MIGA: Helping Sustain Russia’s Economic Growth
January 24, 2012 -- As one of the BRIC developing economies that are turning heads with their significant growth, the Russian Federation is an interesting—though challenging—foreign direct investment (FDI) destination. The country is rich in natural resources and domestic demand for goods and services is growing rapidly.
MIGA has an extensive history of insuring private sector projects to support Russia’s economic diversification and to offer an extra degree of comfort to foreign investors. In fiscal year 2011, MIGA’s gross exposure in the country totaled $917 million, 10 percent of the agency’s portfolio.
MIGA’s diverse portfolio in the Russian Federation includes support to many sectors, including agriculture, banking and financial services, manufacturing, information technology, mining, and wastewater—among others.
What does MIGA’s involvement mean for the country’s development? Profiles of two recent projects in Russia demonstrate how foreign direct investments insured by MIGA have created jobs, transferred technology, and supported the economy.
Bolstering the Banking Sector during Uncertain Times
During times of financial stress, local subsidiaries of international banks may need to rely on their parent companies for liquidity and capital support. Parent banks face increased demand for such crossborder funding at a time of heightened risk aversion and diminishing headroom for taking on the additional risk. MIGA has a strong history of providing supporting to the banking sector, especially in these challenging conditions.
In Russia, MIGA is supporting the Belgian bank KBC by reinsuring $130 million of its shareholder loan to its Russian subsidiary, Absolut Bank. This has enhanced and strengthened Absolut Bank’s liquidity, allowing it to maintain its lending to productive sectors of Russia’s economy. During a time of global financial instability, when available credit has shrunk—often to the detriment of small and medium enterprises—this support has been crucial.
The timing of KBC’s expansion into Russia just before the global financial crisis hit meant that important benefits accrued for the country, according to Wim Verbraeken, the bank’s Senior Managing Director. He explained that without the additional liquidity that the Belgian bank was able to inject, the crisis’ impact might have been worse for Russia. As for MIGA, “There is no doubt that MIGA’s insurance has allowed us to stay in the Russian market longer than we would have otherwise,” Verbraeken said.
Verbraeken also pointed to an additional benefit that has arisen from KBC’s investment in the country. KBC’s strategy in Russia is to maintain local employment in order to build local capacity in a country whose banking sector has been controlled by the state until relatively recently. “These young professionals are building important and marketable skills, and transforming the nature of Russian banking,” he noted.
Yet, much of the banking sector’s benefits are not visible without drilling down to the next level—the recipients of the bank’s lending – many of them small and medium-size enterprises. Among Absolut Bank’s corporate clients, Belaya Dacha—a Moscow-based business that sells packaged salad greens—stands out.
At Belaya Dacha’s Moscow production facility the pace is brisk. Iceberg lettuce, arugula, and other leaves move through state-of-the-art machines that thoroughly wash and package the greens in near-freezing temperatures. The produce moves quickly, and gently—so that it arrives to supermarket shelves and Belaya Dacha’s corporate consumers still fresh and ready-to-eat.
In a nation more accustomed to cooked vegetables, Belaya Dacha has been instrumental in promoting salad consumption. Business is thriving and, when it came time to expand the company’s production, Belaya Dacha turned to Absolut Bank for a corporate loan—which it delivered, despite the credit crunch.
Tea Time in Russia — via India
A modest-looking tea factory on the outskirts of Moscow represents an interesting corporate marriage. Here, the Indian multinational Tata Group has invested in Russia’s Santy Tea to gain a foothold in this large market of tea-drinkers. MIGA’s guarantee for $30 million supports this joint venture.
The scent of tea permeates the Santy factory, where large burlap sacks hailing from China, India, Kenya, Sri Lanka, and Vietnam are emptied and their contents redistributed into small tea bags. These are then packaged into boxes for shipment to markets across the vast Russian territory.
The factory employs over 500 workers, whose salaries outpace those of surrounding factories. Local sourcing of services boosts the neighborhood’s economy. Santy’s sourcing of tea from Asia and Africa, as well as coffee— a secondary product for the company—from Latin America, illustrates how economic benefits can be spread across borders.
The partnership has brought better equipment, technical capacity, and familiarity with international standards in human resources and environmental management to Santy Tea.
“This joint venture has been created to realize the potential of the emerging Russian market, and create new brands,” said Nikita Dyakov, Tata Global Beverage’s Quality Director based at the Moscow factory. He notes that the partnership allows Santy to capitalize on “the potential of an international company experienced in the areas of food safety, effective production, and consumer services.”
Going forward, the joint venture insured by MIGA is expected to increase market share for Santy, as the company completes the refurbishment of an older factory and fully modernizes.
FDI in Russia Remains on the Upswing, with Downside Risks
Despite the overall negative outlook for global growth in general and for Europe in particular, the World Bank recently noted Russia as one of the few exceptions in the region, citing the country’s robust domestic demand that led to strong growth in the latter part of 2011. While investors are likely to continue to be sweet on the country’s growth prospects, they may be nervous as spillover from the euro zone crisis may result in unforeseen risks. In this context, MIGA’s risk-mitigation products can play an important role in continuing the flow of developmentally beneficial FDI into Russia.