment in capital assets grew by just 0.6 percent. Most major businesses preferred to pay interim dividends than to invest in projects.