Foreign investment surged between January and September 2004 to hit a record $29.1bn. While figures from the third quarter indicate a slowing of the market, there is still no let up in FDI, which was up by a fifth to $5.6bn over the first three quarters of 2004.

Soaring incomes and burgeoning consumer credit have lead to a retail boom in Russia, but as imports are punished by high import duties, foreign firms can no long ignore the need for domestic production if they are going to meet growing Russian demand for their goods.

Advertisement

About half of FDI went into industry and half of that into the oil and gas sector, still the biggest draw to investors in the Russian economy. However, the non-fuel part of the economy is attracting more investment each year: wood, paper and food processing all received about $1bn of foreign direct investment each since the start of the year.

This year’s numbers have been boosted by a handful of massive deals. US oil major ConocoPhillips spent just under $2bn for a 7.95% stake in LUKoil, Russia’s largest oil company, in July 2004 and has since raised its stake to 10%. The company says it will invest up to $5bn over the next four years.

But the most frenetic investment activity is being carried out by medium-sized companies. Average incomes were up 15% year-on-year in November and have driven ballooning sales across the board. And the advent of consumer credit – now a $16bn business – has made big-ticket items affordable to more Russians.

Ford, which opened a greenfield Ford Focus production plant near St Petersburg in 2002, says Russian sales of its cars doubled in 2003 – a trend it expects to continue.

General Motors (which owns Ford) broke new ground when it tied up with AvtoVAZ, the maker of the ubiquitous Lada, in February 2001 and has just committed itself to investing $50m in its plant in Vsevolozhsk to boost production from 25,000 to over 100,000 cars a year.

Volkswagen and Renault have also launched projects but Toyota’s plans are the most ambitious. The company is in the final stages of negotiations to build what will be one of the most expensive car plants in Russia. Toyota says it will invest between $770m and $950m in a Leningrad-based plant to produce 100,000 cars a year after it opens in 2006.

Money is also pouring into a host of smaller facilities that will make everything from chocolate bars to bricks. German firms have been particularly active – among them, chocolate producer Alfred Ritter and Knauf Group, a major construction materials company. Germany’s Stada – a leading European supplier of inexpensive generic drugs and products for self-medication – made the first substantial investment into Russia’s nascent pharmaceutical sector, beating off several other suitors with a €80m-€85m bid for Nizhfarm, Russia’s top-rated pharmaceutical producer.

Ben Aris