FDI inflow and related issues in Russia

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This presentation talks about the FDI inflow in Russia and the related political and social issues having an impact on the FDI.
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  • FDI inflow and related issues in Russia

    1. 1. Group 11 Indranil Sapre | Jaikrishnan | Sameer Tandon Saumya Gopi | Sumit Agarwal | Surabhi Srivastava
    2. 2. <ul><li>Russia experiencing unprecedented capital flight </li></ul><ul><li>1996 </li></ul><ul><ul><li>$22.3 billion left the country – illegally that is! </li></ul></ul><ul><ul><li>$2.2 billion inflow </li></ul></ul><ul><li>Investment from FDI higher in smaller nations e.g. Hungary </li></ul><ul><li>Complex tax code - ever-changing and randomly enforced </li></ul><ul><li>Weak and untested property and contract safeguards </li></ul><ul><li>Endless regulations </li></ul><ul><li>Playing field made uneven by trading and tax favors - Russian government to Russian companies </li></ul>
    3. 3. <ul><li>Russia favor local companies </li></ul><ul><li>companies sold for a fraction of their market value to local banks </li></ul><ul><li>FDI’s not given an opportunity to bid </li></ul><ul><li>privatization of several large-scale companies has seen the majority of stock sold - incumbent managers and employees for a fraction of the price </li></ul>
    4. 4. <ul><li>Largest oil and gas reserves </li></ul><ul><li>Production dropped: 569 million tons(1988) - 305 million tons(1996) </li></ul><ul><li>Issues: </li></ul><ul><ul><li>leaking pipelines </li></ul></ul><ul><ul><li>aging oil wells </li></ul></ul><ul><ul><li>lack of new drilling </li></ul></ul><ul><ul><li>conflict between the various states of the former Soviet Union </li></ul></ul>
    5. 5. <ul><li>Boris Yeltsin in November 1997 opened FDI in oil and gas industry </li></ul><ul><li>allowed foreign investors to buy 100 percent of Russian oil companies </li></ul><ul><li>Royal Dutch Shell had teamed up with RAO Gazprom to bid for Rosneft </li></ul><ul><li>BP purchased 10% stake in Sidanco </li></ul>
    6. 6. <ul><li>Stronger legal and tax guarantees </li></ul><ul><li>Sign internationally recognizable production sharing agreements </li></ul><ul><li>Ownership of natural resources with the state but allow foreign developers a defined share of future revenues </li></ul><ul><li>Not passed as of 1997 </li></ul>
    7. 8. <ul><li>EU is the largest investor in Russia </li></ul><ul><li>Russia’s nominal GDP over USD 1 trillion in 2006 </li></ul><ul><li>During the period 2000-2006, growth due to gradual increase in utilization of existing industrial capacity </li></ul><ul><li>FDI’s were of fundamental importance for making resumption of growth in Russia </li></ul><ul><li>Estimated FDI figure’s </li></ul><ul><ul><li>$56-62 billion in 2009 </li></ul></ul><ul><ul><li>$60-67 billion in 2010 </li></ul></ul><ul><ul><li>$65-73 billion in 2011 </li></ul></ul>
    8. 11. <ul><li>Significant progress in liberalization of electricity sectors </li></ul><ul><li>Natural gas sector remains mostly unreformed </li></ul><ul><li>In July 2007, Govt. submitted “ On the Rules of Foreign Investments in Enterprises Having Strategic Importance for the National Security of the Russian Federation” to Duma </li></ul><ul><li>Two sectors identified – strategic and subsoil </li></ul><ul><li>Legislation </li></ul><ul><li>Business climate </li></ul><ul><li>Legal framework not stable – deterrent to investments </li></ul><ul><li>Russia ranks 106 th of 178 countries in “Doing Business 2008” </li></ul><ul><li>Russia performed worst in licensing requirements, dealing with workers and trading across borders </li></ul>
    9. 12. <ul><li>World’s largest natural gas company which controls 16% of world’s natural gas reserves </li></ul><ul><li>Revenues of USD 75.8 billion in 2007 </li></ul><ul><li>Contributed 64% of total exports from Russia in 2007 </li></ul><ul><li>A public stock company listed on stock exchange in 1994 </li></ul><ul><li>Government of Russia holds 50.01% stakes </li></ul><ul><li>Europe Union is dependent on Gazprom for its gas supplies </li></ul><ul><li>Gazprom has been under scan for its political connnections </li></ul><ul><li>Was expected to become $1 trillion company and largest corporation in world by 2010 before financial meltdown </li></ul>
    10. 13. <ul><li>The current Russian President was Gazprom's chairman. He replaced the president who became prime minister, replacing the existing prime minister who became Gazprom's chairman </li></ul>
    11. 14. Viktor Zubkov Current Chairman of Gazprom Former Prime Minister of Russia Valdimir Putin Shareholder in Gazprom Former President of Russia Current Prime Minister of Russia Viktor Chernomyrdin Former Chairman of Gazprom First Prime Minister of Russia Dmitry Medvedev Former Chairman of Gazprom Current President of Russia
    12. 15. Viktor Zubkov Valdimir Putin Dmitry Medvedev
    13. 17. <ul><li>The Good </li></ul><ul><li>Re-centralized a chaotic regime </li></ul><ul><li>GDP grew by 70%, industrial growth by 75 %, investments have increased by 125% </li></ul><ul><li>Controlling stake in Gazprom , Rosneft went public local and international investment </li></ul><ul><li>Setup of the Stabilization fund </li></ul><ul><li>Real incomes have doubled and poverty has halved </li></ul><ul><li>Removed legislative and policy hurdles changing international opinion </li></ul><ul><li>Created opportunities for investment in Oil, Gas, Power generation, distribution and food. </li></ul><ul><li>The Bad </li></ul><ul><li>Authoritarian culture </li></ul><ul><li>High inflation </li></ul><ul><li>Commodities-based economy </li></ul><ul><li>High dependence on food imports </li></ul><ul><li>Growing gap between rich and poor </li></ul><ul><li>Not enough local investment </li></ul><ul><ul><li>Only 1 mn of the total 140 mn involved in stock trading </li></ul></ul><ul><ul><li>70% russians have no savings </li></ul></ul><ul><ul><li>26% keep their savings in cash </li></ul></ul><ul><li>Trade embargoes on countries that do not fall in line (Ukraine, Estonia, Georgia) </li></ul>
    14. 18. <ul><li>How is Russia is using its oil muscle? </li></ul>
    15. 19. <ul><li>Russia has positioned itself as an important alternative supplier to the increasingly unstable Middle East </li></ul><ul><li>Oil and gas generate 70% of the countries income </li></ul><ul><li>Russia is using oil as a major tool of its foreign policy </li></ul><ul><li>“ Booming sales of oil and gas are driving Russia's economy to new levels, and Moscow is eager to prove that its humiliating years of post-communist uncertainty are over.” </li></ul>
    16. 20. <ul><li>Instances of forcing private companies to hand over projects to Gazprom </li></ul><ul><li>Instances of cutting supply to neighboring countries </li></ul><ul><li>ANOTHER SIDE OF THE STORY </li></ul><ul><li>Oil is slippery path to power </li></ul><ul><li>Short term strategy of Putin </li></ul><ul><li>Oil companies in Russia using outdated technology </li></ul><ul><li>Oil prices are falling </li></ul>
    17. 22. GDP FACTORS 2003 2004 2005 2006 2007 2008Q1-3 GDP Growth % 7.3 7.2 6.4 7.4 8.1 8 Industrial Production Growth y-o-y 8.9 8 5.1 6.3 6.3 5.4 Fixed Capital Investment growth 12.5 13.7 10.9 16.7 21.1 13.1 Federal Government balance 1.7 4.3 7.5 7.4 5.5 8.1 inflation ( CPI) % Change 12 11.7 10.9 9 11.9 11.6 Current Account Billion USD 35.4 58.6 84.2 95.6 76.6 91.2 Unemployment % 8.6 8.2 7.6 7.2 6.1 5.3 Reserves Including gold in (billion USD) 76.9 124.5 182.2 303.7 478.8 475
    18. 23. GDP 2003 2004 2005 2006 2007 2008 2008 ( Q1 -3 ) Total GDP GROWTH 7.3 7.2 6.4 7.4 8.1 8.5 7.5 Tradable 8.9 6.3 3.5 2.6 4.6 5.2 3.4 Agriculture, Forestry 5.5 3 1.1 3.6 3.1 3.2 3.2 Extraction industries 10.8 7.9 0.5 1.6 0.3 1.5 -1 Manufacturing 9.5 6.7 6 2.9 7.4 7.6 5.6 Nontradable sectors 7.2 7.3 7.3 9.8 9.8 9.9 9.1 Electricity,gas,water,prod. And distribution 1.6 2 1.2 4.7 -1.9 5.3 1.7 Construction 13 10.3 10.5 11.6 16.4 28.3 18.7 Wholesale and Retail 13.2 9.2 9.4 14.6 12.9 11.9 11.7 Financial Services 9.6 9.9 11.9 10.3 11.4 9.7 9.7 Transport Sector and community 7.2 10.9 6.2 9.6 7.7 9.8 9.4
    19. 27. SECTORAL INVESTMENT 2005 2006 2007 2008 Tradable Sector Total 77.7 53.5 65.7 37.4 Agriculture, Hunting, Forestry 0.9 1.4 0.8 1.7 Extraction Industry 30.7 33.1 50.1 22.6 Manufacturing 46.1 19 14.8 13.1 Non-tradable Sector Total 22.3 46.5 34.3 62.6 Electricity,gas,water production & dist 1.1 0.4 0.5 33.9 Construction 0.9 2 3.2 5.3 Retail & wholsale trade 5.9 6.1 11.7 8 Hotels & Restaurant 0.2 0.2 0.2 n/a Transport & Communication 1.9 2.8 2.1 1.5 Finance 4.5 11 4 1.3 Real Estate and Leasing 7.1 23.5 11.8 11.9 Provision of other public utilities 0.6 0.4 0.5 0.5 FDI and DEBT FLOWS 2005 2006 2007 2008 FDI Inflows 13.1 13.7 27.8 11.1 External Debt Stock 257.2 310.6 463.5 527.1 External debt flows 43.7 53.4 152.9 63.6 Total capital flows 57.7 67.1 180.7 74.7 Share of Debt flow as % of total Capital Flow 77.00% 79.60% 84.60% 85.20%

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