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The Moscow Times: All the Thrills an Investor Can Stomach

Friday, March 2, 2007. Issue 3607. Page 8.

Prime Minister Mikhail Fradkov tried to lure Japanese investors during this week’s visit to Tokyo with the following description of Russian markets: “You can’t say that business is risk-free … but the presence of risks in Russia makes standard profits higher.”

Returns on capital in Russia are significantly higher than in Japan or other developed countries. Russia was No. 5 on Standard and Poors’ list of the 22 most attractive developing nations for investors in 2006, and foreign investment was $31 billion (a 140 percent increase from 2005). The RTS index rose by more than 70 percent last year, compared with a climb of 6.9 percent by Japan’s Nikkei index.

Japan is among the top 10 countries by investment in Russia, with a total of $2.5 billion. But do Japanese investors really want to increase their stakes in Fradkov’s roulette game?

Risk and the associated high profits attract speculative investors. As much as 70 percent of publicly traded shares in Russian companies are held by foreign pension and investment funds, according to the Federal Securities Commission. An informed approach to the securities market helps them hedge their risks, and they would be crazy not to take advantage of this rapid growth. But even these institutional investors fear too much risk, and rather than hold the stocks themselves, they prefer to hold Russian securities in the form of depository receipts on the London and New York exchanges.
Strategic investors prefer stability and clear rules to risk and high returns. Japanese businesses know the dangers involved from experience: Gazprom’s purchase of a controlling stake in the Sakhalin-2 project at a significant discount from British-Dutch Shell and Japan’s Mitsui and Mitsubishi after ecological complaints were lodged by the government illustrates the rules of the game and risk involved.

Fradkov talked to the Japanese about improvements in the investment climate. But it is important to understand that the Sakhalin case was the second shock to investor confidence, following the assault on Yukos. A few words from the prime minister are unlikely to make things better. A recent study by the international public relations company Edelman reported that just 18 percent of businesspeople in developed countries said they trusted business in Russia, while the figure was 65 percent for doing business in Japan.

The Russian delegation brought a bunch of high-risk projects in a high-risk country to Japan — from a tunnel linking Sakhalin to the mainland to the construction of an oil pipeline in cooperation with Rosneft. Perhaps Fradkov’s talk about risk was trying to make a virtue out of a shortcoming. But he came off sounding more like a carnival barker: “Come on in for a thrill!”

This comment appeared as an editorial in Vedomosti.

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