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Contents

• Introduction
• Chapter 1. Investment climate: evaluation methodology and literature review
• World Investment Reports (UNCTAD)
• World Development Reports (World Bank)
• Doing Business methodology (World Bank)
• Mick Moore and Hubert Schmitz methodology (Institute of Development Studies at the University of Sussex Brighton)
• Investment climate evaluation in Russia
• Folom'ev A. and Revazov V. methodology
• Russian Union of Industrialists and Entrepreneurs (RSPP) and KPMG regional investment climate investigation
• Chapter 2. The investment climate in Volga federal district
• Key indicators of investment activity in Volga FD
• The analysis of the investment climate in Volga FD and recommendations
• Developing regional legislation
• Conclusion
• References
• Annexes
• Maps of Volga Federal District of the Russian Federation
• Expert RA rating performance in Volga FD regions
• Investment regulatory framework


Introduction

“A good investment climate is central to growth and poverty reduction. A vibrant private sector creates jobs, provides the goods and services needed to improve living standards, and contributes taxes necessary for public investment in health, education, and other services. But too often governments stunt the size of those contributions by creating unjustified risks, costs, and barriers to competition”.

-- François Bourguignon, Senior Vice President and Chief Economist, World Bank (2005). investment climate russia

The investment environment is a subject matter for many researchers and politicians throughout the world. However, there is no consensus about how good investment environment can be build and what this “good” means. Fortunately, more governments start to recognize that their policies and behavior greatly affect the business environment. Thus, the policy question is to envision the investment highlights of a certain Territory that compose favorable conditions for investors in the long run. According to Khan (2005) the good investment climate (hereinafter IC) is characterized by “standard good governance requirements together with the adequate supply of certain types of infrastructure” Terms “investment climate”, “investment attractiveness”, and “investment appeal” are often used as synonyms in the academic literature.. At the same time, good governance is “epitomized by predictable, open and enlightened policy making; a bureaucracy imbued with a professional ethos; an executive arm of government accountable for its actions; and a strong civil society participating in public affairs; and all behaving under the rule of law” (World Bank,1994). These conditions have a bearing not only upon investment climate, but the overall economic growth of a country and the poverty rate. As is seen from above, the investment environment is a critical aspect of economic development, and it is if high importance considering developing countries. Investment climate improvements in China and India have already shown significant results in poverty reduction while implementing a government investment climate policy (World Bank, 2005).

Concerning the current economic situation in Russia, the investment attractiveness of a whole country is low without mentioning particular regions. Before the economic recession and events in Crimea in 2014, investors gave Russia an average score of 5.6 for its investment climate (Detail Communications, 2015). The average score for today is equal to 2.5, which is indicative of a negative outlook for Russia.

Moreover, it is strategically important for Russia to attract investments in the non-oil sector of the economy. The reason is that for many years Russia has acquired the image of a country of oil and gas, and the economy is operating mostly on the export of products of extractive industries. This phenomenon was first termed as a “resource curse” by Auty back in the 90s (Auty, 1993) and applied to all countries that are rich in natural resources, not only to Russia. The consequences of this phenomenon cause the opportunistic behavior of the politicians and businesses that are becoming interested in imperfect institutions, which greatly facilitate the assignment of the resource rent. Hence, it results in the slowdown in country's economic growth. Inefficient institutions not only pave the way for corruption, but generate serious social consequences for the population and the investment environment. The socio-economic status of raw regions of Russia is very different from the situation of regions that are not rich in natural resources. For example, the unemployment rate according to International Labor Organization methodology in 2011 in the Yamalo-Nenets Autonomous District was 3.7%, and in the Republic of Ingushetia - 48.8%. According to Rosstat Rosstat is an abbreviation of the Russian Federal State Statistics Service. Website: http://www.gks.ru/ , from 2001 to 2011, the population in Russia has decreased by 2.3%, and that is more than 3.3 million people. At the same time, the environmental situation in the commodity areas is extremely unfavorable.

Nevertheless, investors still can find some very promising considerations of doing business in Russia, such as comparatively low competition between foreign and domestic investors, cheap labor, and large market of raw materials. Despite these advantages, foreign investors are not in a hurry to invest their capital in the Russian economy, which can be explained by these reasons (Popkov & Semenov, 2001):

· Unstable political and economic situation;

· Imperfect and inconsistent legislation;

· Lack of clarity in the definition of property rights;

· Lack of real benefits and privileges to foreign capital;

· Instability of the ruble as the national currency;

· Unpredictability of changes in the tax system and others.

One of the possible ways to improve this situation is to revise regional investment policy for better economic conditions for foreign and domestic investors, increased profitability of investment projects with minor risks.

Thus, the main goal of this work is to evaluate the effectiveness of regional state policies in Russia in improving investment environment and attracting foreign investors. The evaluation will be based on a quantitative analysis of several economic factors forming the investment climate of Russian regions. I will use official statistics as a premier source of data for the most of the analysis. However, there are some limitations that must be considered in this work:

· The obtained research findings mostly will be independent of the researcher; however, category selection of the investment climate might not correspond to the complete independence.

· The data collection might include not only official sources but other investigations in this field, namely for weight measurement of specific factors.

· Knowledge produced by this research might be too general for direct application to local contexts.

These limitations refer to almost every quantitative evaluation as every research has its weaknesses and strengths. The investment climate is an aggregate index that can be evaluated only by partitioning onto smaller indexes and then individual factors. So that the initial point of this research will be quantification of factors comprising the investment climate index of a region.

These are the main questions that this work is aimed to answer:

· What drives investors to capitalize their money on certain regions?

· How regional authorities can play a role in this process?

· What are the main strengths and weaknesses of the Volga federal district regions and how can they promote themselves using various investment policy instruments?

· What an effective regional investment policy includes?

The first section of this paper reviews theoretical literature on the investment policy and investment climate in the world and in Russian regions in particular regarding methods evaluating investment climate existing in the world and justifying the chosen methodology for analysis. The empirical analysis itself constitutes the second section of the work. The final section will expose the results and policy recommendations.



Chapter 1. Investment climate: evaluation methodology and literature review

This chapter aims to indicate different classifications of factors and techniques that are used in the world to evaluate the investment appeal of different territories, and to examine if these techniques can be applied to assess the investment attractiveness of the Russian regions.

The analysis of investment attractiveness of a Territory is an important element in developing national and regional investment policy reforms, because it provides an insight into related with investment risks and, more importantly, it shows promises in certain areas of development. Investor can be motivated by different factors related with investment object; however, this set of factors depends on the investor's main aim: direct investing with involvement to the management or portfolio investing in existing businesses without direct participation. It seems that for the second type of investors the investment climate is not vital as the overall return on equity of the chosen company. Concerning this fact, in this paper I will consider only direct investors that are explicitly interested in the favorable business conditions of a country or region.

Fundamentally, the existing approaches to assessing the investment climate vary in the purpose of study, the number of analyzed indicators and their qualitative characteristics, and the choice of indicators itself. The most general method is based on the estimation of the overall attractiveness of a Territory including the maximum number of indicators: economic, political, trade, legal, ecological, geographical, social and other indicators. This type of evaluation is important for investors at the first step of the investing process. The typical representatives of this method are country's snapshots made by different international organizations, such as OECD, United Nations and World Bank. Unfortunately, for Russian regions this type of evaluation has not been done comprehensively and foreign investors can only find this information for the whole country.

The second type of evaluation is based on a comparative analysis of different territories with consecutive rating composition. This method is often used to compare developing countries and countries in transition with developed countries to show the gap in values of chosen indicators. The importance of such assessment is incontestable as far as it emphasizes strengths and weaknesses of each country and shows prospects for reforms. Moreover, along with statistical data on a particular indicator they often use expert's surveys, which enhance overall reliability and validity of the research. World Bank's rating on Doing Business and UNCTAD's World Investment Reports are good examples of this methodology in use. Russia in such ratings most of the times overrun very low positions, for example, 2015 Doing Business rating for Russia assigned Russia an overall rank 62 out of 189 economies.

The third type of evaluation considers two basic components of the investment climate: investment potential and investment risk. Therefore, the investment potential of a country or region is determined by returns on investment, and the investment risk is determined by the degree of development of investment laws, customs and tax administration, difficulties in registering property, and so on. Comparing risks and returns, the investor assesses the attractiveness of a chosen Territory and decides on investing. Quite often to this classification researchers add the third factor - time. The implementation time of the investment project is also important for strategic investors. Consequently, guided by these three factors: risk, profitability, and time, the investors in the first place to decide whether to invest in the project or not. Figure 1 reflects the illustration of favorable and unfavorable investment climate in the country depending on this methodology.



Figure 1. Unfavorable and favorable investment climate comparison.

Thus, as we can see in the first picture, the investment climate is unfavorable if returns on investment project are low compared with long deadlines and high risk. The figure to the right shows the region that is attractive for investors, where the project will be implemented efficiently with low risks and big profits in a short period.

This type of assessment can be whether quantitative or qualitative, with rating composition or without, but the principal idea remains constant. For the Russian Federation, the most typical example of this kind of research is the Investment Appeal Rating developed by the agency “Expert RA” Website: www.raexpert.org/ .

Summing up the above information and getting together the existing methods of assessing the investment climate, I distinguished five major groups of factors that affect investor's decision:

1. Economic factors: a market size, prices of factors of production and their quality, gross national and gross regional products (GDP and GRP), and others.

2. Infrastructure development factors: transport, communications, financial and other institutions.

3. Government policy implementation factors: national and regional economic policy effectiveness (including financial regulation), foreign trade policy, social policy, labor policy and others.

4. Ease of doing business factors: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency and employing workers The World Bank methodology is often used to evaluate investment attractiveness of different countries and regions. Source: http://www.doingbusiness.org/methodology. .

5. Geographical factors: country location, natural resources, proximity to the world biggest economic markets and other factors.

In this chapter, I will observe the most well-known methodologies to assess the investment climate existing in the world.

World Investment Reports (UNCTAD)

One of the most comprehensive studies on investment factors has been done by the United Nations Conference on Trade and Development (UNCTAD). The UNCTAD's annual World Investment Reports (WIRs) provide an excellent in-depth analysis of current FDI trends in the world, including investment policies in different countries, statistical data, trans-national corporations (TNCs) both at regional and national levels. According to UNCTAD's WIR 1998, there are three core factors determining investment attractiveness of a host-country: policy framework for FDI, economic determinants, and business facilitation. Each of these factors is divided into smaller indices that are listed below:

I. Policy framework for FDI

· economic, political and social stability

· rules regarding entry and operations

· standards of treatment of foreign affiliates

· policies on functioning and structure of markets (especially competition and M&A policies)

· international agreements on FDI

· privatization policy

· trade policy (tariffs and NTBs) and coherence of FDI and trade policies

· tax policy

II. Economic determinants

A. For market-seeking investors:

· market size and per capita income

· market growth

· access to regional and global markets

· country-specific consumer preferences

· structure of markets

B. For resource/asset-seeking investors:

· raw materials

· low-cost unskilled labor

· skilled labor

· technological, innovatory and other created assets (e.g. brand names), including as embodied in individuals, firms and clusters

· physical infrastructure (ports, roads, power, telecommunication)

C. For efficiency-seeking investors:

· cost of resources and assets listed under B, adjusted for productivity for labor resources

· other input costs, e.g. transport and communication costs to/from and within host economy and costs of other intermediate products

· membership of a regional integration agreement conducive to the establishment of regional corporate networks



III. Business facilitation

· investment promotion (including image-building and investment-generating activities and investment-facilitation services)

· investment incentives

· hassle costs (related to corruption, administrative efficiency, etc.)

· social amenities (bilingual schools, quality of life, etc.)

· after-investment services

Unlike most of other classifications, UNCTAD divides economic determinants into three groups depending upon the motives of investors: market-seeking, resource/asset-seeking and efficiency-seeking. Every investor is looking for the best deal possible for a combination of these three factors and selects the most favorable business area. Although UNCTAD's methodology is focused on evaluating host countries investment climate for TNCs using foremost global parameters, for the aims of this research this method can be adapted with several adjustments to evaluate Russian regions investment attractiveness.

World Development Reports (World Bank)

Another view on the investment climate belongs to the World Bank assessment methodology described in the World Development Report 2005 “A better investment climate for everyone” (WDR, 2005). The World Bank defines investment climate as a set of “location-specific factors that shape the opportunities and incentives for firms to invest productively, create jobs and expand”. To my opinion, this definition is made well enough, although it is quite difficult to determine what constitutes the good investment climate and how it can help to attract investors. The report describes the work of the government machinery for different countries that promote investment in the country, for example, facilitating the execution of contracts, reducing crime, improving the tax regulation, developing a skilled workforce, and so on. Such measures have been repeatedly declared by governments of many countries, but they have no concrete and observable outcomes concerning the inflow of direct investments and improving the investment climate.

Doing Business methodology (World Bank)

The Doing Business methodology relies on the comparative evaluation of business regulations and property rights protection policy in different countries. The report is published annually and covers 189 economies. It measures 11 quantitative indicators affecting the life of private companies: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency and, additionally, labor market regulation.

In developing countries, including Russia, the main obstacles for businesses are the lack of access to finance and energy along with the existence of shadow economy and high tax rates. Russia, in particular, in Doing Business 2015 has three major areas for development with lowest ratings: dealing with construction permits (156 out of 189), trading across borders (155 out of 189) and getting electricity (143 out of 189). It is indicative that the last two factors even became worse comparing to the year 2014.

The Doing Business study based on quite an extensive theoretical foundation from such academic journals, as the Quarterly Journal of Economics, the Journal of Financial Economics, the American Economic Journal, the Journal of Political Economy and others.

The study Doing Business in Russia is also carried out at the sub-national level, which is very important because Russia is a regional country and the situation in different regions can radically vary. Since the ranking is compiled annually for the regions and municipalities, it gives an opportunity to exchange experiences and monitor the progress. The results of this rating also allow guiding future reforms.

Mick Moore and Hubert Schmitz methodology (Institute of Development Studies at the University of Sussex Brighton)

A more detailed study on the investment climate was conducted by the IDS researchers Mick Moore and Hubert Schmitz. The study was conducted in 2008 and was called “Idealism, Realism and the Investment climate in developing countries”. This document contains not only the method of assessing the investment climate, but also the wording of the specific policy tools for various countries to improve their investment climate. For example, a relationship mechanism between businesses and government “at an arm's length”.

According to Moore and Schmitz, a favorable investment climate is formed due to the presence of a number of factors that shape a positive investment decision. Authors use the favorable investment climate models as a base to assess the factors that are important to investors. These are:

· Stable macroeconomic forecast

· External stability

· Macroeconomic policy

· Effective institutions

· Effective financial system

· Human capital

· Availability of material and technological infrastructure

Additionally to assessing the investment climate, they propose possible solutions to the existing problems. For example, to identify weak points governments need to conduct surveys of existing investors and assess their investment climate based on that surveys. The results can be the basis for evidence-based policies.

Some international organizations provide such services and develop recommendations for governments to reform. The study also noted that foreign investors may not be aware of the country's progress in improving the investment climate. Therefore, they must have the appropriate mechanisms to provide investors with access to such information.

This research is action-oriented, rather than theoretical. However, it is rather important to this work as it provides concrete recommendations to countries to improve their investment and business climates that might be applied to Russian regions.

Foreign studies often evaluate and equate to one another the concept of the business environment and the concept of the investment climate. In many ways these concepts are similar and are often used in describing the activities of the government in the long term. Even the Russian governmental papers use these terms as synonyms. For example, the strategic document “Main directions of activities of the Government of the Russian Federation until 2018” has a section entitled “Improving the investment climate and attracting capital”, which states as one of the priorities for the Russian Government the implementation of the national entrepreneurial initiative that will significantly improve the business climate. Moreover, the Presidential Decree #596 dated May 7, 2012 states as the long-term goal for the Russian Federation to enter the top 20 countries in the World Bank's Doing Business rating.

The conditions that are good for businesses are not always good for investors, but the conditions that make it difficult to do business in a country impede investment activity in this country. In this paper, I shall rely just on this one-way communication between the investment and business climate and consider methods of assessment, not making fundamental distinctions of these concepts.

Investment climate evaluation in Russia

Over the last few years, the Russian federal government has been introducing a new system of operating the regional investment climate, and it has already had some positive outcomes. As a result of introducing investment standards, regions become more aware about the requirements of federal government, and the system became more organized. The new regional investment (or development) agencies made it possible for investors to contact directly with regional top authorities. Moreover, the sensational Russian Strategy 2020 put the regional investment climate as one of the main priorities for Russia till 2020. However, the gap between the most and the least developed regions is enormous. For instance, in 2013 from eight Russian federal districts the most developed Central Federal District attracted 14,151,090 thousand dollars, while the least developed North-Caucasus Federal District attracted only 86,769 thousand dollars, which is a 163 times less difference. These figures indicate that Russian regions have a very diverse investment climate, and some regions need to improve it urgently.

The main reason for this uneven distribution of investment in Russian regions, to my opinion, is the inefficient regional policy in the field of investment. Many regions have not developed an investment strategy yet, and also they have not established an appropriate competent public authority for dealing with investors. The first step in doing this will be to conduct an appropriate evaluation of the investment climate in each region and then to design an investment policy based on the results of that evaluation.

In this section, I will discuss methods for assessing the investment climate of the Russian regions existing in the Russian academic literature for the moment.

Folom'ev A. and Revazov V. methodology

One of the first studies in the field of Russian regions investment climate evaluation has been done by Folom'ev A. and Revazov V. in the year 2000, where the investment climate was described as the “aggregate of social, economic, legal, political, and socio-cultural preconditions that predetermine the attractiveness and expediency of investing in one or another economic system” (see Folom'ev & Revazov, 2000). Authors single out three most typical approaches to investment climate evaluation: narrow approach, expanded (factor) approach, and risk approach. The narrow approach is based on the evaluation of general rates of economic development, such as gross domestic product, national income, and inflation. At the heart of the second approach is multifactor assessment of the investment climate as a composite indicator according to a formula:

,

where Q is the total weighted measure of the IC, x_i is the average value of a specific factor i, and P_i is the corresponded weight.

Subsequently, the IC indicator is counted as a total sum of weighted values of factors. This approach is often used to make ratings by different government and non-government authorities for various countries or regions as it is comparatively less time-consuming and cheap to conduct. Moreover, the results of such evaluation might be the most reliable way to understand weaknesses of a particular Territory.

The third approach is called risk approach that considers two basic variants of the IC from the point of view of investors: investment potential and investment risk.

Russian Union of Industrialists and Entrepreneurs (RSPP) and KPMG regional investment climate investigation

In a study conducted by the Committee on International Cooperation of RSPP, the International Council for Cooperation and Investment of RSPP (ICCI) ICCI is an advisory body established by the Russian Union of Industrialists and Entrepreneurs (RSPP) in 2008 to provide a platform for a dialogue of foreign business and Russian state authorities. and the company KPMG, the investment climate was analyzed from the point of view of foreign investors. It should be noted that the study was conducted in 2010 and for five years the situation in some regions of Russia has changed significantly. However, the given methodology is very comprehensive and valuable at present.

The research embraces 12 regions of Russia (see Table 1).

Table 1. RSPP and KPMG research: regions coverage.

Central Federal District	Volga Federal District
Voronezh Region Kaluga Region	Tatarstan Republic Perm Territory Nizhny Novgorod Region Saratov Region
North-West Federal District	Ural Federal District
Arkhangelsk Region	Sverdlovsk Region
South Federal District	Siberian Federal District
Krasnodar Territory Rostov Region	Irkutsk Region Novosibirsk region

The study was based on an analysis of interviews with foreign investors, thanks to which authors identified the most influential factors of the IC. These factors can be divided into hard and soft factors, where hard factors are part of the existing environment in the regions and cannot be changed in a short period. Soft factors are factors related to the internal efficiency of regional public policy in the field of investments.

It is remarkable that soft factors are very difficult to quantify. According to RSPP and KPMG, they lie in the following areas:

· The concernment of regional administration in FDI

· The ability to manage the investor's expectations

· The experience of successful implementation of investment projects with FDI

· The effectiveness of the administrative process

· The development of the legal environment

· The existence of financial and tax incentives

In accordance with the classification of “hard” and “soft” factors, investors prefer to give them equal attention. However, such factors as the geographical location, resourcing, labor supply cannot be changed through time. Thus, regional authorities should concentrate mostly on soft factors and improve them. Such factors include, for example:

· Human capital;

· Legislative support of the investment process;

· Possibility of financial support of investment activity;

· The development of regional infrastructure and others.

Developing new economic policy based on “soft” factors will reduce Russia's dependence on exports of natural resources and, thus, reveals the potential of regions that are not rich in natural resources. From my personal perspective, the main reason for the low level of FDI in Russia is the lack of attention to the soft factors determining regional investment climate.



Chapter 2. The investment climate in Volga federal district

Volga Federal District (VFD) is one of the eight Russian federal districts holding key positions in country's manufacturing activity. The main distinctive feature of this district is that it has huge production possibilities due to its advantageous position compared to other districts of Russia. In the map in Annex 1, you can see the exposition of this district on the map of Russia and the exposition of regions in the map of Volga federal district itself.

There are fourteen regions of Russia forming the Volga FD that are presented in Table 2 in alphabetical order.

Table 2. Volga Federal District structure.

#	Flag	Region	Population Source: FSSS Socio-economic indicators of regions: population by the end of 2013. http://www.gks.ru/bgd/regl/b14_14p/IssWWW.exe/Stg/d01/02-01.htm	Regional Capital
1		Bashkortostan Republic	4 070 000	Ufa
2		Mari El Republic	688 000	Yoshkar-Ola
3		Mordovia Republic	812 000	Saransk
4		Tatarstan Republic	3 838 000	Kazan
5		Udmurtia Republic	1 517 000	Izhevsk
6		Chuvashia Republic	1 240 000	Cheboksary
7		Perm Territory	2 636 000	Perm
8		Kirov Region	1 311 000	Kirov
9		Nizhny Novgorod Region	3 281 000	Nizhny Novgorod
10		Orenburg Region	2 009 000	Orenburg
11		Penza Region	1 361 000	Penza
12		Samara Region	3 211 000	Samara
13		Saratov Region	2 497 000	Saratov
14		Ulyanovsk Region	1 268 000	Ulyanovsk

All these regions greatly differ by the level of economic development and investment attractiveness. There are five the most developed regions with the diversified economy that helped them to overcome the crisis of 2008-2010: Nizhny Novgorod Region, Tatarstan Republic, Bashkortostan Republic, Samara Region and Perm Territory. The population of these regions is increasing every year by 1-5%. Experts put these regions the highest ratings not only among other regions on the district, but also among all 85 regions of Russia.

The traditional specialization of this district is engineering industry. Volga regions produce more than 70% of all cars in Russia Official website of Volga federal district www.pfo.ru/ (Avtovaz in Samara region, GAZ and ZIL in Nizhny Novgorod region, IZH in Udmurtia Republic, UAZ in Ulyanovsk region, KAMAZ in Tatarstan Republic, NEFAZ in Bashkortostan Republic and many more). Other industries are also developed in this district, such as aviation and space machinery construction, energy manufacturing, professional equipment, shipbuilding, machine tool industry and others. Moreover, Volga federal district is ranked second after Ural FD by crude-oil and petroleum production.

Another important characteristic of Volga federal district is its location at the crossroads of two international transport corridors “North-South” and “East-West” linking European countries with East Asian countries through Siberia, which makes it easier to deal with a transshipment cargo by roads.

In the next sections, I will present the review of main indicators of the investment activity in regions of Volga federal district, as well as the statistical analysis of its investment climate.



Key indicators of investment activity in Volga FD

This section aims to indicate the dynamics of main economic indicators that affect regional investment climates in Volga federal district of Russia from 2005 till 2015.

Gross regional product

The gross regional product is one of the main economic determinants of the investment attractiveness. It measures the process of production of goods and services for ultimate use and accounts as a difference between production and intermediate consumption. The regional GRP is close within the meaning to the country's GDP. However, in Russia the sum of all 85 GRPs does not account as overall GDP because GDP includes nonmarket public services, such as defense, public administration, and others.

In recent years, the level of GRP in Volga FD increased sharply. In 2012, it accounted almost three GRP of 2005, which is quite a good result. Figure 2 shows the dynamic pattern of Gross Regional Product in Volga FD from 2005 to 2012.

Figure 2. The GDP growth in Volga FD All data can be found at the website of the Russian Federal State Statistics Service: www.gks.ru/

.



Concerning the regional GRP distribution, the sharpest increase can be seen in Republic of Tatarstan and Republic of Bashkortostan, where in 2012 it valued at 1436 and 1154 billion rubles respectively. As we can see from Figure 3, there are five leading regions in Volga FD by the level of GRP. Eminently, these regions forge ahead by other indicators as well.

Figure 3. Volga regions GRP growth.

Foreign direct investments

The next indicator showing investment attractiveness of a region is the amount of attracted foreign direct investments. Its dynamic varies in different regions of Volga FD while some of them introduce specific instruments to attract FDI. For example, after the total reconsideration of the investment policy in Tatarstan region in 2011, we can see the groundbreaking outcome of almost six-time increase of attracted FDI in 2012. Although in Figure 3 there can be seen a significant difference between other Volga regions.

Figure 3. The level of FDI in Volga federal district of Russia

As we can see from the chart, there are huge disparities in FDI distribution within this federal district. Some regions, such as Perm Territory, Kirov Region and Orenburg Region, show severe declines in the amount of attracted FDI.

The following section represents the investment climate analysis of fourteen Russian regions.



The analysis of the investment climate in Volga FD and recommendations

At the heart of this analysis lies the research of the Russian Union of Industrialists and Entrepreneurs and KPMG in terms of factor determination. In the presented above research, authors carried out series of in-depth interviews with regional authorities and foreign investors concerning their experience of investing in Russia. They developed a classification of “hard” and “soft” investment climate factors that drive investors to bring their capital to Russia and appointed weights for each of them. This is a qualitative research, and it can be a good advancement to the following statistical evaluation.

As it has been discussed above, “hard” factors cannot be changed in the short period. “Soft” factors are more flexible and they can be changed with the aid of an effective regional investment and economic policy that should be based on evidence.

The following statistical analysis is based on a quantitative assessment of the compound indicator (the investment climate) integrating a set of factors that have an influence on investors. It bears reminding that these factors were specified according to the evaluation of more than fifty in-depth interviews with foreign investors operating their businesses in Russia or planning to do so from different market sectors and different countries.

Taking as a basis the factors identified by the RSPP and KPMG and using the available sources of data, I defined for each factor the estimating indicators. The most of the statistical data, I found at the website of Russian Federal State Statistics Service and, in particularly, in the annual report on regional socio-economic indicators for the years 2013-2014 Available in Russian only http://www.gks.ru/wps/wcm/connect/rosstat_main/rosstat/ru/statistics/publications/catalog/doc_1138623506156 .

In the Table 3 you can find all the indicators that I have chosen to evaluate investment climate factors.

Table 3. The investment climate factors and corresponding indicators

SOFT FACTORS	Human Capital	Ø Number of students per 10 thousand inhabitants Ø Number of undergraduates Ø Number of arrivals from other regions of Russia in 2013 as a percentage of the total number of arrivals and departures	HARD FACTORS	Geographical Location	Ø Population Ø Number of cities with a million-plus population within 500 km from region Ø Number of international transportation corridors Ø The shortest distance to the nearest border-crossing point
	Living Standards	Ø Living minimum wage Ø Crime rates Ø Poverty level		Environmental Resources	Ø Amount of converted wood Ø Total land area Ø Farming land
	Region Assistance Capacity	Ø Financial independence: the proportion of uncompensated receipts from federal budget in total regional budget revenues Ø Gross Regional Product Ø Fixed assets depreciation rate		Labor Market	Ø Average monetary income per capita Ø Labor force participation rate Ø Unemployment rate
	Previous Experience of Investment Activity in the Region	Ø Number of organizations with foreign capital Ø Capital investments per capita Ø The volume of accumulated foreign direct investments		Domestic Market Features	Ø Percentage of innovative goods, works and services Ø Number of personally owned vehicles Ø Manufacturing activity Ø Extraction of commercial minerals Ø Retail turnover Ø Actual final consumption per capita
	Available Infrastructure for Investors	Ø Industrial parks (greenfield and brownfield, including building projects) Ø Special economic zones Ø Technological parks		Transport and Energy Infrastructure	Ø Number of active subscribers of fixed broadband internet Ø Railway density rate Ø Motor transport cargo turn-over

The values of each indicator were normalized using the following formulas:

where is the indicator's value for a specific region, is the minimum indicator's value for the whole selection, and is the maximum indicator's value for the whole selection.

The further calculations include the simple generalization of each index for every region and compilation of the overall investment climate index rating. The analysis of “soft” investment climate factors is presented in Tables 4 and 5, and the analysis of “hard” investment climate factors is presented in Tables 6 and 7.

Table 4. The analysis of “soft” factors of investment attractiveness

Factor	Indicator	Bashkortostan Republic	Mari El Republic	Mordovia Republic	Tatarstan Republic	Udmurtia Republic	Chuvashia Republic	Perm Territory	Kirov Region	Nizhny Novgorod Region	Orenburg Region	Penza Region	Samara Region	Saratov Region	Ulyanovsk Region
Human capital	Number of students per 10 thousand inhabitants (2013/2014)	346	330	423	474	363	387	309	320	381	339	335	406	388	362
	Number of undergraduates (thousands), 2013	31,1	5,4	7,7	38,7	13,8	13,2	17,8	9,6	31,4	14,2	10,9	30,5	22,7	11,0
	Number of arrivals from other regions of Russia in 2013 as a percentage of the total number of arrivals and departures	24,8	34,9	37,2	29,5	28,0	27,3	19,7	25,2	29,8	29,0	27,6	39,5	30,2	45,4
Normalized index on the factor “Human capital”	0,40	0,24	0,48	0,79	0,30	0,33	0,12	0,14	0,54	0,27	0,21	0,70	0,47	0,50
Living standards	Living minimum wage (rubles per capita, 2013)	6446	6198	6260	6278	6375	6049	7361	6905	6488	6131	6057	7482	6126	6472
	Crime rates (number of crimes per 100 000 inhabitants, 2013)	1288	1196	1031	1202	1779	1140	2150	1656	1435	1348	950	1622	1132	1182
	Poverty level (%, 2013)	10,4	19,5	18,2	7,2	11,2	16,0	11,4	13,6	9,0	12,1	12,6	12,1	15,4	13,3
Normalized index on the factor “Living standards”	0,58	0,30	0,40	0,65	0,40	0,38	0,52	0,50	0,59	0,44	0,52	0,68	0,41	0,54
Region assistance capacity	Financial independence: the proportion of uncompensated receipts from federal budget in total regional budget revenues (%, 2013)	17,98	44,49	44,47	19,21	21,47	35,19	10,64	32,44	14,65	16,66	39,18	13,29	25,04	23,64
	Gross Regional Product (per capita, rubles, 2012)	284068	170089	161159	376889	244747	174294	340933	160462	254631	311589	175095	293001	190482	191060
	Fixed assets depreciation rate (%, 2013)	52,2	58,7	56,4	43,4	62,3	53,5	60,2	51,9	49,7	55,9	51,3	53,5	53,5	46,9
Normalized index on the factor “Region assistance capacity”	0,63	0,08	0,11	0,92	0,36	0,27	0,65	0,30	0,66	0,62	0,27	0,67	0,39	0,52
Previous experience of investment activity in the region	Number of organizations with foreign capital (% of total, 2013)	0,14	0,17	0,13	0,36	0,23	0,24	0,27	0,28	0,24	0,28	0,25	0,26	0,40	0,35
	Capital investments per capita (rubles, 2013)	65489	65446	65859	135825	47332	47627	71612	43221	82848	75819	59192	81665	48874	59987
	The volume of accumulated foreign direct investments from 2011 to 2013(thousand US dollars)	394569	21407	20214	1085143	58117	24665	305147	64906	1416266	420787	171346	1044144	220232	147076
Normalized index on the factor “Previous experience of investment activity in the region”	0,18	0,13	0,08	0,87	0,15	0,15	0,34	0,20	0,61	0,40	0,24	0,54	0,40	0,36
Available infrastructure for investors	Industrial parks (greenfield and brownfield, including building projects)	3 Bashkortostan Republic - Industrial park “Sigma” in Ufa, Industrial park “Himterra” in Salavat, Industrial park “Agidel”	0	0	6 Tatrstan Republic - Industrial parks “KIP Master”, “Kamskiye Polyany”, “M-7”, “Razvitie”, “Tyulyachi”, “Chistopol”	0	1 Chuvashia Republic - Industrial park “Cheboksary”	0	0	1 Nizhny Novgorod Region - Industrial park “OKA Polimer”	0	1 Penza Region - Industrial park “Kizhevatovo”	1 Samara Region - Industrial park “Preobrazhenka”	1 Saratov region - Industrial park “Spetcavto”	2 Ulyanovsk Region - Industrial parks “Zavolzhye” and “Dega Klaster Ulyanovsk”
	Special economic zones	0	0	0	2 Tatatstan Republic - Special Economic Zone (Industry) “Alabuga”, Special Economic Zone (Innovation) “Innopolis”	0	0	0	0	0	0	0	1 Samara Region - Special Economic Zone (Industry) “Tolyatti”	0	1 Ulyanovsk region - Special Economic Zone (Logistics) “Ulyanovsk”
	Technological parks	0	0	1 Mordovia Republic - Technological park “Tehnopark-Mordovia”	6 Tatarstan Republic - Technological parks: “Idea”, “Idea South-East”, “East”, “KNIAT”, “Khimgrad”, “Prikamya”	0	0	0	0	2 Nizhny Novgorod Region - Technological parks “Sarov” and “Ankudinovka”	0	2 Penza Region - Technological parks “Centr innovatcionnyh tehnologiy” and “Tehnopark vysshih tehnologiy”	1 Samara Region - Technological park “Zhigulevskaya dolina”	2 Saratov Region - Technological parks “SGU” and “Volgoagrotehnika”	0
	Total infrastructure objects	3	0	1	14	0	1	0	0	3	0	3	3	3	3
Normalized index on the factor “Available infrastructure for investors”	0,214	0	0,071	1	0	0,071	0	0	0,214	0	0,214	0,214	0,214	0,214

Green and red marks testify the best and the worst values of indicators for investors.

Table 5. The results of “soft” investment climate factors analysis

	Bashkortostan Republic	Mari El Republic	Mordovia Republic	Tatarstan Republic	Udmurtia Republic	Chuvashia Republic	Perm Territory	Kirov Region	Nizhny Novgorod Region	Orenburg Region	Penza Region	Samara Region	Saratov Region	Ulyanovsk Region
Normalized index on the factor “Human capital”	0,40	0,24	0,48	0,79	0,30	0,33	0,12	0,14	0,54	0,27	0,21	0,70	0,47	0,50
Normalized index on the factor “Living standards”	0,58	0,30	0,40	0,65	0,40	0,38	0,52	0,50	0,59	0,44	0,52	0,68	0,41	0,54
Normalized index on the factor “Region assistance capacity” ...

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