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| Mikhail Khodorkovsky |
Foreign investors with their eyes fixed on Russia’s continued powerful economic growth are shrugging off the recent arrest of Mikhail Khodorkovsky. The CEO of oil giant Yukos and Russia’s richest man, he was pulled in on October 25 by Kalashnikov-toting officers of the FSB (federal securities services). This might have briefly unsettled the stock market, but foreign companies selling soap and coffee to increasingly affluent Russian consumers believe their businesses will be unaffected.
“It was a flash in the pan,” says Peter Boone, the head of research at Brunswick UBS Warburg. “Even if they liquidate Yukos, which I am sure they won’t, then it will be a bigger flash in the pan. But key is that the economy has passed critical mass. The disappearance of Yukos won’t alter the structure of the economy, which currently creates a very profitable business environment.”
Right on cue the economic development and trade ministry announced towards the end of last month that it was upgrading the full-year GDP forecast to 6.6%, the seventh revision this year. The ministry began the year with a 4.3% growth prediction but seriously underestimated the strength of the consumer spending boom.
Spend, spend, spend Russia’s economy is now growing as fast as it was in November 2000, when a massively devalued rouble helped push it along, as it goes into the forty-sixth straight month of increased consumer spending.
Official statistics may underestimate reality. According to the Moscow Narodny Bank production index, growth in the services sector was higher in October than at any time since November 2000. Its new GDP index attempts to measure activity in the new economy. By contrast, the state committee for statistics is bad at measuring service companies and small enterprises. The Moscow Narodny index showed 8.8% GDP growth between January and October.
It is this phenomenal growth with no let-up in sight that is holding the interest of foreign investors. Russia received $20.9 billion in inward investment between January and September, just over 1.5 times more than in the same period a year previously, and direct investment was up 77% to $4.7 billion. Most of this is going into retooling factories to meet burgeoning demand.
Despite the uncertainty introduced by the political battle raging between Yukos and the Kremlin, another big direct investment into the oil and gas sector was added to a growing pile. BP started the ball rolling in February by signing off on a $7 billion-plus tie-up with Tyumen – an investment that doesn’t show up in the statistics as the two companies are both registered offshore. It has been followed by several high-profile mergers and foreign-backed projects.
TNK-BP was back in the news last month after it finalized talks with state-owned China National Petroleum Corporation and South Korea’s Kogas to develop the huge Kovykta gas field in Siberia. Production is due to start in 2006, with the first gas reaching China in 2008.
Russian state-owned gas monopoly Gazprom produces most of its gas from three large fields, but all of these are reaching maturity and the Kovykta field promises to take up the slack in the future.
TNK-BP says the estimated cost of developing the field is $18 billion, including the construction of a pipeline to China and on to South Korea.
Interest is also high in a 25.82% stake in RUSIA Petroleum, which holds the production licences for the Kovykta field that Interros oligarch Vladimir Potanin’s industrial holding company has put on the block.
Having lost control of oil company Sidanco to TNK in 2000, Potanin is selling off his remaining oil and gas assets. Fifteen foreign companies, including Chevron Texaco, ExxonMobil, Conoco Phillips, TotalFinaElf and Royal Dutch/Shell, have all expressed an interested in bidding for the stake, worth an estimated $100 million. Analysts say the final price for the blocking stake could go as high as $200 million.
At the other end of the scale after dithering over investments for more than a decade, automotive majors Renault and Fiat also both decided to take the plunge.
With incomes rising by over 12% a year and following the advent of consumer credit at the start of the year, Russians have been trading in their shabby old Ladas for foreign cars. Foreign-made cars are now outselling domestically produced ones, despite costing almost twice as much.
Renault announced that it plans to increase its stake in Avtoframos, a 50:50 joint venture with the Moscow city government, and could go into full production by spring 2005. The venture, which currently assembles imported parts, already produces 60,000 Renaults a year.
And within weeks Basic Element, the industrial holding company of oligarch Oleg Deripaska, signed a joint production protocol with Italian car maker Fiat. Fiat will team up with GAZ, the maker of the Volga saloon, to expand production plans that stalled in the aftermath of the 1998 financial crisis.
