Russian capital trots the globe in search of lucrative investment outlets*
Years back, Karl Marx, speaking about capitalism, once said that after saturating their local markets, capitalists would sooner or later go abroad in search of new markets. Time has proved the legendary author of the Das Kapital right. Addressing the St. Petersburg Economic Forum in 2007, then-Russian President Vladimir Putin said that the accumulated foreign direct investments in Russia and the sum of Russian investments abroad had leveled out, noting the investment process into and out of Russia could now be compared to a two-way street.
"The process of expansion of Russian capital abroad has taken off, and nothing can stop it now. Paraphrasing the well-known popular saying, once can say today that Russians are not just coming onto the key foreign markets, but are already there to stay for good."
Similarly, speaking at the Krasnodar Investment Forum last spring, Viktor Vekselberg, the owner of the Renova Group, raised the issue of the expansion of Russian capital abroad, calling on the government to support the process. Dmitry Medvedev, who was then a presidential candidate, agreed that some Russian industries were indeed in particular need of government support. These, first and foremost, include sectors, where there is currently cutthroat competition on the global markets, namely, the energy, mechanical engineering and research and development industries. “The export potentials of these and other industries should be supported, both financially and administratively, through the simplification of the current lending procedures for foreign buyers of Russian products/services and by providing information support to promoting Russian brands on the global markets.”
Medvedev specifically called on Russian corporations to buy enterprises abroad, citing Chinese companies, which have aggressively been doing so, as an example. Indeed, China has been on a foreign asset-acquisitions spree. This is vividly illustrated by the Chinese Trade Ministry, which has announced that the volume of Chinese investments abroad increased from $5bln in 2004 to $20bln in 2007, and will grow further this year, as the sum of Chinese investments in foreign assets in the first quarter of 2008 alone was about $19.3bln. In recent years, ever more increasing number of Chinese companies has been looking for legal accesses to state-of-the-art technologies and know-how, technological modernization, improved performance and new markets.
Monitoring the foreign capital expansion trends
The Moscow International Business Association (MIBA) has been tracking the expansion of Russian businesses for the past five years, and has consequently built up a huge database covering 1,173 projects. An analysis of these data has shown that Russian companies have been involved in between 200 and 300 transactions annually in such industries as oil, steel, mining, energy, finance and trade in foreign countries since 2004. This is further collaborated by the results of a recent study by the Skolkovo Moscow School of Management and New York's Columbia University, which showed that the top-25 Russian companies more than doubled their foreign assets to almost $60bln between 2004-06, with LUKoil, Gazprom, Severstal and United Company RusAl at the forefront of the growing foreign expansion trends. On the whole, Russian investments abroad are on the rise, a fact evident in the M&A Intelligence report, which put the aggregated value of foreign assets acquired by Russian companies in 2006 at $10.7bln and $20.8bln in 2007, while the estimates for 2008 equally robust, are expected at $30bln.
So far, the largest foreign asset acquisitions made by Russian companies — worth between $800mln and $1.5bln — include those concluded by Mechel, which bought Oriel Resources Plc in Kazakhstan, the Evraz Group (Delong Holdings in China), Siberian Cement (cement factories in Turkey) and Severstal (Sparrows Point in the United States). There have also been other acquisitions, which though smaller in size by comparison, still reflect the general positive trends in the expansion of Russian capital onto foreign markets. For instance, five years ago, Akron bought a fertilizer factory in China and now sells its products through a distribution network of 40,000 shops across China. The Metropol Group has opened a subsidiary bank in the Congo, which is ready to serve Russian companies operating in that country as well as offer all types of traditional banking services to the local customers. Nutritech has launched a baby food factory in New Zealand and expects to ship its products to all Southeast Asian countries. Mikron, a Zelenograd-based technology firm, has invested $550mln in a joint venture (JV) with a Taiwanian company to produce microchips.
Another trend is the expansion of Russian investments into construction of commercial, housing and hotel properties abroad. Nineteen companies have already invested about $5bln in “green- and brown-field hotel projects in 21 countries. For instance, the alone is currently developing resort and other hospitality properties in Greece, Cambodia, Tunisia, Turkey, Ukraine, Montenegro, Switzerland and the United States worth a total of $1bln. Similarly, famous Russian entrepreneurs —and Alexander Lebedev — have bought significant stakes in German travel companies, TUI AG and Oger Tours GmbH, respectively.
A score of Russian companies is currently developing housing, business and retail centers in 20 countries worth about $10bln. But construction is only part of the growing trend, as some of these companies are also buying huge stakes in leading foreign construction companies and construction materials manufacturing corporations. A striking example is acquisition of a 30% stake in the Austria-based and 10% of Germany-based. In a related development, Shalva Chigirinski’s has set up a JV with the Swiss developer, while the Peresvet Group has gained control over Austria’s Alpenbau. Open Investments is buying a controlling stake in Viceroy Homes Ltd., the Canadian manufacturer of frame panels, and LSR, a St. Petersburg-based company, has started the construction of two gas concrete plants in Ukraine and Lithuania, while Alfa Group plans to a set up a JV with 21st Century, the Ukrainian developer, via the X5 Retail Group, to build several retail centers in Ukraine.
Russian-foreign-capital expansion not without problems
However, the expansion of Russian companies abroad has not always been a success. According to the American-Russian Chamber of Commerce and Industry, tenders on sale of U.S. companies were cancelled on 11 occasions in 2006 as soon as it surfaced that Russian companies won the bids. And, speaking recently on this negative trend, Prime Minister Putin said that Russian companies had failed on political grounds/reasons to invest about $50bln in foreign assets in the past few years. For example, despite the fact that EADS, the European manufacturer of aerospace, defense and related services, has been suffering from acute shortage of funding, Western governments, which are the corporation’s principal shareholders, have effectively barred Russia’s Vneshtorgbank from injecting more money into the corporation and boost its 5% stake.
“There are different reasons for some of the negative outcomes of Russian companies’ asset acquisition bids abroad. But one thing is now obvious, and that is the fact that both the Russian government and companies need to coordinate their efforts and boost their interactions as they globalize their economic activities on the international markets.”
Similarly, there has been stiff opposition in the West to the proposed participation of Russian Railways Corp. in the privatization of Deutsche Bahn, the German railways company, and Gazprom’s intention to purchase Centrica Plc, one of the biggest energy companies in the United Kingdom. Also, local authorities in Ukraine and Azerbaijan have refused to support National Reserve Corp.’s construction projects, while the Russian retail network, Paterson, is shutting down its stores in Ukraine for similar reasons. Also, a construction license earlier granted by Kiev to Konti, the Moscow-based company, has been revoked without cogent reasons.
There are different reasons for such negative outcomes for Russian companies in these countries, but one thing is now obvious, and that is the fact that both the Russian government and companies need to coordinate their efforts and boost their interactions as they globalize their economic activities on the international markets. It needs stated here that such efforts are being taken today. Thus, in the fall of 2007, Russian Foreign Affairs Minister Sergei Lavrov, and Moscow Mayor Yuri Luzhkov, who also doubles as the MIBA chairman, signed a cooperation agreement to take a number of practical steps, which include requesting Russian embassies in abroad to support MIBA member companies’ business initiatives in foreign countries. This cooperation trend is to be stepped up in the future.
Today’s trends represent only the tip of iceberg
On the whole, Russian companies have continued to improve, both in quantity and quality, and are also continuing their expansions abroad. This means that what we are witnessing today is only the tip of the iceberg because lots of foreign deals involving Russian corporations never come to light. There are many reasons for these non-transparency/disclosure trends. For one, some Russian companies usually work through their foreign subsidiaries, thus keeping their deals out of Russia-related statistics. In other cases, some Russian buyers are reluctant to make their deals public, while some other business deals involving Russian companies are simply too small to warrant public attention or notice.
In any case, the process of expansion of Russian capital abroad has taken off, and nothing can stop this process now. Thus, to paraphrase the well-known popular saying, Russians are not just coming onto the key foreign markets, but are already there to stay for good.
* The author, Alexander Borisov, is the General Director of MIBA
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