Investment climate: concept, factors and investment attractiveness of Russia
The economy of any state needs constant investment. But few people would risk investing large sums in a country with constantly changing political regimes, flawed legislation, excessive tax rates, and a high level of public dissatisfaction with the work of government..
National economies with a stable political regime, fair laws, and tax incentives look much more promising. The investment climate makes it possible to evaluate one or another state for its attractiveness to an investor.
Investment climate: what is it?
The investment climate is a set of political, economic, innovative and infrastructure factors that determine the suitability of investing in the economy of a state (region/industry) for potential investors (or other countries). It can also be called the level of favorability of investments, taking into account the potential risk.
The investment climate is:
- favorable (investors are willing to invest in the economy);
- unfavorable (investors are skeptical about investments and look to other states).
It should be understood that the investment climate is not constant. This value is dynamic and constantly changes depending on the political and economic factors of the country.
What influences the investment climate and its indicators
The investment climate is associated with a series of indicators that determine its dynamics:
- Political (the authority of power, the reliability of legislative bodies, the distribution of powers among political parties, the state of interstate relations).
- Social (standard of living of the population, social tension, presence of civil conflicts).
- Economic (economic growth of the region, internal sectoral policy, inflation rate, availability of reliable objects for investment).
- Innovative (in priority – the level of development of scientific, intellectual and educational environments).
- Financial (balance the budget, taxation, the economy of the region, taking into account the balance).
- Resource (provision of the subject with natural resources).
- Work (the state of professional and labor resources, the level of your education).
- Production (characteristics of the sectoral economy).
- Infrastructure (topographic location of the country, infrastructure, availability of telecommunications).
- Criminal (corruption of officials, crime rate).
- Environmental (the degree of environmental pollution in a particular region).
They are essential when making an investment decision.
What improves the investment climate
The following factors are considered bullish for investors:
- capital protection guarantee;
- transparent tax system;
- legislative certainty;
- the possibility of free movement of capital in the state and beyond its borders, the absence of barriers;
- worthy domestic market potential;
- low level of corruption;
- resource availability.
What makes the investment climate worse
The following factors remain alarming for investors:
- dubious state investment policy (lack of guarantees for investors);
- monopolization of all or some industries;
- unstable prices;
- high inflation;
- political instability;
- social tension;
- high level of public debt;
- underdeveloped legislation.
Investment climate in Russia
Investment risk assessments vary across regions and industries. But, in general, Russia cannot boast of a favorable investment climate. In almost all regions, the risk to foreign investors is estimated to be higher than average. And many niches are problematic at all.
National rating of the state of the investment climate in the constituent entities of the Russian Federation
According to the rating agency Expert RA, the following regions are considered the most attractive for investment:
- St. Petersburg;
- Nenets Autonomous District;
- Moscow, Yaroslavl, Oryol, Belgorod, Novgorod regions.
The least attractive are the northern regions, the Far East and some of the North Caucasus.
The assessment is constantly changing, but the trend remains unchanged: regions with a high concentration of population, transport arteries and industry have a favorable investment climate. In addition, leading positions are provided by impressive reserves of strategically important raw materials. And an unfavorable investment climate is in regions with poor natural conditions, little development of the territories, lack of natural and labor resources, an underdeveloped transport system and an unstable social situation.
Roadmap to improve the investment climate
The roadmap is an action plan to create favorable conditions for attracting foreign investors to invest in the economy of Russia or its individual regions. Approved by the Russian government, giving it the status of state law.
The purpose of the roadmap is to include the Russian Federation in the TOP-20 countries in terms of investment climate. To do this, you must take the following steps:
- improve the state of the regulatory environment in the interaction of government systems with companies;
- increase competition in all spheres of the economy;
- improve the tax system as a mechanism for the execution of administrative resources;
- stimulate exports and international cooperation;
- improve evaluation activities;
- finalize the legislation (cancel or modify laws and other acts that make it difficult to carry out commercial and investment activities).
- reduce the level of influence of the public sector in the investment climate (privatize a block of shares owned by the federal government).
- strengthen control over corruption.
In terms of improving the investment climate, the Russian government uses the developments of Western countries, where, in order to attract FDI, tax incentives are created, loans are granted on mutually beneficial terms, subsidies are issued, and fair laws are adopted in the financial sector. The goal of the roadmap has not yet been achieved. Work on investment processes is still ongoing. The climate for potential investors in Russia remains unfavourable.
Top 25 countries in the world for investment attractiveness (based on the AT Kearney Confidence Index)
- USA Maintain leadership position for 7 consecutive years due to sustainable economic growth.
- Germany. It has a strong competitiveness score, recently announcing a technology and digital infrastructure initiative.
- Canada. The investment climate in Canada only gets better every year. Compared to the previous year, foreign direct investment (FDI) inflows increased by almost 60%.
- Britain. It retains fourth place for three consecutive years. Despite Brexit, it remains an industrialized market and the fifth largest economy in the world.
- France. Improvement of the business environment, reduction of corporate tax rates. Claims for the highest rating.
- Japan. It ranks sixth for four consecutive years, which is associated with an optimistic assessment of the country’s 3-year outlook.
- China. The only state with an emerging market in the TOP-10. But internal and external obstacles can change the opinion of investors about the viability of the investment.
- Italy. Ranked top since 2020 due to a less volatile political environment, the continued appeal of strong brands and a strong manufacturing sector.
- Australia. It shows continuous economic growth for more than 25 years. It remains an attractive country for investors.
- Singapore. It returned to the top 10 after a year-long hiatus due to optimistic estimates of the economic outlook. Singapore’s main driving force is its world-class business environment.
- Spain. National competitiveness has increased in the country, the financial system is gradually being restored, and the economic climate is improving. All this contributes to increasing investor confidence.
- Netherlands. Ranked the highest in the country’s history due to strong business environment indicators and the emergence of new companies leaving the UK due to Brexit.
- Swiss. It maintains the ranking thanks to a variety of business indicators and strong economic growth.
- Denmark. The high level of human capital and the absence of corruption are key factors that attract the attention of investors.
- Sweden. The country has a stable and business-friendly legal framework, tax exemptions for individuals and legal entities, but a weak real estate market (which can curb consumer spending).
- India. Cross-border mergers and acquisitions reached an all-time high, the outlook for the economy continues to grow steadily. But there is uncertainty about the new rules on foreign investment.
- South Korea. It is positioned as a leader in 5G wireless networks and other emerging technologies. The country’s economy and its ratings are relatively stable.
- Belgium. The country adopted a law on guarantees, which simplifies the practice of borrowing and lending, which increased the interest of investors. This explains the sharp increase in points in the ranking (one of the most significant this year).
- New Zealand. Sustained economic growth, stable and business-friendly legislation, and a strong food and beverage industry are key factors in attracting foreign investment.
- Ireland. It has an external economy vulnerable to Brexit, but benefits from fungibility as the UK’s new destination for foreign investment after Brexit.
- Austria. Investors are interested in the country’s technology sector and business-friendly tax environment. Although the recent digital tax proposal introduces some uncertainty.
- Taiwan (China). It returned to the rankings after a two-year hiatus thanks to a business environment open to foreign investment.
- Finland. A skilled workforce is the strongest asset of a country. Especially given the digital transformation of the economy.
- Norway. It has strong prospects for economic growth (compared to other EU states) due to stable prospects for world oil prices and the strengthening of the country’s image as a leader in green energy.
- Mexico. It remains attractive to investors hoping privatization measures will be reversed and savings unlocked through new trade deals.
The Russian Federation has all the necessary resources to implement the goals of the roadmap. But to improve the investment climate, serious measures must be taken in the fight against corruption, investment legislation must be improved, and reforms must be carried out in the field of business culture and labor productivity.