*Karl P. Sauvant, PhD*
*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
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The Evolving International Investment Law and Policy Regime: Ways
Forward (E15 Task Force policy options), "China's outward FDI and
international investment law", "Policy options for promoting FDI in
the LDCs", “The negotiations of the United Nations Code of Conduct on
Transnational Corporations: Experience and lessons learned”, and
*Improving the International Investment Law and Policy Regime: Options
for the Future are* available at

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*Columbia FDI Perspectives*

Perspectives on topical foreign direct investment issues
No. 171  April 11, 2016
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Maree Newson ([log in to unmask])

*Untangling the effects of “special purpose entities” on global FDI*
Delphine Nougayrède* *

The measurement of foreign direct investment (FDI) flows and stocks between
home countries and host countries is muddied by the widespread use of
“special purpose entities” (SPEs), including for the round-tripping of
domestic investment.[1]
Many national statistical bodies still do not separately track investments
through SPEs and thereby risk presenting a distorted picture of global FDI.
International bodies, including the OECD[2]
and UNCTAD,[3]
have long identified the problem, but it persists.

This *Perspective* provides a Russian illustration: the US$55 billion
acquisition of TNK-BP, a Russian oil producer, by Rosneft, another Russian
oil company, in 2013. While the case may be singular, its magnitude made
the distortive effect quite visible.

Rosneft is a Russian company that is majority owned by the Russian state.
TNK-BP was a Russian oil-producing group with a top holding company in the
British Virgin Islands (BVI). Before its acquisition by Rosneft, it was
50/50 owned on the one side by BP of the United Kingdom (UK) and, on the
other side, by AAR, a consortium of companies registered in the BVI but
ultimately owned by Russian individuals.[4]

BP’s total consideration for the sale of its TNK-BP share was US$27.4
billion, split into Rosneft shares and net cash proceeds of approximately
US$12 billion.[5]
The cash proceeds were taken out of Russia, i.e., for BP this was a share
swap and partial divestment. As for the AAR segment, the consideration of
US$27.7 billion was paid entirely in cash by state-owned Rosneft to the BVI
companies of the Russian shareholders.[6]
Seen synthetically, the combined transaction was therefore a share swap and
partial divestment by a foreign investor (BP), combined with a
renationalization of domestic oil production assets.[7]

Official FDI statistics, however, gave a picture that was arguably the very
opposite—that of an all-around increase in global FDI. Russia’s Central
Bank reported a significant outflow of Russian FDI, with stocks in the BVI
jumping to US$82 billion as of December 31, 2013, making the BVI the second
largest Russian outbound FDI destination behind Cyprus.[8]
The reason was that, technically, although the TNK-BP assets were located
in Russia, the shares acquired by Rosneft were those of a BVI company.
Russia’s Central Bank also reported a significant inflow of FDI into Russia
from the UK (and not a divestment),[9]
and on that basis Russia appeared to become the world's third largest
recipient of FDI inflow that year.[10]
This was presumably because BP's previous position in TNK-BP had never been
reflected as British Russian-bound FDI in the first place.

The TNK-BP example illustrates the difficulties of untangling the
statistical effects of SPEs in cross-border investment. International
bodies recommend that national data compilers create additional series
looking through SPEs to identify the ultimate origin and destination of
This task would be facilitated, however, if all countries hosting large
numbers of SPEs produced such origin and destination data for their
resident SPEs (as here the BVI). Mandatory corporate registers publicly
disclosing ultimate beneficial ownership of these SPEs would also increase
transparency and lead to a better understanding of global capital flows.[12]


Delphine Nougayrède is an adjunct lecturer at Columbia Law School. The
author is grateful to Maria Borga, Masataka Fujita, Michael Gestrin, and
Thomas Jost 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.*

"Special purpose entity" is used here in the wide sense of legal entities
with little or no substance that are used in cross-border investment, for
tax or other purposes (whether or not they are separately reported as SPEs
in national statistics).

*OECD, *Benchmark Definition of Foreign Direct Investment*, 4th ed. 2008
and “How multinational enterprises channel investments through multiple
countries”, February 2015, available at

*UNCTAD, *World Investment Report 2014 *(Geneva: UNCTAD, 2014) p. 3.

One of them is a Soviet-born UK citizen.

BP, “Annual report and Form 20F 2013”, p. 148, available at

Rosneft Oil Company*, *“Consolidated financial statements”, December 31,
2013, p. 35, available at

The main production units forming TNK-BP had been privatized in the 1990s.

Central Bank of the Russian Federation (CBR), “Russian direct investment
abroad, stocks broken down by instrument and country (assets/liabilities
principle)”, available at

CBR, “Foreign direct investment in the Russian Federation, flows broken
down by instrument and country”, available at

supra* note 3, p. 71.

*See* OECD, op. cit. and “Identifying the ultimate investing country”,
March 2015, available at

*FATF Guidance, *Transparency and Beneficial Ownership*, October 2014; and,
in the EU, *Directive (EU) 2015/849 on the prevention of the use of the
financial system for the purposes of money laundering or terrorist
financing, Recital 14 and Article 30, available at

 *The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Delphine Nougayrède, ‘Untangling the effects of
“special purpose entities” on global FDI,’ Columbia FDI Perspectives, No.
171, April 11, 2016. Reprinted with permission from the Columbia Center on
Sustainable Investment (
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,
Daniel Allman, [log in to unmask]

*Most recent Columbia FDI Perspectives*

   - No. 170, Wenhua Shan, “An outline for systemic reform of the
   investment law regime,” March 28, 2016.
   - No. 169, Kaitlin Y. Cordes and Anna Bulman, “Land investments and
   human rights: how home countries can do more,” March 14, 2016.
   - No. 168, Karl Sauvant and Daniel Allman, “Can India emulate China in
   attracting and benefitting from FDI?” February 29, 2016.

*All previous **FDI Perspectives** are available at *
*. *

*Other relevant CCSI news and announcements*

   - *On April 21, 2016*, CCSI is co-organizing “The Politics of Investment
   Treaties,” with Freshfields Bruckhaus Deringer LLP. The starting point will
   be a recent book by Dr. Lauge Poulsen, which focuses on the historic
   practices of developing countries concluding investment treaties, and finds
   that governments in many developing countries overestimated the economic
   benefits of those agreements and practically ignored their risks. Panelists
   include Brian King, (Freshfields Bruckhaus Deringer), Lauge Skovgaard
   Poulsen (University College London), and Jennifer Haworth McCandless
   (Sidley Austin LLP). The event will take place from 6:30–7:30 pm at
   Freshfields Bruckhaus Deringer, 601 Lexington Avenue, 31st Floor, New York,
   NY 10022, with a reception to follow. *Registration is free but
   required. For more information please see our website here
   and registration is available here
   - *On* *August 1-5, 2016,* CCSI will hold its Executive Training on
   Investment Arbitration for Government Officials at Columbia
   University. Through an intensive week-long course, government officials
   involved in managing investment treaty disputes or negotiating investment
   treaties will increase their knowledge of crucial procedural and
   substantive aspects of investment law. Sessions will be taught by leading
   academics and practitioners and will be tailored to uniquely address issues
   relevant to governments.*For more information about the program,
   including application materials, please visit our website
   - *On November 2-3, 2016*, CCSI will host the eleventh annual Columbia
   International Investment Conference, entitled “Climate Change and
   Sustainable Investment in Natural Resources: From Consensus to Action.”
   Both the Sustainable Development Goals and the Paris Agreement, reached
   last December at COP21, make clear that climate-change mitigation must be
   pursued within the broader agenda of ending poverty, promoting economic
   development, ensuring social inclusion, and protecting the physical
   environment. Our Conference, taking place one week before COP22, will offer
   a high-level opportunity to explore the complex challenges of the Paris
   Agreement in light of sustainable development, the SDGs, and the real
   challenges facing developing countries within the global economy. The
   Conference’s sessions will address issues including: the rapidly changing
   (and declining) role of hydrocarbons in the global energy system; how
   low-carbon strategies can and should be adapted to the development needs of
   low-income countries; how to manage land use to mitigate climate and
   environmental impacts and to maximize benefits for development; and the
   development of new international legal frameworks and global governance to
   support national-level actions. *Registration is free, but required; for
   more information, including registration, please check our website

Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946

*Copyright © 2016 Columbia Center on Sustainable Investment (CCSI), All
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