August 24th, 2016

SHOALING CREEK OF FDI

Picture by loanscanada.ca

Picture by loanscanada.ca

According to the recent statistics provided by the Russian Federal Statistics Service, foreign direct investments (FDI) in Russia have dropped in the first half of 2016 by 4.3% APR. In fact, shallowing of the investment inflow has continued for more than two years. Hunger for superprofits sharks of capitalism perceive the expropriation of Yukos in the mid-2000s as an isolated case, which does not affect the overall investment climate in the country. They continued actively flirting with the Putin’s regime, and only economic sanctions, entered by the Western governments in 2014 in response to the annexation of Crimea and support of separatists in Donbass, have forced transnational corporations to slow down its expansion on the Russian market.

Russia’s overall investment climate quickly turned from positive to negative. Russia was among the top three recipients of FDI with a record US$94 billion in 2013. This precipitously fell to only US$21 billion in 2014 and US$4.8 billion in 2015.

In 2014 just 178 new foreign investment projects worth US$13 billion were launched, compared to 396 projects worth US$23bn in 2011. Russia’s second biggest European investor (after Cyprus), the Netherlands, decreased its investment from US$5.7bn to US$1.23bn in 2014. Even though weak currency usually attracts foreign investors, as ruble weakened, FDI kept collapsing.

Ernst & Young sees the following issues negatively influencing the investment climate: inconsistent and selective law enforcement, non-transparent decision-making procedures, and corruption.

Historically, the main industries for FDI inflows in Russia have been wholesale and retail trade, banking, manufacturing, and the mining sector (mostly extraction of oil and gas). Surprisingly the mining industry takes only the 4th position –explained largely by the tough governmental restrictions in the sector. However, despite Western sanctions, it remains attractive and transnational corporations interested in joint projects.

The ongoing sanctions against the energy, defense, and banking sectors, coupled with the weak oil market, have pushed the Russian government to look for alternative investors. What has emerged is the so called ‘Asian pivot’ – directly appealing to potential investors in Asia, specifically China. At the G20 summit in November 2015 Putin said that approximately 90 percent of investments in the Russian market came from Asia this year. This is only partially proven by the statistics – in previous years inflows from China never exceeded US$450m, and in 2014 they reached $1.3bn. Most of this is focused on the Russian Far East, the geographically closest region to the Chinese mainland. China has a broad sector focus and invests in the oil industry, transport infrastructure, highways, ports and airports. Furthermore, it is aiming to increase investment in Russia four-fold by 2020.  Nevertheless, even with this increase, the Central Bank of Russia reports that China occupies 5th place of FDI net inflows in 2014 after Cyprus, the Bahamas, British Virgin Islands, Switzerland and France. In 2015 China didn’t even reach the 5th place – its inflows dropped to US$571m – less than those from Ireland. Thus, ‘Asian Pivot’ has not been as successful as Putin wanted it to be.

Photo by Gennady Alexandrov / WWF Russia

Photo by Gennady Alexandrov / WWF Russia

In current conditions of low oil prices, that without an influx of foreign investment remains the only significant source of foreign currency in the country, it is essential to be open to foreign businesses, have a transparent decision-making system, clean the law enforcement of corruption, and improve relations with the West. The idea of autonomy, independence of their own market and import substitution, planted by the Kremlin, in the 21st century – the century of global integration – condemns the most of the 146 million Russian population to poverty.

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