Foreign Direct Investment in Russia

21
Foreign Direct Investment in Russia Econ 508 Matt Autrey

Transcript of Foreign Direct Investment in Russia

Page 1: Foreign Direct Investment in Russia

Foreign Direct Investmentin Russia

Econ 508

Matt Autrey

Page 2: Foreign Direct Investment in Russia

Background

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.

Page 3: Foreign Direct Investment in Russia

Background

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.

Page 4: Foreign Direct Investment in Russia

896 900

877 300

841 700

861 100 868 000

890 600

810 000

820 000

830 000

840 000

850 000

860 000

870 000

880 000

890 000

900 000

1994 1995 1996 1997 1998 1999

Number of small businesses in Russia, units

Page 5: Foreign Direct Investment in Russia

Economic Information

• Population: 143.4 million

• Population Growth: -0.45%

• GDP breakdown: Agriculture (5.2%), Industry (34.17%), Services (60.67%)

• Inflation: 14.45

• Exports of Goods and Services as a % of GDP: 31.7%

Page 6: Foreign Direct Investment in Russia

Emerging Trends

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 2nd largest oil exporter!

Page 7: Foreign Direct Investment in Russia
Page 8: Foreign Direct Investment in Russia

FDI Information

• Top 3 Destination Sectors: Food & Drink, Automotive, Financial Services

• Top 3 Source Countries: US, Germany, Finland

• Top 3 Investors: Royal Dutch Shell, IKEA, Renault

Page 9: Foreign Direct Investment in Russia

President Putin

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 2nd highest levels in Russian history during 2002, but has cooled off considerably in 2003.

Page 10: Foreign Direct Investment in Russia

WTO

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.

Page 11: Foreign Direct Investment in Russia

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.

Page 12: Foreign Direct Investment in Russia

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.

Page 13: Foreign Direct Investment in Russia

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%).

Page 14: Foreign Direct Investment in Russia

Country

1997Population(millions) 1995 1996 1997 2002

Armenia 4 25.3 17.6 51.1 70.0

Bulgaria 8 90.4 109.0 505.0 200.0

Croatia 4 101.2 533.3 388.3 854.0

Czech Rep. 10 2567.6 1435.3 1286.0 1400.0

Hungary 10 4518. 1982.4 2079.0 5000.0

Lithuania 3.5 72.6 152.4 354.5 925.5

Poland 39 3659.0 4498.0 4908.0 5500.0

Romania 23 419.0 263.0 1215.0 950.0

Russia 147 2016.0 2478.0 6243.0 2183.0

Ukraine 50 267.0 521.0 623.0 640.0

Total 397.5 16138.4 15216.2 22220.9 18226.9

Foreign Direct Investment Inflows in Central and Eastern Europe and Central Asia (US $millions)

Page 15: Foreign Direct Investment in Russia

Profitability

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.

Page 16: Foreign Direct Investment in Russia

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.

Page 17: Foreign Direct Investment in Russia

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.

Page 18: Foreign Direct Investment in Russia

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.

Page 19: Foreign Direct Investment in Russia

Conclusion

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.

Page 20: Foreign Direct Investment in Russia

Conclusion

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.

Page 21: Foreign Direct Investment in Russia

Conclusion

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.