Never has it been more apparent that Russia, at times, operates in a parallel universe to the rest of the world than during an investment summit held in the city of Kazan in February 2012. Gathered in a large ballroom of the Grand Hotel Kazan, proud public officials addressed the audience, almost exclusively in Russian, thanking them for the opportunity to showcase their region to the world. The fact that only a handful of foreigners made it to snow-covered Tatarstan did not seem to deter them.

Among the speakers at the forum was Artem Avetisyan, director of the new business department at the Agency of Strategic Initatives, an entity created in 2011 by the then-prime minister Vladimir Putin (now the country's president) and charged with improving Russia's business climate. Mr Avetisyan talked about the investment potential of Tatarstan and Russia, and also about his country's goal to climb in the World Bank's Doing Business ranking.

Advertisement

Russia's aim was to be in the top 50 by 2015 and the top 20 by 2018. At the time of Mr Avetisyan's speech in Kazan, Russia was ranked 120th. This goal, therefore, seemed as surreal as the announcements being made touting the investment forum a world-class event.

Tense times

Two years later, however, and Russia has already climbed to 92nd place in the ranking. In the past year alone, it jumped 20 places and was named one of the world's top 10 reformers of 2013. According to the World Bank, Russia made particular progress in improving its procedures for granting businesses access to electricity (up 71 places to 117th), registering property (up 29 places to 17th) and starting a business (up 12 places to 88th).

But while Russia's pro-business advances might be impressive, its international diplomacy in recent months has been less so. The country has received a lot of negative publicity in the past few months thanks to its involvement in the ongoing conflict in Ukraine.

However, this bad press may not have damaged the country's attractiveness to foreign investors. In fact, data from greenfield investment monitor fDi Markets shows that the country has attracted slightly more projects in the first quarter of 2014 compared with the same period in 2013, with 67 projects announced this year, compared with 64 last year.

Among the biggest spenders that either launched or announced their projects in Russia in the first three months of 2014 are New Hope Group, a Chinese agribusiness company, which announced plans to invest $500m into a feed mill located in Tatarstan in March, and Ikea, a Swedish furniture company, which plans to spend more than $490m opening three new stores in Moscow, Khimki and Krasnodar.

Similarly, the level of investment into the country is yet to be impacted by the political tensions, but could this situation change? According to the Vienna Institute for International Economic Studies (WIIW), the answer to this question is yes. A report published by WIIW in early June forecasts that Russian FDI inflows might contract by as much as 50% to $41bn in 2014.

Too big to flail?

Not everyone agrees that recent events will damage Russian FDI inflows though. “Russia is still a big market, which cannot be neglected by foreign investors. Investors are keen on entering the country in order to invest there,” says Astrit Sulstarova, an economist at the United Nations Conference on Trade and Development.

Moreover, according to Mr Sulstarova, FDI inflows into Russia should not be expected to decline dramatically, as much of the inward investment in the country is connected with natural resources. “Investors are very keen on entering into [Russia's] huge oil and gas market. If they have opportunities to enter, they will definitely [take them],” he says.

Investors' unwavering interest in Russia in evidence at the St Petersburg International Economic Forum (SPIEF), which was held in May 2014, only two months after Russia's annexation of Crimea from Ukraine. Unlike the investment forum in Kazan, the event in St Petersburg attracted a slew of high-profile individuals, including senior officials from German automobile manufacturer Mercedes-Benz, South Korean car manufacturer Hyundai and Swiss robotics firm ABB. According to the event's organisers, the forum attracted attendees from 73 countries and resulted in the signing of some 175 contracts totalling $11.5bn.

Moreover, although reports circulated that the US government had warned chief executives of US companies against attending SPIEF, and some of them, such as Citigroup's CEO Michael Corbat, decided against participating in the event, some leading US businessmen and women still attended.

No wonder, then, that Mr Putin was in high spirits when he attended SPIEF. Speaking at the forum, the president even dared to joke about the $3bn loan Russia had made to Ukraine when Viktor Yankuvych, Ukraine's former president who was ousted in February, was still in power.

Bad forecast

That is not to say that Russia can expect to emerge from the Ukrainian crisis completely unscathed. In April, the International Monetary Fund cut the country's 2014 GDP growth forecast from 1.3% to 0.4%, pointing to Russia's involvement in Ukraine as the main reason for its revision. In May, the Organisation for Economic Co-operation and Development also revised its 2014 GDP growth forecast for the country, from 2.3% to 0.5%.

Moreover, according to a recent report published by US financial services firm Morgan Stanley, sanctions announced by the US government against Russian state-owned companies operating in the energy, banking and defence sectors could push the country into recession.

“There will be reduced access to external funding markets for Russian borrowers [who] will need to find the $157bn required to service external debt in the coming four quarters,” said the authors of the report, adding that Russia's growth outlook might also be negatively impacted by growing uncertainty among consumers and investors. Their morale is likely to drop even further, given that in late July the EU imposed economic sanctions on Russian oil and defence industries, dual-use goods and sensitive technologies, and the US increased sanctions introduced earlier that month, following alleged Russian involvement in the shooting down of Malaysia Airlines Flight 17 in mid-July.

Plugging the gaps

Still, some experts believe that even if some investors withdraw from Russia, others will step in to plug the funding gaps. “The situation in Ukraine might detain certain investors from investing but it does not mean others will not continue there... Investors from [emerging markets] are active in Russia and they might be interested in filling [gaps left by exiting investors],” says Mr Sulstarova. He points to the announcement made by the government of Abu Dhabi in September 2013 that it would invest $5bn in Russia's infrastructure.

Indeed, Mr Putin made it clear at SPIEF that his country's focus on inward investment would move away from developed countries, and without pointing to any markets in particular, he stated that Russia is going to “focus on Eurasian investment”.

There is a feeling that current difficulties could even be good for Russia, if they motivate the government to be more proactive in diversifying sources of FDI and make efforts to further improve the business climate. This is a view supported by Charles Movit, a senior analyst at US consulting firm IHS.

“As the economy has slowed so much and is even perhaps going into recession in the first half of this year, the pressure to improve the investment environment is growing,” says Mr Movit. “There is a recognition at very top that [there] is a real problem, and that Russia needs a great deal of investment in order to make its non-energy economy competitive. FDI is part of that."

Additional reporting by Qingqing Chen