*Karl P. Sauvant, PhD*
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*Columbia Center on Sustainable Investment**
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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 150 June 22, 2015
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Adrian P. Torres ([log in to unmask])
*FDI in Russia in difficult times*
<http://columbia.us6.list-manage1.com/track/click?u=ab15cc1d53&id=5a56b30fc9&e=dd153d6a25>
by
Thomas Jost*** <#14e1b89936744f63__edn1>
The annexation of Crimea by Russia in March 2014 and Russian support of
separatist groups in Eastern Ukraine provoked sanctions from the United
States (US) and European Union (EU) on Russian banks, as well as
restrictions on the export of military and dual-use goods. Negotiations
about trade and investment issues in various fora halted. Russia responded
with import restrictions, especially on food, and Russian politicians
threatened to nationalize foreign assets, including foreign direct
investment (FDI) projects.[1] <#14e1b89936744f63__edn2> The investment
climate suffered as a result of increased political risk, reflected in a
50% decrease of inward FDI (IFDI) in the first half of 2014 ($24 billion),
as compared to the first half of 2013.[2] <#14e1b89936744f63__edn3>
Although the majority of the business communities in the US and the EU
supported their governments’ policy, they nevertheless hope that the
economic ties they have built in the past two decades will not be
destroyed. Several business representatives and economists also raised
doubts about whether economic sanctions will have positive political
effects, fearing that many companies could lose market shares to Asian
competitors. Russia has already re-oriented its oil and gas policy to China.
Since the opening of Russia’s economy in the early 1990s, trade and
investment ties with Western economies have grown considerably. Russia is
the EU’s third largest trade partner, and the EU strongly depends on
Russian energy, whereas Russia depends on Western imports of investment
goods for the modernization of its economy. Russia’s IFDI stock rose from
virtually nothing in 1990 to US$576 billion by the end of 2013.[3]
<#14e1b89936744f63__edn4> But a large part of Russian IFDI is
round-tripping capital that is channeled through Cyprus, Belgium,
Luxembourg, the Netherlands, and Caribbean tax havens. Therefore, the real
size of Russia’s IFDI lags much behind IFDI into other post-Soviet
economies like Poland and other emerging markets.
The low investments of Western multinational enterprises in Russia are due
to its weak and uneven economic growth in the past two decades as Russia
failed to diversify its resource-driven economy. Additionally, corruption,
bureaucratic barriers and weak infrastructure have hampered FDI inflows.
Economic growth was already sluggish before the start of the conflict in
2014; with sanctions, the Russian economy is expected to contract by 3% in
2015.[4] <#14e1b89936744f63__edn5>
Despite many problems, Russia has been a reliable business partner for
foreign investors in the past decade. To modernize its economy, Russia has
created a solid FDI regime. The 1999 Federal Law No. 160 on foreign
investment (the most important law), together with the 1991 Investment
Code, guarantee that foreign investors have rights equal to Russian
investors. The Russian constitution allows for nationalization only under
very limited conditions. In addition, 54 bilateral investment treaties are
in force. Russia is also a member of the International Centre for
Settlement of Investment Disputes (ICSID), and Western firms do not depend
on Russian courts before turning to ICSID. On the other hand, limits on
foreign ownership in sectors that have strategic significance for national
defense and state security, Russia’s withdrawal from the Energy Charter
Treaty, as well as the sluggish privatization process, prevented higher FDI
from Western firms in the past.
From a long-term perspective, Russia’s abundant natural resources and human
capital should make it an interesting market for foreign investors. But its
political problems and the uncertainty over harsher sanctions—causing
perhaps a sanction spiral—are destroying trust, an essential requirement
for FDI projects. Meanwhile, Russia has sent mixed signals. It still wants
to attract Western FDI and has continued to relax investment barriers; but
it has also threatened to impose new retaliatory measures or to shift
toward Asia to replace Western investment.
Russian policy makers are also divided. In October 2014, a new draft law
(the so-called “Rotenberg bill”) that would allow the confiscation of
assets of foreign enterprises to compensate Russian citizens and companies
for Western sanctions, passed a first reading in parliament’s lower house
with a slim majority. In November 2014, it was blocked by Russia’s Supreme
Court. Although the Russian Economy Minister had repeatedly warned that the
law is counterproductive,[5] <#14e1b89936744f63__edn6> foreign investors
are missing a clear signal from the Russian government that their
investments are welcomed and safe.
In late 2014, the economic environment worsened, and a currency crisis led
to an acceleration of the ruble’s depreciation. FDI prospects further
deteriorated. Although some companies (especially in the food industry)
could increase FDI in Russia to circumvent trade barriers, the weakening
economy and shrinking exports to Russia will dampen market and export
oriented FDI for the majority of investors. In a recent survey of 300
German companies operating in Russia, 12% of the firms answered that they
are planning to divest in Russia if the situation does not improve.[6]
<#14e1b89936744f63__edn7>
------------------------------
* <#14e1b89936744f63__ednref1> Thomas Jost ([log in to unmask]) is
Economics Professor at the University of Applied Sciences Aschaffenburg.
The author is grateful to Kari Liuhto, Andrei Panibratov and Zbigniew Zimny
for their helpful peer reviews. *The views expressed by the author of this
Perspective do not necessarily reflect the opinions of Columbia University
or its partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579)
is a peer-reviewed series.*
[1] <#14e1b89936744f63__ednref2> *See* “Russia preparing Response to U.S.
and EU sanctions“, *The Moscow Times*, March 6,
2014www.themoscowtimes.com/news/article/russia-preparing-response-to-us-and-eu-sanctions/495665.html
.
[2] <#14e1b89936744f63__ednref3> *See* Central Bank of Russia,
www.cbr.ru/eng/statistics/?Prtid=svs
<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=a2dd8a2238&e=dd153d6a25>
.
[3] <#14e1b89936744f63__ednref4> *See* UNCTAD’s FDI database,
http://unctadstat.unctad.org
<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=ee3ef8fae2&e=dd153d6a25>
[4] <#14e1b89936744f63__ednref5> *See* The World Bank, *Global Economic
Prospects, January 2015*,
www.worldbank.org/en/publication/global-economic-prospects
<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=872d2abf0d&e=dd153d6a25>
.
[5] <#14e1b89936744f63__ednref6> *See* *Frankfurter Allgemeine Zeitung*,
“Rußland wirbt um westliche Investoren”,
www.faz.net/aktuell/wirtschaft/wirtschaftspolitik/interview-mit-russlands-wirtschaftsminister-uljukajew-13284410.html
<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=d32e8a9641&e=dd153d6a25>
.
[6] <#14e1b89936744f63__ednref7> *See* “Wenn der Rubel nicht mehr
rollt“, *Frankfurter
Allgemeine Zeitung*, December 17, 2014,
www.faz.net/aktuell/wirtschaft/unternehmen/russlands-rubel-krise-wirkt-sich-auf-deutsche-unternehmen-aus-13327662.html
<http://columbia.us6.list-manage1.com/track/click?u=ab15cc1d53&id=6e22db1be1&e=dd153d6a25>
.
*The material in this Perspective may be reprinted if accompanied by
the following acknowledgment: “Thomas Jost, ‘FDI in Russia in Difficult
Times,’ Columbia FDI Perspectives, No. 150, June 22, 2015. Reprinted with
permission from the Columbia Center on Sustainable Investment
(www.ccsi.columbia.edu <http://www.ccsi.columbia.edu>).” A copy should
kindly be sent to the Columbia Center on Sustainable Investment at
[log in to unmask] <[log in to unmask]>.*
For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Alex Weaver, [log in to unmask]
*Most recent Columbia FDI Perspectives*
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- No. 149, John P. Gaffney, “When is investor-state dispute settlement
appropriate to resolve investment disputes? An idea for a rule-of-law
ratings mechanism,” June 8, 2015.
- No. 148, In Hyeock Lee, Shige Makino and Eunsuk Hong, “Outward FDI
does not necessarily cost domestic employment of MNEs at home: Evidence
from Japanese MNEs,” May 25, 2015.
- No. 147, Joachim Karl, “An appellate body for international investment
disputes: How appealing is it?,” May 11, 2015.
*All previous FDI Perspectives are available at *
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Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
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