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Friday, 25 October 2013 10:54

Russian Investment Needs Credit Support

MonumentCathedralBy Kester Kenn Klomegah*

MOSCOW, October 25, 2013 (Buziness Africa) -- Over the past few years Russian companies have shown an increasing interest towards investment and preparedness to compete with other foreign players in Africa, but they have also complained bitterly of lack of state financial support and investment credit guarantees from policy banks and money-lending institutions. China, India and Japan, and more recently the United States have provided funds to support companies ready to carry out projects in various sectors in African countries.

This foreign policy development has sparked discussions among experts. For instance, Dr Martyn Davies, Chief Executive Officer of the South African based Frontier Advisory (Pty) Ltd, does not think that the Chinese model of financing various infrastructure and construction projects in Africa is replicable considering the current structure/nature of the Chinese policy banking system, adding that Russia's banking sector operates quite differently.

 

There are now approximately 50 leading Chinese state-owned enterprises that are all Fortune 500 firms that are present in Africa, with the majority of these active in infrastructure and construction in Africa, he explained to Buziness Africa.

 

Explaining further, he said although the rapidity of and pervasiveness of their market entry into Africa has taken many by surprise, and the main factor that has assisted this speedy market engagement was that the projects were largely "de-risked" from a financial perspective.

 

Arguably the single greatest risk of contracting (with governments) in Africa is ultimately getting paid. In the case of the Chinese contracted projects, the Chinese state's so-called policy banks have provided finance and have underwritten the infrastructure roll-out very often supported by sovereign guarantees from the recipient African state. No other (even development) banks have been willing to absorb such financial risks on infrastructure projects in Africa. This accounts for China's "success" in building infrastructure in Africa in recent years, according to the academic professor.

 

"It is almost impossible for the model to be replicated in a true commercial sense. The only likelihood of similar financial structures arising is in the case of tied-aid for commercial purposes. I would argue that the strategy of China Inc. is resulting in a rethinking of how aid/developmental capital is being allocated or spent in Africa by other partners. This is especially the case with Japanese aid to Africa, with the recent Fifth Tokyo International Conference on African Development (TICAD) meeting and the commercial outcomes from it evidence of this," Davies concluded assertively.

 

In July last year, the former Chinese President Hu Jintao delivered a speech at the opening ceremony of the Fifth Ministerial Conference of the Forum on China-Africa Cooperation (FOCAC) where he indicated explicitly that "China will expand cooperation in investment and financing to support sustainable development in Africa. China provided $20 billion dollars of credit line to African countries to assist them in developing infrastructure, agriculture, manufacturing and small and medium-sized enterprises."

 

In June this year, Japan made a five-year commitment of $32 billion dollars in public and private funding to Africa, and the money will be used in areas prioritized as necessary for growth by the Fifth Tokyo International Conference on African Development (TICAD).

 

Japan's new pledge is nearly four times larger than its last commitment to the group. The plan of action is ambitious. Japanese funds will help in a number of areas, including trade, infrastructure, private sector development, health and education, good governance and food production

 

Suffice to say that the United States, Britain, Brazil and India have followed concretely Chinese footsteps with financial commitment towards sustainable development projects in Africa. These steps have, indeed, made competition keen for bidding for available infrastructural projects on the continent.

 

During the official working meeting with Barack Obama, South African President Jacob Zuma told his colleague: "The United States' strategy towards sub-Saharan Africa that you launched last year is well-timed to take advantage of this growing market. We look forward to strengthening the US-Africa partnership and we are pleased with the growing bilateral trade and investment." For example, there are 600 US companies operating in South Africa which have created in excess 150,000 jobs for local people.

 

Many experts still believe that Russian authorities have to provide incentives. Charles Robertson, Global Chief Economist at Renaissance Capital, thinks that the major problem is incentives. China has two major incentives to invest in Africa. First, China needs to buy resources, while Russia does not. Second, Chinese exports are suitable for Africa - whether it is textiles or iPads, goods made in China can be sold in Africa. Russia exports little except oil and has (roughly 2/3 of exports), steel and metals (which is either not cost effective to sell in Africa, or again is the same as Africa is selling) and military weapons.

 

"Most importantly, Chinese firms see African growth as benefiting China, while Russia has less to gain from this. There is little incentive for Russian firms to operate in Africa...though Renaissance Capital sees opportunities, as does RusAl, and a few others. The problem is not investment credits or guarantees," Robertson pointed out.

 

In his objective views, Russia has a northern hemisphere focus. And that explains why Russia has shown low financial commitment in its foregn policy implementation in Africa as compared to countries such as Japan, India and China.

 

According to Jimmy Saruchera, a Director at Schmooze Frontier Markets, an investment fund that works to support small-and-medium sized businesses in new emerging markets, investment credits are useful tools for encouraging investment but are not the main drivers for investment, as any country can provide these. And of much more importance at this point is visibility and quantification of the investment opportunities plus government and institutional stability and transparency. These are the foundations upon which to build an investment friendly environment that can include incentives such as investment credits.

 

With regard to export credits, again these can be good but before that there is the need to have trade policies that encourage local manufacturing. For example import tariffs on components necessary for manufacturing are so high in many African countries that it makes manufacturing locally expensive, reducing prospects of being able to export competitively - so export credits are of little use in this case, Saruchera explained in an interview with Buziness Africa.

 

However, both Russia and Africa need work on a good trade policy, stable and transparent institutions are the fundamental ingredients, then tools such as credits and export guarantees can be more effective.

 

Dr Scott Firsing, a visiting Bradlow fellow at the South African Institute for International Affairs (SAIIA) and a senior lecturer in international studies at Monash University in Johannesburg, said "the absence of export credit guarantees can be a real obstacle to some in countries such as Russia because there are businesses and policy holders that look for these guarantees to help alleviate the fear of doing business in high risk markets like Africa."

 

Export credit guarantees show the exporter protection against the main risks, which include political and commercial risks, in places such as Africa. This has been very successful for countries like South Africa, which even manage to stockpile cash over time due to the premiums being more than the payouts. Moreover, one can deduce that without such cover or this 'safety net', South African companies might have never taken such risks or would have been unable to bid or win contracts in developing economics, according to his explanation to Buziness Africa.

 

"I would suggest such a move that Russia has to design a policy strategy. One of China's policy banks, the Chinese Development Bank (CDB) is the country's largest lender for funding acquisitions and investments overseas, totaling more than its four main commercial banks. This has helped expand the overseas presence of Chinese companies like ZTE Corp and Huawei that wouldn't have been previously unlikely without the assistance from such a policy bank," he added.

 

According to Dr Firsing: a similar statement can be made of the importance of American institutions like their Export-Import Bank that supports American companies and their expansion into African markets. Obama's latest African Power Initative sees the Export-Import Bank granting up to US$5 billion in support of U.S. exports for the development of power projects across sub-Saharan Africa. Russia can learn a lot from the approach of these countries.

 

Professor David H. Shinn, an Adjunct Professor at the Elliott School of International Affairs George, Washington University, suspects that Russia's problem goes well beyond investment credits and export credit guarantees. Just look at Russian trade with Africa. It is embarrassingly low. Turkey has twice as much trade with Africa as Russia. Most Russian investment in Africa goes into large energy and mineral projects. China is investing in just about everything.

 

See the African Development Bank's Africa Economic Brief, vol. 2, issue 7 (11 May 2011) on "Russia's Economic Engagement with Africa." Look at an article titled "Russia's Africa Policy" by Alexandra A. Arkhangelskaya in the March 2013 special edition of The China Monitor published by the Centre for Chinese Studies at Stellenbosch University. Natalya Volchkova and Maria Ryabtseva did a good paper in February 2013 titled "Russia-South Africa Relations: Collaboration in BRICS and the G-20" for the South African Institute of International Affairs. You can access it at www.saiia.org.za/images/stories/pubs/occasional_papers_above_100/saia_sop_135_volchkova_ryabtseva_20130307.pdf.

 

Professor Shinn, who was a former U.S. ambassador to Ethiopia (1996-99) and Burkina Faso (1987-90), wrote in an email interview to Buziness Africa, that lack of or weakness of Russian government incentives for investing outside Russia seems to be the significant part of its African policy problem, that compared, China does a lot of project financing in Africa.

 

He argued that western countries are also at a disadvantage because there is much more separation between the government and the private sector and there is no equivalent government state-owned sector, at least, not in the United States. Most Chinese investment in Africa occurs with the large state-owned companies, which work closely with the government. President Barack Obama tried to energize the US private sector in Africa during his recent visit, especially with the Power Africa initiative.

 

Interestingly, Russian policy experts have repeatedly called for state support for corporate investment initiatives as well as helping systematically private entrepreneurs to make strong strategic inroads into mutually viable investment sectors and to raise economic presence in Africa.

 

"Until recently, Africa was poorly represented in macro-economic forecasting and research, especially in terms of Russian-African relations," wrote Professor Aleksei Vasiliev and Evgeny Korendiasov both from the Russian Academy of Sciences, Institute of African Studies (IAS). Vasiliev is the current Director of the IAS and former Special Presidential Envoy to African Countries while Korendiasov retired Russian Ambassador and now the Head of the Department for Russian-African Research at the IAS.

 

They both authored an article published in June that Russia has officially declared promoting relations with Africa a priority goal. Assurances made by Russian officials in their statements that Africa is "in the mainstream of Russia's foreign policy" have not been substantiated by systematic practical activities, and the development of relations between Russia and Africa has so far nothing to boast about.

 

According to the academic researchers, currently the scope for Russian-African partnership is significantly expanding and of the 48 countries in Sub-Saharan Africa, Western experts consider 24 to be democratic countries.They both argued that "through large-scale and purposeful participation in the international development assistance, Russia strives to advance its foreign policy priorities and strengthen the positions of Russian business in the African economic space."

 

But, they pointed out unreservedly that the situation in Russian-African foreign trade will change for the better, if Russian industry undergoes technological modernization, the state provides Russian businessmen systematic and meaningful support, and small and medium businesses receive wider access to foreign economic cooperation with Africa.

 

Among other policy recommendations, they stressed "defining clear guidelines and priorities of Russian policy towards Africa, creating conditions for the promotion of Russian goods and investments in African markets, setting up mechanisms of financial support by the state of export and investment projects which is a compulsory condition for successful Russian business activity on the African continent and introducing tariff preferences for trade with African partners."

***Kester Kenn Klomegah is a keen foreign policy observer and an independent researcher on China's and Russia's policy in Africa. In 2004 and 2009, he won the Golden Word Prize for series of analytical articles highlighting Russia's economic cooperation with African countries. (Source: Buziness Africa)

 

 
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