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Investment attractiveness rating of Russian regionsDecember 2013

Investment attractiveness rating of Russian regions – 2013

The National Rating Agency (NRA) presents the first rating of investment attractiveness of the regions of Russia based on the own methodology of the Agency. The purpose of the project is to identify Russian regions which are most attractive from the point of view of investment projects implementation.

Table of contentsSummary

Methodology

Investment attractiveness rating of Russian regions

Comments to the rating

Investment attractiveness ratingof Russian regions

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December 20132

Summary

The NRA’s rating differs from other similar projects because it is based on three sources of the information on the factors of investment attractiveness of regions (statistical data, expert estimates and results of business perception surveys). Such approach allows to receive the most reliable and comprehensive assessment of regional investment potential. Other important feature of the rating is that its methodology was developed by the specialists of the Agency in cooperation with the prominent experts from investment and scientific communities. Thus, the NRA’s investment attractiveness rating takes into account opinions of real investors and experts in the field of regional economy.

The investment attractiveness rating of Russian regions includes 80 regions of the Russian Federation. Characteristics of the Nenets Autonomous Area are considered as part of the rating assessment of the Arkhangelsk region, and characteristics of the Khanty-Mansi and Yamal-Nenets autonomous areas are considered in the rating assessment of the Tyumen region.

The investment attractiveness rating of Russian regions will be published by the NRA annually

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MethodologyInvestment attractiveness of the region is defined in the rating as the combination of factors influencing expediency, efficiency and level of risks of investments on the territories of a given region. These factors serve as an active background for all investment projects implemented in the territory of the region and influence the risk and profitability of these projects.

Investment attractiveness of a region consists of several factors; each of them can be evaluated by means of selection of proxy-variables for every such factor. In the rating of the National Rating Agency seven factors of regional investment attractiveness are considered:

1) Natural resources and the quality of environment in the region: availability in the region of main types of natural resources (including fuel and energy), level of environmental pollution, possibility of purification of the drains and processing of production wastes.

2) Regional labor resources: the key characteristics of a region’s manpower, including the size of economically active population, an employment and unemployment rates, volume of the offer of the qualified labor, as well as labor productivity.

3) Regional infrastructure: level of development and availability of both «rigid» and «soft» infrastructure. The concept of «rigid» infrastructure includes transport, energy, telecommunication and housing infrastructure. The «soft» infrastructure includes several components of which the financial infrastructure has the greatest importance from the point of view of investment attractiveness.

4) Regional consumer market size (potential regional demand): level of development of domestic market of the region (including the sizes of sectors of retail trade and paid services), the available income and purchasing power of the population of the region.

5) Productive capacity of the regional economy and gross regional product: aggregate results and specific features of economic activity of the enterprises which are already operating in the region (the volume and dynamics of production, the size of assets, their quality and efficiency of their use).

6) Institutional environment and socio-political stability: expert assessment of efficiency of the regional legislation regulating interaction between the authorities and investors, expert assessment of favorability of the regional tax legislation (availability of tax privileges and possibility of their receiving), level of social and criminal unrest in the region.

7) Financial stability of the regional budget and regional enterprises: state of public finance in the region (the amount of tax revenues, level of the balance of the budget, and regional public debt) and assessment of a financial position of the enterprises of the region (profitability / unprofitability of the companies, status of creditor and account receivables of the organizations, and availability of investment resources).

In order to assess these seven factors the NRA’s experts built a set of 53 indicators (proxy-variables). The indicators used in the methodology of the NRA for the assessment of the factors of investment attractiveness of a region can be divided into three groups:

1) Statistical indicators are traditionally used to evaluate the majority of the factors of investment attractiveness of the regions. The sources of such indicators are the official publications of the statistical bodies and the Federal authorities. In the methodology of the NRA use is made of the data provided by Rosstat (Russian Federal State Statistics Service), the Bank of Russia, the General Prosecutor’s Office of the Russian Federation, the Ministry of Finance of the Russian Federation, the Ministry of Communications and Mass Relations, and the Ministry of Natural Resources and Environment of the Russian Federation.




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2) Business perception surveys allow estimating indicators of investment attractiveness that cannot be measured quantitatively. The methodology of the NRA uses the results of polls conducted by Rosstat in the framework of the survey of the investment activity of organizations. Heads of organizations from all regions of Russia take part in such polls, which identifies the key internal and external factors limiting investment activity.

3) Expert opinions are used in studying the factors of investment attractiveness of a region, statistics on which is not conducted or published in the open sources. In the methodology of the NRA, expert opinions are used to assess the quality of the institutional environment and the level of social and political stability. Expert assessment scores are made by the NRA analysts and independent experts using a standardized score scale.

To determine the relative importance of the different factors in the final assessment of the investment attractiveness, a poll of experts has been conducted among representatives of investment and scientific communities (experts in the field of direct and portfolio investments, having experience of working with investment projects in the regions of Russia).

Here is the list of companies and organizations that participated in the survey: UK «BCS» (http://bcs.ru/am), Asset Management Company «VIVALDI» (http://www.uk.vialdi.ru), Gazprombank – Asset Management» (http://am.gazprombank.ru), Group of Companies «ICT» (http://www.ict-group.ru), IFC “METROPOL” (http://www.metropol.ru/index.wbp), Asset Management Company «Kapital» (http://www.kapital-am.ru), NPF «KIT Finance» (http://www.kitnpf.ru), Asset Management Company «Libra Capital» (http://www.libra-am.ru), Group of Companies PIONEER (http://pioneer.ru), NPF «Telecom-Soyuz» (http://www.npfts.ru); Economic faculty of Lomonosov Moscow State University (http://www.econ.msu.ru).

Following the results of the survey (poll), the factors of investment attractiveness have been assigned the following weights:

16,43% 15,95% 15,24% 14,29%

14,2

9%

13,

10% 1

0,71%

REGIONALINFRASTRUCTURE

NATURAL RESOURCES AND THE QUALITYOF ENVIRONMENT IN THE REGION

REGIONALLABOR RESOURCES

FINANCIAL STABILITYOF THE REGIONAL BUDGETAND REGIONAL ENTERPRISES

INSTITUTIONAL ENVIRONMENTAND SOCIO-POLITICAL STABILITY

REGIONAL CONSUMER MARKET SIZE(POTENTIAL REGIONAL DEMAND)

PRODUCTIVE CAPACITYOF THE REGIONAL ECONOMYAND GROSS REGIONAL PRODUCT




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Procedure for the assignment of ratings included several stages. At the first stage there data series have been collected for each of the 53 indicators to be used for all 80 regions considered in the study. During the second stage, the input statistical, survey-related and expert values were converted into calculated indicators based on correlating the values of the index of each region with minimum, maximum and average values among all the studied regions. Then, using the expert weights aggregated evaluation of all factors of investment attractiveness have been calculated, as well as the integral index of investment attractiveness for each of the regions. At the final stage threshold values of the index have been calculated on the basis of which the distribution of the regions across the three broad categories and nine groups of investment attractiveness have been made.

Rating assessment of the investment attractiveness of a region is being assigned according to a special scale divided into three broad categories with the three levels found inside each category:

Category «regions with a high level of investment attractiveness»:

• Group IC1 (high investment attractiveness – the first level)

• Group IC2 (high investment attractiveness – the second level)

• Group IC3 (high investment attractiveness – the third level)

Category «regions with medium level of investment attractiveness»:

• Group IC4 (medium investment attractiveness – first level)

• Group IC5 (medium investment attractiveness – the second level)

• Group IC6 (medium investment attractiveness – the third level)

Category «regions with a moderate level of investment attractiveness»:

• Group IC7 (moderate investment attractiveness – the first level)

• Group IC8 (moderate investment attractiveness – the second level)

• Group IC9 (moderate investment attractiveness – the third level).




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Investment attractiveness rating of Russian regions

Region Administrative center Date of rating assignment /affirmation

Group IC1 (high investment attractiveness – first level)Moscow Moscow 10.12.2013

Sakhalin region Yuzhno-Sakhalinsk 10.12.2013

Group IC2 (high investment attractiveness – second level)Belgorod region Belgorod 10.12.2013

Moscow region Moscow 10.12.2013

Republic of Tatarstan Kazan 10.12.2013

St. Petersburg St. Petersburg 10.12.2013

Tyumen region Tyumen 10.12.2013

Group IC3 (high investment attractiveness – third level)Kaliningrad region Kaliningrad 10.12.2013

Kaluga region Kaluga 10.12.2013

Kamchatka Krai Petropavlovsk-Kamchatski 10.12.2013

Krasnodar Territory Krasnodar 10.12.2013

Leningrad region St. Petersburg 10.12.2013

Magadan region Magadan 10.12.2013

Samara region Samara 10.12.2013

Sverdlovsk region Yekaterinburg 10.12.2013

Томская область Томск 10.12.2013

Khabarovsk Territory Khabarovsk 10.12.2013

Chukotka Autonomous Area Anadyr 10.12.2013

Group IC4 (medium investment attractiveness – first level)Amur region Blagoveshchensk 10.12.2013

Arkhangelsk region Arkhangelsk 10.12.2013

Voronezh region Voronezh 10.12.2013

Krasnoyarsk Territory Krasnoyarsk 10.12.2013

Lipetsk region Lipetsk 10.12.2013

Nizhny Novgorod region Nizhny Novgorod 10.12.2013

Novosibirsk region Novosibirsk 10.12.2013

Orenburg oblast Orenburg 10.12.2013

Perm region Perm 10.12.2013

Primorsky Krai Vladivostok 10.12.2013

The Republic of Bashkortostan Ufa 10.12.2013

The Republic of Komi Syktyvkar 10.12.2013

Republic of Sakha (Yakutia) Yakutsk 10.12.2013




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Republic of Khakassia Abakan 10.12.2013

Rostov region Rostov-on-Don 10.12.2013

Group IC5 (meidum investment attractiveness – second level)Astrakhan region Astrakhan 10.12.2013

Vladimir region Vladimir 10.12.2013

Volgograd region Volgograd 10.12.2013

Irkutsk region Irkutsk 10.12.2013

Kemerovo region Kemerovo 10.12.2013

Kursk region Kursk 10.12.2013

Murmansk region Murmansk 10.12.2013

Novgorod region Veliky Novgorod 10.12.2013

Omsk region Omsk 10.12.2013

Republic of Karelia Petrozavodsk 10.12.2013

Saratov region Saratov 10.12.2013

Smolensk region Smolensk 10.12.2013

Stavropol Territory Stavropol 10.12.2013

Tambov region Tambov 10.12.2013

Tula region Tula 10.12.2013

Udmurt Republic Izhevsk 10.12.2013

Ulyanovsk region Ulyanovsk 10.12.2013

Chelyabinsk region Chelyabinsk 10.12.2013

Yaroslavl region Yaroslavl 10.12.2013

Group IC6 (medium investment attractiveness – third level)Vologda region Vologda 10.12.2013

Kostroma region Kostroma 10.12.2013

Kurgan region Kurgan 10.12.2013

Penza region Penza 10.12.2013

Republic of Adygea Maikop 10.12.2013

Republic of Dagestan Makhachkala 10.12.2013

Republic of Mordovia Saransk 10.12.2013

Ryazan region Ryazan 10.12.2013

Tver region Tver 10.12.2013

The Republic of Chuvashia Cheboksary 10.12.2013

Group IC7 (moderate investment attractiveness – first level)Altai Territory Barnaul 10.12.2013

Bryansk region Bryansk 10.12.2013

Jewish Autonomous Region Birobidzhan 10.12.2013

Ivanovo region Ivanovo 10.12.2013

Orel region Orel 10.12.2013

Pskov region Pskov 10.12.2013




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Republic of Altai Gorno-Altaisk 10.12.2013

Republic of Buryatia Ulan-Ude 10.12.2013

The Chechen Republic Grozny 10.12.2013

Group IC8 (moderate investment attractiveness – second level)The Zabaikalye Territory Chita 10.12.2013

Kabardino-Balkar Nalchik 10.12.2013

Kirov region Kirov 10.12.2013

Republic of Ingushetia Magas 10.12.2013

Republic of Mari El Yoshkar-Ola 10.12.2013

Republic of North Ossetia Vladikavkaz 10.12.2013

Group IC9 (moderate investment attractiveness – third level)Karachay-Cherkess Republic Cherkessk 10.12.2013

Republic of Kalmykia Elista 10.12.2013

Republic of Tuva Kyzyl 10.12.2013




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Comments to the ratingRating of investment attractiveness of the regions of Russia in 2013 shows the existence of two distinct reasons allowing the regions to be attractive for investors. The first reason is the availability in the region of basic advantages being attractive for investors. Such basic characteristics first of all include ample reserves of natural resources, status of a capital city and advantageous geographical position. The second reason for the growth of investment attractiveness of the region is the purposeful work on the creation of favorable investment climate contributing to attracting of large investors and facilitating the business development. Regions that are doing this work have managed to appear among those with high investment attractiveness, although many of their closest neighbors with similar «starting position» were assigned an average or a moderate rating. In addition, high ratings of several regions were caused by the combination of the two above-mentioned reasons (for example, in the case of Tatarstan).

Figure 1. Number of regions within the groups of the rating

Source: NRA

Results of the rating of investment attractiveness of the regions of Russia based on the data for the year 2012 are well correlated with the real picture of the activity of foreign direct investors in 2012 (see Figure 2). 18 regions included in the groups IC1, IC2 and IC3 of the NRA rating (category «high investment attractiveness») have jointly attracted more than 71% of the total FDI inflows to Russia excluding offshore investments, whereas the share of the 18 regions with ratings IC7, IC8 and IC9 (category «moderate investment attractiveness») accounted for less than 1.8% of the inflows of FDI in Russia. These figures may indicate that when choosing a region the foreign investors are guided, among other things, by the indicators included in the NRA’s estimation of investment attractiveness of regions.




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Figure 2. Distribution of Foreign Direct Investments excluding offshore across groups of rating in 2012

Source: Rosstat, NRA

The leaders of the rating of investment attractiveness of the regions of Russia in 2013 have become Moscow and Sakhalin region. These two regions were included in the group IC1 (high investment attractiveness of the first level). Moscow has once again confirmed its role of the centre of the economic life of the country. Moscow is among the leaders with a significant excess over the average Russian level across nearly all the indicators considered during the formation of the rating. The capital is the undisputed leader in important areas such as infrastructure development level and the volume of the domestic market, Besides, Moscow shares with Saint Petersburg the first position in terms of volume and quality of the workforce. Regarding the Sakhalin region, the high rating of the territory is caused first of all by the availability of rich natural resources. Active development of oil and gas fields of Sakhalin, including those with the use of foreign investments, has led to a confident leadership of the region in terms of gross regional product per capita. The Sakhalin region is also among the top regions in terms of the capacity of the regional demand, productivity and profitability of enterprises. A large volume of tax revenues from companies engaged in the extraction of natural resources also allows the region to enjoy a high stability of the regional budget. High investment attractiveness of Moscow and the Sakhalin region is confirmed by the activity of foreign investors. According to the experts of the NRA on the basis of the data of Rosstat, Moscow raised about 23% of the total inflow of foreign direct investment in Russia in 2012 excluding offshore. Sakhalin region, in its turn, raised approximately 4% of the total FDI inflows in 2012, yet following the results of 2012 held the confident highest position in terms of inflow and accumulation of foreign direct investment per capita.

The group IC2 (high investment attractiveness of the second level) includes five regions. St. Petersburg and the Moscow region have obtained the high rating thanks to availability of a qualified manpower resources, well-developed infrastructure, availability of solvent demand, as well as sufficiently high financial stability of both regional budgets and the enterprises operating in the region. Tyumen region (along with the autonomous districts it comprises) is the leader on the reserves of natural resources; resources extraction also determines a stably high GRP, the amount of the fixed assets and investments in the fixed capital per capita. Tyumen region is also among the top ten regions




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of the country in terms of labor resources, the potential of the domestic demand and the financial sustainability. Republic of Tatarstan is almost the unique example of a beneficial combination of all the factors of investment attractiveness. Tatarstan ranks among the top 12 best regions of the country in terms of each of the seven factors of investment attractiveness considered in the ranking. The region looks especially confident in the issues such as the availability of natural and labor resources, infrastructure and the quality of the institutional environment. Management experience of Tatarstan in the sphere of creation of favorable investment climate is currently actively used as a «best practice», and rightly so. Finally, high rating of Belgorod region proves that oil and gas are not the only kinds of natural resources on which the welfare of the region can be based. The region has rich reserves of iron ore and a well-development metallurgical industry, has recently been making an increasingly great use of yet another competitive advantage - fertile soils. As a result, agriculture and food industry have become real drivers of growth for the economy of the region and one of the most attractive investment destinations.

Group IC3 (high investment attractiveness - the third level) comprises 11 regions. Among them are the «resource» regions (Kamchatka Krai, Magadan region, Tomsk region, and Chukotka Autonomous Area), traditional industrial centers (Leningrad region, Samara region, Sverdlovsk region, and Khabarovsk territory) and the agro-industrial center (Krasnodar territory). The Kaliningrad region is attractive for investment due to its strategic location as well as thanks to a high infrastructural and institutional development. Finally, Kaluga region is recognized as the «economic miracle» of the last decade. Thanks to the creation of a favorable investment climate, the authorities of the region have managed to attract major foreign investors into the region, whose activity has led to the growth of the main macroeconomic indicators. A well-established image of a reliable and safe region allows the Kaluga region to maintain a consistently high inflow of investments, first of all into several clusters of manufacturing industry.

More than a half of all the regions of Russia (44 regions out of 80 examined in the framework of the present study) have a «medium» level of investment attractiveness (groups IC4, IC5 and IC6). What is encouraging is the fact that many of these regions have a relatively good level of infrastructural development and a high quality of the institutional environment. Accessible infrastructure and functioning institutions to support businesses are already helping the regions to establish and develop new industries which in the medium term will allow increasing the production potential and volume of the domestic market, i.e. to improve the position of the region in terms of all the factors of the investment attractiveness. Several regions of the group IC4 can be increased to a higher level in the next year provided that they preserve a positive dynamics of development.

Rather troublesome is the situation with the investment attractiveness of the regions that have been assigned ratings IC7, ІС8 and ІС9. These regions are below the Russia’s average level on most of the indicators included in the methodology of the NRA. Insufficiently high investment attractiveness of most of these regions results from the combination of low availability of natural resources and structural socio-economic problems the solution of which can take time and resources. In particular, the republics of the Northern Caucasus, the Republic of Kalmykia and the Republic of Tuva need to develop infrastructure (including transport, telecommunications and financial), improve the qualification of labor resources, create effective institutions and tackle the issues of social development. As regards some of the regions of the Central Russia, the Volga region and the North-West that turn up among the regions with a moderate level of investment attractiveness, the best solution here may be to use the experience of their neighbors - the subjects of the Federation located in the same macro regions, yet much more successful in attracting investments.




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It is necessary to bear in mind that any rating of investment attractiveness depends largely on the statistical data that take into account changes occurring in the region with a certain delay. If the administration of the region takes vigorous efforts to enhance the investment attractiveness, there is no need to wait for these measures to be reflected in the statistics. Regional authorities can communicate timely information regarding the ongoing positive changes with the assistance of the media, regional investment portals, and personal meetings of the heads of regions with the potential investors. If an investor receives guarantees and convincing evidence that the region is developing dynamically, he / she can close the eyes to the fact that the region is among the laggards in the current rating of investment attractiveness. The decision to implement the investment project in such a region may be good news for the future: the investor›s business will grow together with the regional economy. Yet for the investor to take such a decision, two conditions are necessary: active and insistent promotion of the region, aimed at overcoming the image of a depressive territory ,and the real social and economic reforms, primarily aimed at reducing the risks and improving the doing-business environment.




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