For the third consecutive year, Russia has been experiencing an economic rise triggered by the precipitous fall of the ruble in the wake of the August 1998 financial crisis and fueled by the favorable world-market situation for Russia's traditional export commodities. But, when these factors lost momentum by the second half of 2001, it became clear that this potential for growth had been exhausted.

An economic slowdown began in September 2001, and, during November, the tempo of industrial growth in the country declined 5.4 percent. This occurred against the background of a declining rate of investment: According to the State Statistics Committee, year-on-year growth of investments made in Russian industries declined from 18.1 percent in 2000 over 1999 to 8.3 percent in January-November 2001 over the corresponding period of 2000.

As things stand today, investments are concentrated in the fuel and raw-materials sectors, while processing industries are badly suffering from being almost neglected. During the first nine months of 2001, the fuel and transportation sectors accounted for 23.3 percent and 22.9 percent of total investments, respectively.

Another problem plaguing Russia is capital flight: Some $20 billion flow out of the country every year; last year, capital flight reportedly grew to $28 billion. According to estimates made by experts from the Macroeconomic Research Institute, in the last two years the rate of owned-fund accumulation in the oil industry increased from 17 percent to 35 percent, while not more than 15 percent has been spent on investment programs, and the remaining money was either converted into foreign currency or transferred to the bank accounts of various off-shore companies.

The "Program of State Investment Policy for the Period of 2001 Through 2010" drafted by the Ministry of Economic Development and Trade calls for creating conditions for sufficient supply of capital to the market that would fully satisfy the economy's need for investments. According to estimates made by the Ministry of Finance, Russia needs approximately $15-$20 billion invested every year just to maintain its production growth at the present rate of 4-5 percent per year. Furthermore, according to the government document "Energy Strategy of the Russian Federation," Russia needs $700 billion over the period to 2020 solely for financing the development of its fuel and energy sector.

The ability of a country to attract investment is determined primarily by its macroeconomic and political stability and the existence of legislative support for investors and their rights. As regards the former, Russia is in reasonable shape, as its GDP posted a growth of 20 percent over the last three years, exceeding the global figure of 10 percent. Leading rating agencies have repeatedly upgraded Russia's investment-attractiveness ratings. Besides, Russia started paying off its foreign debts ahead of schedule, which reflected itself in the 60 percent growth of Russia's stock market over the past year. This notwithstanding, it does not appear possible to expect any substantial activity on the part of portfolio investors toward Russia, because the overall capitalization of the Russian stock market is comparable to just a small fraction of Western ones.

Russia currently has some 30 major laws and legislative acts in effect to regulate investment activities, including private and state investments, leasing and insurance.

The presidential decree "On Private Investments in the Russian Federation" provides for an annual allocation of funds in the amount of 0.5 percent of the GDP to finance promising investment projects selected by competition.

The Federal Law "On Investment Activity in the Russian Federation" and the government resolution "On the Additional Stimulation of Private Investments in the Russian Federation" provide for state assistance in the volume of 20 percent to 50 percent (depending on the project's category) of the cost of an investment project provided that not less than 20 percent comes from a private investor. State assistance is provided from the federal budget in the form of an interest-free loan or in exchange for a share of ownership in the companies being set up.

In the "Program of State Investment Policy," foreign investments are named among the main sources of long-term investments.

The Federal Law "On Foreign Investments" guarantees the irrevocable observance of the rights and interests of investors throughout the territory of the Russian Federation, including ownership rights and rights to the proceeds and profits of their enterprises.

The Federal Law "On Production-Sharing Agreements," which was adopted in 1995 and amended and appended by other laws and legislative acts in 1997, 1999 and 2000, is already in action, as a number of high-profile production-sharing projects are under way, including Sakhalin-1 ($15.2 billion) and Sakhalin-2 ($9 billion). The ointment, however, is not without its flies, as the national subcontractor guaranteed share of work of 70 percent is not always observed (the law establishes that 70 percent of the work to be fulfilled under a production sharing project should be contracted from Russian companies). In Sakhalin-1, for example, foreign companies handle 80 percent of work and Sakhalin-2 does not involve any Russian subcontractors at all.

In order to prevent violations of the rights of the Russian side in production-sharing projects, a number of amendments have been made to the procedure of concluding such agreements, specifically a clause limiting the total volume of production-sharing projects to 30 percent of the discovered and itemized mineral resources in the country.

Three federal laws have been drafted with the aim of improving Russia's investment climate and reducing bureaucratic red tape, specifically to simplify company registration procedure, shorten the list of activities requiring licensing and reduce the number of checks and inspections. These are the laws "On the State Registration of Legal Entities," "On Licensing of Certain Kinds of Activities" and "On the Protection of the Rights of Legal Entities and Individual Entrepreneurs During State Inspections."

One of the worst barriers hampering investments in Russia is the excessively complicated procedures for coordination and approval of project documentation and obtaining permission for implementing investment projects. In the near future, amendments to the Federal Law "On Investment Activities in the Russian Federation in the Form of Capital Investments" are planned that will simplify the procedures of investment-project coordination and introduce a "one-stop-shop" system. For this purpose, an ad hoc organization will be established that will be in charge of state inspection of investment projects.

Another draft law, "On the Affiliated Entities," is aimed at strengthening controls over deals involving affiliated entities, combatting the practice of making deals in violation of shareholders' rights and, as a result, improving Russia's investment climate.

In order to increase the efficiency of direct state investment, plans call for introducing amendments in the set of laws dealing with bankruptcies.

The adoption of a second part of the Tax Code has created reliable legal guarantees for taxpayers. The profit tax has been reduced from 35 percent to 24 percent and the income tax was set flat at 13 percent.

At the same time, the existing legislation in the field of investment is still far from perfection, and as long as investors lack confidence and guarantees of protection of their rights, it will not be possible to expect any sizable influx of investment into Russia's economy.

(The author has a Ph.D. in economics and is chief analyst at financial-information agency Konsultant)