Foreign Direct Investment in RussiaPresentation Transcript
Foreign Direct Investment in Russia Econ 508 Matt Autrey
At the opening of the new millennium, Russia looms on the horizon as an immense opportunity for investors.
Russia is a vast country stretching across Europe and Asia, possessing spectacular wealth in the form of exploitable natural resources, technology, a large skilled workforce, and nearly 150 million consumers whose needs are endless.
Their goals are to move toward a market system based on private capital investment and enterprise, and to integrate rapidly into the world economy.
Russia has rapidly privatized the bulk of assets from the former state enterprises, and this has spawned thousands of new small and medium-size businesses.
891,000 new small business have been created by early 2000, and 65% of all Russia’s private business are now classified as small-medium sized.
Population: 143.4 million
Population Growth: -0.45%
GDP breakdown: Agriculture (5.2%), Industry (34.17%), Services (60.67%)
Exports of Goods and Services as a % of GDP: 31.7%
There is an increased interest from foreign investors in the Russian economy, which has seen continuous growth over the past 3 years – a major turnaround after a decade of declines in the 1990s.
On the back of strong oil prices, real GDP growth in 2005 is expected to reach between 3.4 and 5.6%.
Key Point : The world oil price plays a huge role since Russia is the world’s 2 nd largest oil exporter!
Top 3 Destination Sectors: Food & Drink, Automotive, Financial Services
Top 3 Source Countries: US, Germany, Finland
Top 3 Investors: Royal Dutch Shell, IKEA, Renault
President Putin has brought political stability, representing a major change for investors after the rotating governments in the final years of Boris Yeltsin’s presidency.
The state is consolidating its control functions, and political / macroeconomic risk factors have been significantly reduced.
FDI increased under Putin to the 2 nd highest levels in Russian history during 2002, but has cooled off considerably in 2003.
Russia has recently been recognized by the EU and the USA as a ‘market economy’.
The result has been a boost to Russian exports, relief of the country’s anti-dumping laws (particularly on steel), and entry into the World Trade Organization (WTO).
Note : Russian and EU negotiators anticipate Russia joining the WTO in 2006 at the earliest, and they still face talks with the US and China before joining.
Pro’s of joining the WTO
Russia’s accession to the WTO would…
Complement it’s internal economic reforms by promoting rule of law, fair competition, and transparency in business and investment.
Attract FDI and promote the long term growth of FDI (as seen in China).
Greater factor mobility as export-oriented Russian producers will become more attractive for FDI.
Opportunities for investment
The existing level of FDI in the Russian economy remains short of current needs
Low levels are not due to the lack of opportunities or potential, but mainly the difficult climate for private business and investment.
Cumulative FDI in Russia from 1991 to 2001 is $18.2 billion, only 5% of domestic fixed capital formation
Compare to : FDI in China of $46 billion in 2000 alone, more than $200 billion in the US.
Opportunities for investment
Levels of FDI in Russia very low relative to other transition countries
Adjusted for population size, on a per capita basis, cumulative FDI in Russia is $15, compared to $84 for Poland, $118 for the Czech Republic, and $221 in Hungary.
The largest investors by the end of 2000 were Germany (17.1%) and the US (15.6%).
Foreign Direct Investment Inflows in Central and Eastern Europe and Central Asia (US $millions) 18226.9 22220.9 15216.2 16138.4 397.5 Total 640.0 623.0 521.0 267.0 50 Ukraine 2183.0 6243.0 2478.0 2016.0 147 Russia 950.0 1215.0 263.0 419.0 23 Romania 5500.0 4908.0 4498.0 3659.0 39 Poland 925.5 354.5 152.4 72.6 3.5 Lithuania 5000.0 2079.0 1982.4 4518. 10 Hungary 1400.0 1286.0 1435.3 2567.6 10 Czech Rep. 854.0 388.3 533.3 101.2 4 Croatia 200.0 505.0 109.0 90.4 8 Bulgaria 70.0 51.1 17.6 25.3 4 Armenia 2002 1997 1996 1995 1997 Population (millions) Country
Increasing the profitability of FDI will require :
a massive investment into industrial plants and equipment.
the widespread deployment of new technologies.
an improvement in economic management across all sectors of the economy.
Why has FDI not increased more rapidly?
Cynical viewpoint : Russia may not really want foreign investment, and has only paid lip-service to the principle in order to gain the backing of foreign governments and international financial institutions.
Many members of today’s Russian elite distrust the West and believe their only purpose investing in Russia is to rob the country of its riches by making quick profits and shifting them abroad.
Poor implementation of improved rules, and lack of coherence between new legislation and coordination of government policies.
FDI into the Banking Sector
Legislative reforms in banking sector, oil, gas, and rail monopolies has been the weakest element in the reform program so far.
Russian banks are still not fully playing the role of financial intermediaries and do not serve as a major source of enterprise financing.
The banking system, insurance industry, and pension funds are highly protected from foreign competition.
FDI in the Banking Sector
The key points of the governments 3 year program in banking sector reform include:
Mandatory deposit insurance system.
Capital requirements for newly created banks to be increased to 5 million Euros.
International standards for accounting and reporting.
Government to disinvest its stakes in a number of banks.
Equal conditions for resident and non-resident banks.
Russia is now at a critical juncture where it could grow very rapidly, catching up with Europe under the stimulus of international trade and capital flows.
“ The strategy that Russia adapts now will likely determine the irreversible course of events to come ” – Mehmet Ogutcu, Russian Investment Roundtable, June 2002.
The problems faced in Russia are important to both domestic and foreign investors.
The domestic entrepreneur is condemned to cope with local conditions, while the foreign investor is free to choose among competing host countries.
Key Point : A country’s success in attracting FDI is therefore a measure of it’s domestic success as well.
When positive change finally does take root in Russia, I feel FDI will dramatically increase. This investment should become a driving force behind economic growth, and introduce a new era of prosperity to the country.