Definition : "Direct investment refers to investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor, the investor's purpose being to have an effective voice in the management of the enterprise." [IMF Balance of Payments Manual, 4th ed, 1977, p.136]
Type of FDI: -Greenfield Investment -Mergers and Acquisition
Imporatance of FDI
From Firm's POV Resource Seeking ( natural or HR) Market seeking Efficiency seeking strategic-asset seeking
From Host Country's POV Improving quality of labor and infrastructure Develop local skills,tech and local learning Ensure stable & conducive overall macro and regulatory environment
About Russia GDP:1.7 Trillion $ (6 th ) GDP growth:7% Inflation:11.9% 24% increase in Foreign Trade Exchange Rate:1$=23.6 Ruble Labor Force:71.68 Million (Agr:12%,Industry:23%,Services:65% Unemployment Rate:8.5%
The Russian Federation stretches across Eurasia from Eastern Europe to the Pacific coast. Even after the collapse of the Soviet Union, Russia remains the largest country in the world in terms of territory.
Population-approximately 143 million.
About 73% of the population lives in urban areas
13 cities have a population of over 1 million
Largest city in the Russian Federation is Moscow- population approximately 10.4 million,
Second largest St. Petersburg – population approximately 4.5 million
Russia: The Transition Economy
Russian Transformation 1989-2000
Fall of Soviet union in 1991
Transformation from socialism, central planning, government control to market determined prices & privatization
Complex transition process of repositioning itself in the global trading system.
To create a functioning market economy out of the ashes of the communist regime.
Economic slump and Political Turmoil
GDP contracted 54%, industrial activity reduced by 45%
Yeltsin Era 1991-1999 Source: Russia Economic Survey – May 2007 ( US- Russia Business Council)
Putin’s Russia – 2000 to 2008
On average GDP growth rate of 6.5% since 2000 (primarily due to high oil prices )
New era of political stability to push forward economic reforms
Source: Russia Economic Survey – May 2007 ( US- Russia Business Council)
First legal framework conducive to foreign investors
The basic tenet of the code was national treatment for foreign investors.
Law on Foreign investments in Russia 1999
Elaborate framework to protect the rights of investors.
Grandfather Clause - which protects the investor from unfavorable changes in the legal and tax regulation for a period up to 7 years.
Resource Usage - Freedom from performance requirement or any commitment to use or export local goods.
Labour laws - Freedom of employ any personnel of their choice regardless of their nationality
Capital Flow – Unrestricted transfer of funds in freely convertible currencies
In case of Expropriation- followed by adequate and prompt compensation
Dispute resolution – between foreign party and host country referred to international arbitration without having to go thru local court system.
Replaces old license regime with PSA contracts
Very important fiscal incentive for FDI
Streamlined taxation legislation
Non-discriminatory policy - Unitary treatment of foreign & domestic investors
Attractive tax rates
One of the lowest tax rates in Europe Source: RBC-Rating
Foreign exchange controls
The currency controls are imposed on the transaction of both export and import type (these include transaction of capital).
There are restrictions regarding the amount of foreign currency which could be kept on the bank account of the residents.
Russian rouble is the only legal currency in the territory of Russia.
Improved legal framework but suffers from problematic enforcement
Member of Paris convention, Universal Copyright Convention, Berne convention and Geneva Convention.
After joining WTO- abide by TRIPS, Copyright law, Trademark law, Patents
Governed by 1995 - Law on Competition and Limitation of Monopolistic Activity
Level playing field for all players (investors)
Setup Anti-Monopoly regulation
(Difficult in country like Russia coming from completely Monopolistic markets)
Investment is constrained when it comes to some fields of economy such as:
natural resources - foreign ownership can not be more than 11 per cent of the total capital;
banking - can not own more than 12 per cent of total banking capital.;
insurance - foreign participation in the insurance sector can not exceed 15 per cent;
aerospace - can not exceed 25 per cent of the total capital;
electric power- not more than 25 per cent;
defense related industries ;
large scale construction projects;
to ventures with more than 50 percent of the total share capital ;
the amount of money which is more than 50 million Russian roubles (in case the amount of investment exceeds 100 million Russian roubles – there is an additional registration is required);
to projects related to the Russian defense industry (however, in some cases this investment could be prohibited by legislation);
to natural resource exploitation;
Foreign investors will need a prior approval in case of :
Investment advantages of Russia Investors’ opinion Source : questioning of foreign investors « Russia as an object of investments », polled in 2005 г. by FIAC
Russia has great potential for attracting FDI. With 145 million consumers, a well educated and capable labor force and a wealth of natural resources, it should be the leader in Eastern Europe in terms of investment.
Russia as an Investment Destination
Foreign Direct Investment in Russia, USD billion 26.7 2006 FDI Inflow In Russia
The food industry has attracted the highest number of FDI projects - 45 projects, associated with $2.4 billion of investment in 2002-2003. However, in terms of total investment, the energy sector is by far the biggest recipient – accounting for $10 billion in 2002-2003. Other major sectors include wood products ($1 billion), consumer goods ($95 million), automotive OEM ($670 million), and metals/mining ($552 million) sectors. FDI Inflow In Russia – Sector-wise Breakup
Accumulated foreign investment $ 111 . 8 Billion FDI Inflow In Russia – Top Investors
Effectiveness of governments in promoting foreign direct investment?
Base: 134 respondents Source : questioning of foreign investors « Russia as an object of investments », polled in 2005 г. by FIAC
Davos (WEF- 2007)
Politics of Business-Politics Triumphs Profits
3 rd largest oil & 30% gas reserve
Its huge Oil and Gas Reserves( natural Resources) to give it Immense Economic
Putinism – pledge to make Russia strong once again and promote Moscow's international influence
Line between strategic resources like O&G and political power is not only blurred it doesn’t exist. E.g. Former Gazprom’s Chairman, Dmitry Medvedev is current President of Russia
Legacy image of Cold war and instability from Yeltsin era
Current Image issues arising from:
Intimidating its neighbors after they elected pro-western government - Cut Gas taps to Ukraine, Georgia & doubled the gas prices to Belarus
Politics of Business-Politics Triumphs Profits
Horrors of governance and settlements still occur as with the forcible takeover of Yugraneft Corporation, a Russian subsidiary of Norex Petroleum by TNK
ADC’s claim against contract violation by its Russian partner, Arkhangelskgeoldobycha,
July 2001 takeover of Sawyer Research Products’ facility in Vladimir by two Russian companies with the support of the local judiciary.
Risks Investors’ opinion Source : questioning of foreign investors « Russia as an object of investments », polled in 2005 г. by FIAC
FDI confidence index A.T.Kearney in 2005 China India United States United Kingdom Poland Russia Brazil Australia Germany Hong Kong Hungary Czech Republic Turkey France Japan Mexico Spain Singapore Italy Thailand Canada Dubai/UAE South Korea Central Asia Romania Maintained ranking Moved down Moved up
Is Russia’s investment risk higher than?
Lower Investment Risk Lower ROI Higher Investment Risk Higher ROI
Return on Investment vs. Level of Risk
Comparisons with Other Markets
The “IC” of BRIC Source : 2003 BRIC Report-Goldman Sachs
« If you are looking for a gold mine in the sphere of sciences and technologies, pay attention to Russia». George Schultz , Former US Secretary of State « As far as I noticed everything is not that hard and doesn’t differ from other countries » Andrew Kinghorn , Director of Internationa l Investments Knight Frank « There is much talk, particularly in the equity market, of the risks of investing in Russia, but we believe that the risks are more than counterbalanced by the opportunities, especially if you know where to find them» Steven Jennings , chairman of investment group « Renaissance Capital »