Global and Domestic Trends Drive Rebound in Russia’s Investment Appeal

© Sputnik / Kirill Kallinikov / Go to the mediabankMoscow Kremlin as seen from the Bolshoi Moskvoretsky Bridge. (File)
Moscow Kremlin as seen from the Bolshoi Moskvoretsky Bridge. (File) - Sputnik International
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Russia’s investment appeal has rebounded on brighter domestic growth expectations, cheaper production costs and an undervalued market, as well as Brexit and the US President-elect’s international trade agenda, disrupting the existing structure of global trade, and pushing the EU, the UK, the US and Japan to boost economic cooperation with Russia.

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Kristian Rouz – Russia’s attractiveness as destination for flows of international investment capital has gained a major boost in the recent weeks, with several multinational enterprises expanding their business in the country due to a brighter perceived outlook on Russia’s domestic consumption.

Meanwhile, substantial progress made in diplomatic efforts to settle the long-standing issues in the bilateral relations between Russia and Japan has opened ways for an increase in the scope of investment flows between the two world’s major economies.

The projected economic policy shifts in North America have diverted capital from US stocks, and the European Central Bank’s commitment to keep the potentially hazardous ultra-loose monetary environment in the aftermath of Brexit vote in Britain have also resulted in investors looking at Russia more favourably than they used to in the recent years.

The international enterprises that have already announced an expansion in their Russian businesses include the Swedish home improvements manufacturer Ikea Group and their French counterpart Leroy Merlin. Both companies have invested additional billions into expanding their sales and manufacturing operations in Russia, eyeing both the rebound in Russian consumer demand and cheaper workforce as reasons for brighter business sentiment.

“This is the moment for investment,” Walter Kadnar, chairman for Ikea’s Russian division. “I strongly believe in the potential of the Russian market long-term.”

Ikea is allocating some $1.6 bln to open new vending facilities in Russia over the course of next five years. This autumn, Ikea opened a $60-million furniture factory in the vicinity of St. Petersburg and invested additional funds to purchase land nearby for the purposes of commercial development.

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Leroy Merlin, meanwhile, announced a 2 bln-euro deal to increase twofold the number of their retail locations in Russia over the next five years. Other major investors boosting their presence in Russia are the US-based pharmaceutical giant Pfizer Inc., who are building a new factory, and another American company, food manufacturer Mars Inc., which is expanding its pet food and bubble gum facilities.

Meanwhile, Japanese-Russian relations have demonstrated noticeable signs of thawing after the Japanese Prime-Minister Shinzo Abe and Russian leader Vladimir Putin met in Lima on Saturday. Shortly afterwards, on Tuesday, the Japan Bank for International Cooperation and the Russian Direct Investment Fund, the two government-controlled lenders, announced they would form a $901-mln investment fund, contributing roughly half of its funds each, in order to finance development projects to be commenced in 2017.

"The territorial issue and economic cooperation are two sides of a coin," a Japanese government official said as quoted by Reuters. "It's meaningless if only economic cooperation moves ahead."

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The territorial dispute between Russia and Japan has been a painful issue stemming from the aftermath of WWII, and both sides are optimistic of the prospects to resolve it soon. Meanwhile, the new joint fund will allocate capital in Russia’s regions of the Far East and Baikal, including projects in healthcare, urban development, and industrial production, as reported by the Japanese daily newspaper Nikkei.

With attitudes toward Russia in both the East and the West shifting to more favourable ones, the global economic trends are, albeit a prevailing factor, but hardly exclusive. Indeed, whilst the decline in the rouble’s FX rate has depressed local production costs, boosting the operating revenues of international enterprises, and the projected rebound in Russia’s economic growth is stirring expectations of a robust increase in consumption, the structural aspect of Russia’s investment landscape also happens to be on the brighter side.

"Russia (is) currently trading on an average price/earnings ratio of only eight times and a cyclically adjusted p/e of just over five times (both measures are well over 20 times in the US),” Merryn Somerset Webb of MoneyWeek wrote. “It is always worth buying bear market bottom priced markets on the basis that while you might have to wait, barring full-scale wars or communist revolutions, they usually go up in the end."

The vote to leave the European Union in the UK and Trump’s election as President in the US both reflect a shift towards sustainable right-wing  conservatism in the Anglo-Saxon world, and Russia presently appears to be as right-wing as it goes. With numerous references to its glorious Imperial past having resurfaced in Russia’s public rhetoric, and firm opposition to radical Islamic terrorism dominating Russia’s foreign policy narrative and activities, the Kremlin is deemed to be an increasingly desired partner to the minds of policymakers in Downing Street and the White House.

"Trump and Putin seem keen to get along,” Webb noted. “Any strategy that offers a chance of geopolitical stability is likely to appeal more to those who spent US childhoods hiding under desks in ‘duck and cover’ nuclear drills than those who did not."

Shifts in sentiments in international affairs are bound to reflect on the quantitative and qualitative aspects of economic interaction. Both the US and the UK are seeking ways to limit their imports harmful to their traditional domestic industries, whilst enhancing the exchange in goods and services with Russia beyond rocket engines and energy would only contribute to economic growth in the two pillars of the Anglo-Saxon world.

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