Judging by comparative studies conducted for a number of countries, short-term forecasts for the Russian economy give no grounds for optimism. In 2001, Russia ranked 79th out of a total of 91 countries on Transparency International's corruption-exposure rating list. The American Republican think tank Heritage Foundation placed Russia at 131st place out of a total of 153 on its economic-freedom index rating as of 2002. Experts from the World Economic Forum give Russia 63rd place out of 75 in terms of economic-growth potential and 58th out of 75 in terms of competitiveness. Therefore, there are no reasons to expect any significant increase in the volume of foreign investment in Russia's economy. It is worth recalling here that successes in economic reforms in many countries that once belonged to the orbit of the former Soviet Union, like Hungary and Poland, occurred precisely as a result of sizable direct investments from foreign companies.

Direct foreign investments are particularly important for transitional economies that cannot accumulate owned funds in sufficient amounts to implement modernization and innovation projects. Per capita volume of direct foreign investment in Russia is as low as $1.98 (according to estimates made by the Heritage Foundation for 2002), far behind those of other emerging markets. For comparison, in Hungary the figure is $92.7. There are many reasons for this pitiful situation, including the high rate of corruption, imperfection of tax legislation, lack of clarity in the sphere of property rights, an inefficient judicial system, inconsistent economic policy and high inflation.

The State Statistics Committee reports that the total volume of direct foreign investment in the Russian economy currently equals $5 billion, and the inflow of such investment is extremely low. According to government estimates, the country needs at least $100 billion every year just to maintain equipment rotation, while it actually gets only 1,575 billion rubles (approx. $55 billion).

There is no common opinion in the Russian Ministry of Economic Development and Trade. The head of the Ministry's Department for Investment Policies, Sergei Bayev, insists that twice the present rate of investment is required just to maintain production at its present level, while the Ministry's head, German Gref, promises 4-5 percent economic growth.

Who is right, and what should the government do about the situation? Active government measures to stimulate production may result in misuse of government funds. Creating favorable conditions for specific economic sectors is also fraught with dangerous possibilities (suffice it to recall the recent sad experience of establishing free economic zones).

The answer to the question is very simple, though the problem will hardly be resolved any time soon. All that needs to be done is create a normal competition environment in the Russian economy. Only after that will it be possible to expect increase in the rate of investment.

As things stand today, investments are concentrated mostly in the monopolized sectors, primarily in the oil and gas industry. The fuel and energy sector accounts for 53.3 percent of total investment in Russian industries, including 34.8 percent in oil production. According to the State Statistics Committee, 3,333 oilrigs were put into operation during January through October 2001, up 23 percent from the corresponding figure for the year 2000.

The following industries have prospects of becoming attractive for both domestic and foreign investors in the near future: electricity, retail trade, agriculture and insurance. Though a lot of ink has been spilled about the need to develop high-tech industries and cutting-edge technologies, very few companies and enterprises in this sector have succeeded in attracting investment.

The government's economic policy is oriented toward fulfilling the correct recommendations made by international consultants, or at least this is what the authorities are declaring. It would be much better if the declared processes of de-bureaucratization, reducing the tax burden and restraining inflation were going on a bit faster. So far, there have been lots of reorganizations and discussions and many draft laws have been enacted, but they have not produced any noticeable effect on the actual situation in the industries.

Another factor reducing Russia's investment attraction is the unwillingness of company owners to hire managerial teams from outside, even if this would give access to new technology and other valuable opportunities. There are only a few exceptions in a limited number of industries, for example in telecommunications, where the presence of foreign capital and foreign managers is fairly strong.

A diametrically opposite opinion on foreign investment in the Russian economy exists. Presidential adviser on economic issues Andrei Illarionov maintains that foreign investment is only harmful for the Russian economy. Alternatively, the chairman of the board at the oil company Yukos, Mikhail Khodorkovsky, has proposed to drastically reduce taxes in order to release funds for investing. It must be noted here that an economic model where investments are generated by "wealthy sectors," be it the oil industry or others, is fraught with the formation of a Korean-like "clustered system" that may have a negative influence on both economic and political processes.

Instead of stimulating the formation of behemoth-sized holdings, it is necessary to take consistent measures to improve the investment climate in the country, thus attracting both domestic and foreign investors. To achieve that, there is no need to set up yet another "council on investment," but to implement reforms to reduce the government's excessive presence in the economy. It will not be possible to attract any substantial volume of investments without resolving the problem of corruption, improving tax legislation and making the judicial system more effective. We obviously must conclude that Russia will not see any investment boom before the government starts implementing its planned reforms. Therefore, for the next three to four years, the Russian economy will have to count mostly on its available material, human and technological resources.

(The author is staff researcher at the Institute of Financial Research)