Based on a case study!

1. FDI IN RUSSIA By Gourav, Pooja, Prashant Rahul & Rajendra

2. Introduction Russia experiencing unprecedented capital flight In 1996, $22.3 billion left the country and mere 2.2 billion in FDI flowed in Even in Hungary, FDI inflows are more than double from 1989 to 1996 Riskiest Investment destination Complex tax code Endless regulations Favour to local companies Companies sold to banks in “share for loans” scheme & Foreign companies couldn’t bid Privatization favoured Incumbent managers

3. More facts Largest Oil & gas reserves Production dropped from 569 million tons (1988) to 305 million tons (1996) Leaking pipelines Aging oil wells Lack of new drilling technology Conflicts between states on ownership Required $80-100 billion per year for earlier levels and $40-50 billion to maintain their current production levels Why did they sold companies for peanuts??

4. Reforms Boris Yeltsin opened FDI in Oil & Gas sector in 1997 Foreign companies can buy 100% of Russian Oil companies Royal Dutch Shell teamed up with RAO Gazprom to bid for Rosneft BP purchased 10% stake in Sidanco But, still companies were reluctant for big investments as they demanded Stronger and legal tax guarantees Internationally recognizable agreements Not passed as of 1997

5. Reasons for an Investor to Target Russia Natural resources: Oil and natural gas Government policies and local companies play a major role in FDI New markets: Purchasing power of the common middle class man Efficiency: Technological and labour skills. It is said that Russia can become an Engineering hub because of its skilled labour

6. FDI HISTORY Post Cold War consequences FDI plummeted during 1998 due to financial crises Unable to recover from the financial crises in the next three years Since 2002 FDI inflow has grown by more than 8.3 times in 2006 due to the reforms of 1999 Change observed in 2006 was the reversal of capital flight

7. Why FDI had not increased more rapidly till 1997 ? Skeptical view: Perhaps they don’t want FDI and have only paid lip-service in order to gain the backing of foreign governments & international financial institutions Cold War Consequence: Post cold war members of Russian elite distrust the West Poor implementation of improved rules and lack of coordination in government policies

8. Russia’s – Investment Climate Foreign Exchange Control Legal Framework Investment Climate Taxation Competition Regulation & IPR

9. Investment climate 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. Labour laws- Freedom of employ any personnel of their choice regardless of their nationality Dispute resolution – between foreign party and host country referred to international arbitration without having to go thru local court system. One of the lowest Tax rates in Europe

10. Role Of Oil/Gas in Russian politicsPolitical nexus with Gazprom Gazprom is World's largest Natural gas company and accounts for 17% gas production worldwide Russian Government holds 50.02% stakes in Gazprom Accounted for 10% of Russia's GDP in 2008 Maintains a private army and employs half million people in Russia Major gas supplier to European Union countries

11. Ruler? It’s Oil/Gas !

12. Origin of FDI in Russia 18% in 2006 and around 14% in 2007 from one of the smallest EU countries Nearly 1/3 FDI from EU in 2006 More than quarter of the FDI from EU till 3rd quarter of 2007

13. Destination of FDI Service sector has been a big gainer In 2005, energy sector FDI has gone down following the Yukos affair which slowly recovered after that

15. Questions Will your company invest in a country like Russia in 2010? If yes, What would be the best sector to invest in?

16. References Foreign investment advisory council, survey of CEOs 2008 Paper by Ksenia Yudaeva on Foreign ownership Tamila Curtis paper on Investments in Russia Mehmet Ogutcu Paper on Russia CCSE- Paper on FDI brics Articles from Economic times

17. Thanks!