Betting on base support

Investment appeal Rating of Russian regions
Москва, 20.08.2012
«Expert: invest in Russia » №2 (2)
How is the investment appeal rating of Russian regions worked out?

How the Method Has Changed…

This year, we decided to seriously reexamine the methodology for assessing investment risks in our rating system. Above all, we were encouraged to do so because of the changes in governance practices, which had appeared in the constituent subjects of the Russian Federation in the past few years.

The first changes concern regional legislation. As of mid-2000, when power was built on a vertical basis, investment legislation was aligned in Russian regions; as a result, regulations for conducting business in different regions were prescribed under normative acts, and were almost smoothed out. Regional administrations actively “copied” laws on investment operations from each other, and in recent years, they started accepting model documents, drawn up by the federal center. It became meaningless to evaluate legislation risk in such circumstances, so we decided to do without it.

The second major change occurred in management risk. In the new rating, we decided to abandon the evaluation of target-program methods of management. The crisis illustrated that all medium- and long-term regional development programs and strategies were completely inapplicable to economic realities. Documents remained in place, but life went its own way.
In addition, smaller-scale changes affected other individual risks. The evaluation of state debts of the constituent subjects of the federation was added to the financial risk. As for social risks, we did not consider the number of strikes listed by Rosstat (Federal State Statistics Service) in each region and we did not evaluate the accident risk in housing and accommodations, as these indicators no longer reflect an on-going reality.

The changes in potentials are more technical in nature.

We used the updated statistics of the Ministry of Natural Resources and Environmental Protection to assess the natural resource potential. As for the innovation potential, we abandoned calculating the number of technoparks in the region (most of them are just real estate, without any kind of innovation), replacing them with the number of filed patent applications. As for infrastructure potential, we began to assess the level of Internet usage. As for the consumer and financial potentials, we introduced a correction to consumer purchasing power in order to assess the total income of the population.
Past corrections allowed us to estimate the national average of investment risks (both individual and integral) for the very first time. Each average national risk was calculated as a weighted average of that risk in 83 constituent subjects of the federation, and the region’s share in the potential was included in the weighted average.  As a result, we can now monitor the decreases or increases in investment appeal of the country as a whole.
In order to make a good comparison with last year’s results, we decided to set up the data according to the modified rating method used in 2009–2010. The analysis is mainly presented on the basis of this comparison.

The investment appeal rating of Russian regions is traditionally based on official data from Rosstat (Federal State Statistics Service), and statistics from federal authorities: the Ministry of Communications, the Ministry of Finance, the Ministry of Natural Resources and Environmental Protection, the Federal Service for Insurance Supervision, and the Central Bank.

Information and Methods

Investment appeal rating is evaluated according to two parameters: investment potential and investment risk. The potential shows what share the given region holds on the national market, whereas investment risk demonstrates the scope of problems in the given region to investors. Total investment potential comprises nine individual factors: labor and employment, finance, industry, consumerism, institutions, infrastructures, natural resources, tourism, and innovation. Integral potential includes six individual risks: financial, social, administrative, economic, environmental, and criminal. The contribution of each risk or potential to the final indicator is evaluated on the basis of questionnaires submitted to expert representatives, and investment and banking communities.

Specialists from the Deutsche Bank, the SME Bank, the VEB (Bank for Development and Foreign Economic Affairs), the Trust Bank, “Delovoy Rossiyi” (Business in Russia), the Russian and German Chamber of Foreign Trade and Commerce, the Skolkovo Foundation, and the Independent Institute for Social Policy took part in our surveys. Experts determined the weight of each component in the integral indicators for risk and investment potential (see Figure 8).

We used statistical data as of January 1, 2011.             

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