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Jun 18, 2016 | 13:38 GMT

Russia's Search for Foreign Investment

Russia Looks East and South for Foreign Investment
(SERGEI CHIRIKOV/AFP/Getty Images)
Summary

The three-day St. Petersburg International Economic Forum, Moscow's answer to the World Economic Forum at Davos, wrapped up June 18. Though Russia and its companies have signed hundreds of agreements worth tens of billions of dollars with foreign firms at the forum in recent years, participation by European and U.S. firms had fallen off sharply because of Western-Russian tensions stemming from the Ukraine crisis. Now, however, many Western government officials and business leaders have returned, even though U.S. sanctions remain in place and EU sanctions are likely to be renewed in the coming weeks.

Sanctions dominated the discussion at this year's forum. Former French President Nicolas Sarkozy argued June 16 that all sanctions against Russia should be lifted. European Commission President Jean-Claude Juncker responded that more progress is needed in the Minsk negotiations between Ukraine and Russia before that can happen. For their part, Russian politicians such as Deputy Prime Minister Arkady Dvorkovich and economic adviser Alexei Kudrin hinted that talks with European representatives at the forum led them to believe that most sanctions will be eased by the beginning of 2017.

A Western Thaw

Italy has been among the EU countries arguing the loudest against the continued automatic extension of the sanctions, though it is not yet ready to break ranks with Europe on the issue. In gratitude, Russia asked Italy to co-host the St. Petersburg International Economic Forum, the first time Moscow has shared that spotlight. Italian firms were also allowed to promote doing business in and with Italy at the forum. Moreover, Italian firms concluded a string of deals worth $1.7 billion with Russian firms, and it was announced that Italian petroleum company Eni is joining India and China in a possible bid on a privatized stake in Russian oil powerhouse Rosneft before the end of the year.

Royal Dutch/Shell signed a deal with Russian natural gas giant Gazprom that might see it become involved in a $10 billion liquefied natural gas facility on the Baltic Sea. Rosneft and BP (which still owns a stake in the former) also signed a binding deal for a joint venture to be known as Ermak Neftegaz that will explore for oil reserves in Siberia.

Despite this flurry of activity, as of June 17, the volume of deals between the West and Russia remained below the levels seen at forums before 2014. In the weeks before the forum, Moscow said Washington was pressuring European governments to dissuade their countries' businessmen from attending the forum. Though many Western firms still went, statements from them suggest they are reluctant to jump fully back into doing business in Russia.

Alternative Sources of Investment

Western businesses' ongoing reluctance to re-engage has pushed Russia to continue seeking foreign investment elsewhere, particularly from China. At the forum, Russia signed a string of deals with China, many of which were focused on bolstering Russia's transportation corridors. The first stage of a deal worth $600 million for a system between China and Russia's Pacific port of Zarubino like the proposed California Hyperloop was signed. The ambitious project, however, might never leave the drawing board. Negotiations also advanced on China's involvement in conventional high-speed rail between Moscow and Kazan.

[sidebar title="Hyperloop" imgurl="https://www.stratfor.com/sites/default/files/styles/stratfor_large__s_/public/main/images/sidebar-hyperloop.jpg?itok=Lvx9xvX1"] Hyperloop is a registered trademark of the Space Exploration Technologies Corp. for the high-speed transportation of passengers and goods in tubes in which capsules are propelled by linear induction motors and air compressors. [/sidebar]

Both deals are likely to be finalized at Russia's other major economic gathering, the Eastern Economic Forum, in September. The projects advance China's intense focus on its Belt and Road Initiative to build land bridges across Eurasia. But China has neither the interest nor the finances to invest huge amounts in Russia. For its part, Russia does not want to replace overreliance on Western investment with overreliance on Chinese investment.

Moscow has therefore sought other large investment partners, such as India and countries in the Middle East. In March, Rosneft sold stakes in two major eastern Siberian oil fields to three Indian companies. At the forum, the trend continued with India's Oil and Natural Gas Corp. signing deals to invest $5 billion in Russia.

Russia reportedly also held talks with Middle Eastern investment firms at the forum. In recent years, Russia has increased its cooperation with Middle Eastern countries through joint projects with their various investment funds. Middle Eastern investment funds have put billions of dollars into Russia through the Russian Direct Investment Fund, particularly in the agricultural sector.

At the forum, Middle Eastern funds negotiated a deal for a privatized stake in Russian Helicopters, a maker of civilian and military helicopters and Russia's second-largest defense contractor. The 20 to 25 percent stake is reportedly being sold to Russia's Direct Investment Fund, which will then sell some or all of the shares to investment funds from the Middle East with an option for them to raise their stake to 49 percent. Russian media have speculated that the funds are likely from the United Arab Emirates, though Saudi, Qatari and Kuwaiti fund involvement has also been discussed. Allowing groups from the Middle East access to Russia's military-industrial complex would represent a departure for Moscow. But Russia's need for new markets and cash to inject into its struggling economy and military make the departure necessary.

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