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INVESTMENT CLIMATE IN RUSSIA: BUDGET INVESTMENTS AS AN ECONOMIC GROWTH INCENTIVE
Kondratenko M.A., student Financial University under the Government of the Russian Federation, Moscow, Moscow, Russia
E-mail: [email protected] Supervisor: Obukhova L.Yu., Senior teacher Financial University under the Government of the Russian Federation, Moscow, Russia
E-mail: [email protected]
Abstract: The article is devoted to the research on the investment issues in the Russian Federation and the main trends in the investment process. The statistics reported by the Central Bank ofRussia helped identify and analyze the main areas of investment as well as single out the positive and negative factors affecting the development of the economy as a whole. A special attention was paid to budget investments as a significant factor for the formation of the investment climate and stimulation of the economic process. The consideration of the foreign economists' opinions on the nature of budget investments allowed us to identify the influence of the government on the investment situation, the role of budget investments in increasing Russian business activity. It was revealed that at the current stage of development, Russian economy is suffering from a shortage of the investment capital, which is partially offset by budgetfunds allocatedfor investment purposes. However, within the framework of increasing scientific and technological potential as the main vehicle of economic growth, it is necessary to revise the existing approaches to investments and channel more funds to in development of science and technologies, as well as to the development of domestic production in order to enhance economic growth in Russia and increase the competitiveness of the economy for the integration into the international economic space.
Key words: budget investments, investment strategies, foreign direct investments, fixed investments, non-produced non-financial assets, Russia
1. INTRODUCTION
The research of the features of investments, sources of their attraction, areas of usage, as well as the analysis of investment activity and its results take on exceptional importance at the current stage of development of the Russian economy, since investments affect the fundamentals of economic activity, determining the process of economic growth. They are necessary to maintain the profitability of production, while their shortage blocks not only the development of a single manufacturing sector or company, but also the emergence of their new forms for the purpose of deeper mastering of the world market. Due to the maintenance of investment processes, production volumes increase, as well as the level of population welfare and employment. The accompanying investment multiplier effect provides for economic growth. Thus, investments in the economy create
effective prerequisites for the national economic growth. In this regard, the article is discussing the main trends in the Russian investment process by considering the pros and cons. It also provides recommendations for increasing the intensity of investment processes in Russia. 2. ANALYSIS
Exploring current areas of investment activity in Russia, we should note that despite the economic crisis followed by large-scale international sanctions, it is necessary to attract both internal and external sources of investment, since they can contribute to increasing the country's production capacity and become an essential factor in stimulating a new round of economic development. Over the past decades, the volume of investments outflow of the Russian Federation in the economies of other countries exceeded the amount of the inflow of foreign investment. Most of the investment funds
were directed to the banking sector, for example, to participate in capital (except for reinvestment) or debt instruments. Unfortunately, the statistics show that the prospects for expanding the potential of our Table 1. Direct investments of the Russian Federati
country are not very hopeful as the volume of investments in the economies of other countries will be higher than the volume of domestic investments, thus reducing domestic sources of financing: by direct investment instruments, million dollars [6]
Time period
2013 2014. 2015 2016 2017 2018
Investments outflow 70 685 64 203 27 090 26 951 34 153 No data by 01.03.2019
Equity instruments 100 548 36 784 14 376 19 881 33 300
Debt instruments -29 864 27 419 12 714 7 070 853
Investments inflow 53 397 29 152 11 858 37 176 25 954
Equity instruments 41 991 22 765 10 755 36 055 25 738
Debt instruments 11 407 6 386 1 103 1 121 215
According to statistics, until 2013 in the Russian economy there was an increase in foreign direct investment (FDI) and investment in fixed assets. At the same time, their dynamics substantially depended on the economic situation not only in the Russian, but also in the international market. Against the background of a general decline in the inflow of FDI into the Russian economy, the closure of branches of foreign industrial companies and organizations involved in the services sector did not stop. In 2015 production of Opel cars was curtailed, which was followed by the offices of Google, Skype, Adobe Systems in IT sector, Raiffeisen Bank also significantly reduced its presence in the Russian market [2].
In the Russian economy, now there is a transition period when the current crisis, which began in mid-2014, became an indicator that the raw material nature of the economy weakens the most important types of industry and other areas of activity, such as scientific research, production and communications. At the time of writing this article, the data for 2018 have not been published, however, considering the dynamics observed in previous crisis periods, it can
Table 2. Structure of investr
be assumed that their volumes will also be lower than in previous times.
At the current stage, an inflow of innovations in the Russian economy is necessary, since the economy can no longer grow at the expense of oil and gas revenues, as fluctuations in prices for fuel and raw materials constantly destabilize the economic situation. In this regard, at the current stage, as in many other countries all over the world, the priority direction of economic growth is to strengthen the domestic production, ensuring the creation of developments and technologies in Russia [8]. In this regard, firstly, it is necessary to create high-quality conditions for the implementation of investment activities: developed infrastructure, construction of fixed assets or their improvement. In many respects, it is precisely for this reason that the main trend is such that in recent years the largest amount of investment funds has been spent on capital investments compared to other assets. Since 2013, statistical data on investments in intellectual property, research and development (R&D) have been included into the investments in fixed capital:
ts in non-financial assets [9]
First half of 2017 First half of 2018
Bn.rub. % % to 2016 Bn.rub. % % to 2017
Fixed investment 4300,3 98,1 98,9 4608,9 98,9 98,1
Non-produced non-financial assets investments 84,0 1,9 1,1 51,3 1,1 1,9
Total 4384,3 100 100 4660,2 100 100
It should be noted that in the first half of 2018 the share of investments in intellectual property in the total amount of the investment in fixed assets did not account for more than 3.7%, which is a very negative trend. In Russia, only a small share of investments goes for R&D, education, production — they have the least investment attractiveness for both foreign and domestic investors [4], since the development of domestic technologies and personnel policy is carried out with low efficiency and intensity.
At the same time, the lack of investment is not only the result of an erroneous investment policy, but also acts as one of the indicators of the state of the economy. The level of investment in the country's economy is influenced by the following factors as:
• Interest rates (the cost of borrowing)
• Changes in demand (level of economy's development)
• Expectations of potential investors
• Level of technology
• Development of financial system (the availability of borrowing capital) [7].
Investments at the micro level are necessary to diversify production and expand the business
14000 -
12000
3
s
s
.o
3
However, at present, their share in the most developed industrial sectors in the Russian economy is small, so it is possible to say to some extent that we lack the capital for the development of our own
opportunities of economic entities, prevent serious depreciation of basic production assets, and reduce the cost of production and sales. Also, investments are capable of raising the technical level of production through the introduction of new equipment and technologies, as well as contributing to the improvement of quality and ensuring the competitiveness of products.
In the context of globalization, attracting foreign investments plays a great role for the national economy. Their role is very significant, since foreign investments encourage the mutual exchange of technologies and the latest management techniques, which help develop the most promising sectors of the economy, as well as promote the least developed economic spheres. Attracting foreign investment also creates a favorable environment for the commercial sector by facilitating business activities. Attracting foreign investment is an important factor in the development of investment processes. The volume of foreign investments is one of the indicators of the state of the national economy and in many respects determine the country's position in the international arena. Figure 1 shows the share of foreign investment in the Russian economy:
production, since the current economic conditions do not encourage the accumulation of capital from domestic investors. On the one hand, this has some significant positive aspect: the economy is less
Private property State ownership Foreign property
10000 8000 6000 4000 2000 0
2013 2014 2015 2016 2017
Figure 1. Structure of investments in the Russian Federation by the type of ownership [10]
dependent on other countries, and in the event of a massive outflow of foreign capital, there will be no serious destabilization. At the same time, at the current stage of development, the Russian economy is not sufficiently provided with its own resources to maintain the import substitution policy promoted in the past few years, and therefore, to reduce the expenditure burden of the budget system, foreign investment is necessary.
However, considering that the Russian economy is under the large-scale economic sanctions, attracting foreign investment in sufficient volume seems impossible now. Due to the lack of financial resources, to stabilize the situation in the investment sector, state support is becoming a necessary factor on the path to economic growth. It is important to note that unlike most developed European and rapidly developing Asian countries, in the structure of investments of the Russian economy, g overnment investments make up a more significant share - from 18% to 25% [7]. However, among foreign scientists and analysts there is an opinion that large volumes of budget investments may slow down the rate of economic growth. Back in 1996, the chief economist (at that time) of the World Bank, Shantayanan Devarajan, came to this conclusion. In the World Bank's report on the structure of government spending and economic growth, he noted that in developing countries government spending has a negative effect on economic growth [5]. An Italian economist, Andrea F. Presbitero, who studies investment strategies in the relevant department of the International Monetary Fund, based on the results of the regression analysis, suggested that investment projects approved during periods of increasing public investment were less successful [1]. It was also found that the effectiveness of investment projects was particularly low in countries with insufficient capital levels, which is especially important for the Russian economy.
However, due to the current situation in the economy of our country, it is impossible to deny the
high importance of public investment in enhancing economic development and investment attractiveness, therefore, research is actively conducted on ways to improve measures of state participation in investment processes. Considering the large-scale consequences of the economic crisis against the background of international sanctions, state intervention in investment processes is especially necessary at the stage of ensuring a favorable investment climate for Russian investors in domestic regions, for example, within the framework of a public-private partnership aimed at stimulating the interest of domestic investors in developing domestic production scientific and technical potential. 3. RESULTS
In order to attract foreign capital, a set of measures should be taken that would help optimize the infrastructure for the activities of foreign investors, as well as simplify the procedures for interaction with government agencies. According to a study conducted by Ernst & Young in 2015, there are several major factors that have a negative impact on making decisions about investing in the Russian economy.
From this it follows that in order to increase investment activity in Russia, now like 3 years ago it is necessary to pay attention to the barriers to foreign investors which exist in the country's legislation and economy. It is necessary to direct budget funds to create a favorable, developed infrastructure, to simplify administrative procedures as much as possible and to eliminate bureaucratic obstacles in the interaction of the investor with the state apparatus. In the current economic situation, it is necessary to direct funds from domestic investors to capital-intensive industries such as construction and industrial production, as well as to develop the R & D and education spheres, since it is the qualified personnel and our own scientific developments that ensure the growth of the country's economic and technical potential arena.
Figure 2. Actions which should be taken the Government of Russia to improve the conditions in the
sphere of investment, % [3]
No reforms required
Eliminate ambiguity of legislation
Provide judicial and legal reforms
To reduce the level of state control over business activities
Simplify immigration law
Eliminate selectivity in the application of laws
Reduce bureaucracy
10
20
30
53
40
50
60
0
4. CONCLUSION
At the present stage of development of the Russian economy, investments underlie the revitalization of economic growth by attracting private investors to participate in improving the state's economy and its diversification. They act as a primary source of capital in order to enhance the production and scientific potential of the country.
Despite the high need for state support in investments, we are sure that excessive amounts of budgetary investments, as well as other measures taken by the government, can lead to inefficiency of government spending, increasing the budget deficit, which can also weaken the economy of the country, because during periods of recession there will not be enough public funds to stimulate economic growth. In this regard, it is necessary to focus on improving the state investment policy in the framework of planning investment areas and their volumes, as well as review the existing investment strategies.
REFERENCES
[1] Andrea F. Presbitero. Too much and too fast? Public investment scaling - up and absorptive capacity / Journal of Development Economics. -Volume 120, May 2016, pp.17-31
[2] Azatyan M. O. Analysis of the structure and dynamics of foreign direct investment in the Russian Federation [Text] // Economy,
management, finance: materials of the VII Intern. scientific conf. (Krasnodar, February 2017). -Krasnodar: Novation, 2017. - pp. 10-14
[3] Ernst & Young. Investment climate in Russia — Foreign investor perception. Which reforms the Russian Government needs to pursue in order to improve the legislative environment. - 2015/ URL: https://www.ey.com/en_gl/global-review/2018 (Accessed: 02.02.2019)
[4] Pozdnyakov K. K. The theoretical basis of the mechanism of attraction of foreign investments in the Russian regions and the ra-tionale for their practical ap-plicability. Raleigh, North Carolina, USA: Lulu Press, 2015. 174 p.
[5] Shantayanan Devarajan, Vinaya Swaroop, and Heng-fu Zou. The Composition of Public Expenditures and Economic Growth. Journal of Monetary Economics 37(2, April): 313-44, 1996
[6] Statistics of the external sector of the Central Bank of Russia. URL: http://www.cbr.ru/statistics/?PrtId=svs
[7] Tejvan Pettinger. Factors affecting investment/ Cracking Economics - 2017, 320p.
[8] The Inclusive Growth and Development Report. World economic forum - January,2017. URL: http://ww w3 .weforum.org/ docs/WEFForum_IncGrwth_2017.pdf
[9] Federal State Statistics Service, investment in non-financial assets. URL:
http://www.gks.ru/wps/wcm/con n
ect/rosstat_main/rosstat/ru/statistics/enterprise/in vestment/nonfinancia/
[10] Federal State Statistics Service (Rosstat) Investment in Russia 2017 // Statistical compendium. - Moscow. - 2017. - p. 40 URL: http://www.gks.ru/wps/wcm/connect/rosstat_mai n/rosstat/ru/statistics/publications/ca talog/doc_1136971098 75
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