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How might pandemic impact new foreign direct investments in 2020 and beyond?

The impact of pandemic on project realization is less severe in certain countries. But foreign direct investments (FDI) by non-residents in Russian companies of the non-banking sector of the economy fell 52 times in Q1 2020 with the same period last year. And this decrease in Russia follows very strong levels of investment in 2018. Although we should not forget that at the beginning of 2019, foreign direct investment in the Russian Federation has been reduced to a minimum since 1997.

According to the Central Bank of the Russian Federation, the volume of FDI in the non-banking sector amounted to 200 million US dollars. In Q1 2020, non-residents reduced portfolio investments in assets of the non-banking sector of the Russian Federation by $2.4 billion, compared with a decrease of $0.4 billion in the first quarter of 2019. At the same time, in Q1 2020, FDI from Russia to foreign companies increased by $4.9 billion against growth Q1 2019 by $9.1 billion, and portfolio investments increased by $1.8 billion against growth by $0.5 billion a year earlier. In Q1 2020, non-residents increased their investments in the obligations of the federal governing bodies of the Russian Federation by $1.2 billion against an increase of $7.2 billion for the same period in 2019.

First of all, most of the mergers and acquisitions in Russia are under the sign of tough Western sanctions. A decisive role in the behavior of investors is played by several factors:
• The need for Western investors to reduce risks in Russia due to sanctions pressure, so they want to get out of Russian assets
• Weak growth of the Russian economy and, as a result, a decrease in consumer demand
• Tightening regulatory rules by government
• The desire of the Russian investors to sell assets abroad to reduce their country risks.

For example, the volume of purchases of Russian assets by foreign organizations in March exceeded the total volume of transactions in the domestic M&A market. In general, since 2012, there has been a decrease in the volume of mergers and acquisitions. If in 2012 it was $135 billion (according to KPMG data), then in 2018 the volume of transactions fell to $51 billion with a total doubling of the number of transactions during this time (from 334 to 652). This suggests that business owners did not sell assets because of high demand, but because of financial and other difficulties (although we should not forget about the devaluation of the Russian ruble). The decline in consumer activity hit the investment attractiveness of the food industry.

Statistics of the Central Bank speaks of the Russian Federation less integration in the world market of direct investments, experts say. Direct investment in the stock market often scares conservative investors, bank deposits promise too low income. Real estate, traditionally perceived as a safe haven, seems to be the only way out. However, important changes are also taking place in this area. The real estate market may still be affected by the consequences of the events. Many industries found themselves in the deepest crisis: hotels, fitness, educational centres, travel industry, etc. The fight against the virus, the long-term isolation of residents, the experience of remote work leave their mark on consumer habits and bring significant changes for owners of various assets. It is clear that home insulation and remote work experience will become a catalyst for changes in the office real estate market. Many properties in the commercial real estate sector will only be able to experience the effects of a pandemic within 3-6 months after the restrictions are lifted.

After the pandemic, it will become clear that the global economy has become ill with liquidity. The lack of free money amid the global crisis has sharply reduced the ability of foreign investors, including with regard to Russian projects. In addition, the fact that the Russian authorities dragged on time with business support programs also did not inspire foreign players; and the flow of money was almost exhausted. So far, this is not critical for the economy, because something else remains in the system and continues to work. However, the deeper the funnel of the crisis spins, the greater the chances of a complete cessation of investment in Russia.

It is worth noting that now direct investment in the commodity sector has sharply decreased in the global economy, taking into account the uncertainty in the growth rate of the global economy. The hydrocarbon production industry has suffered more significantly, and many countries even freeze production even without the OPEC + deal. In this regard, most investment projects in Russia are paused. The movement of capital reflects the current situation in the real sector and it is worth suggesting that investment will increase with the growth of economic activity.

News

The most popular investment instruments for Russian citizens are savings accounts in banks, foreign

currency, real estate, life insurance and cryptocurrencies.

The real disposable income of Russians in the third quarter fell by almost 5% after a record drop of

8.4% in the second, Rosstat reported.

In September 2020, the monthly increase in consumer prices (as estimated seasonally adjusted) decreased to 0.25% compared to 0.38% in August, according to the next release of the information and analytical commentary “Dynamics of consumer prices”.

Consumer demand in the first seven months of 2020 in Russia decreased due to the coronavirus pandemic by an average of 6.7% relative to the result of January-July 2019.
Net capital outflow in January-August 2020 increased 1.7 times compared to the data for the same period last year – from $20 billion to $34.8 billion.
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