High returns on financial instruments make them more attractive investments than fixed assets

26 june 2017

Making a presentation on the new facts about the Russian economy at the 6th Conference "Economic Situation in Russia" organized by the Franco-Russian Chamber of Commerce, Analytical Center expert Yekaterina Grigorieva talked about the current macroeconomic trends in the Russian economy and the medium term prospects of economic development in the country.

"In January through March 2017 investments in real terms were up by 2.3 % on the same period of last year, demonstrating the largest increase in the past 16 quarters," Ms. Grigorieva said. "The basic drivers of economic growth included investments in machines and equipment, where we saw growth not only in imports, which resulted from a stronger rouble, but also in domestic manufacturing."

According to the experts, the decline in the construction sector, by contrast, was holding back a recovery in investments. The Russian Federal Statistics Services reports that Q1 2017 saw a 4.3 % decrease in construction on an annualized basis.

Ms. Grigorieva, however, believes that the investment figure begs some questions. It includes investments both by large and medium-sized organizations, which make up some 80 % of total capital investments, and investments that are estimated to have occurred in the segment in which the Federal Statistics Service does not conduct surveys and only makes estimates for. At the same time, according to the Federal Statistics Service, the real increase in investments by large and medium-sized organizations calculated on the basis of statistical surveys of large companies was just 0.4 % in Q1 2017, while the estimated increase in investments by small companies is reported as 9.6 %.

This means, that according to the Federal Statistics Service the bulk of investment growth early in the year was happening in the small business segment (as well as in the segment for which no real statistical observations are made), which accounted for 22.1 % of the total investments and which increased by just 4.6 billion roubles in nominal terms, or just 1 %. The expert believes that all this information suggests that the total increase in capital investments in Q1 2017 (+2.3 %) could be overestimated and will probably be revised down at a later point.

"High interest rates are prompting companies to forgo capital investments in favor of financial instruments," Ms. Grigorieva said. "It is notable that capital investments in nominal terms increased less than twofold between 2009 and 2016 while financial investments grew much faster in the same period, increasing sixfold from 22,745 billion roubles in 2009 to 136,718.9 billion roubles in 2016. As a result the share of capital investments in total business investments hit a 17-year low of 9.7 % in 2016. At the current level of returns on financial instruments, capital investments simply do not make much business sense for many companies."