FDI in Russia

GROUP 12GROUP 12

Atul SinghAtul Singh

Arvind BaidArvind Baid

Ram PottyRam Potty

Sheetal DeshmukhSheetal Deshmukh

Sunil MauryaSunil Maurya

What is FDI ?

• Definition : Definition : "Direct investment refers to "Direct investment refers to investment that is made to acquire a investment that is made to acquire a lasting lasting interestinterest in an enterprise operating in an in an enterprise operating in an economy other than that of the investor, the economy other than that of the investor, the investor's purpose being to have an investor's purpose being to have an effective effective voicevoice in the management of the enterprise." in the management of the enterprise." [IMF Balance of Payments Manual, 4th ed, 1977, [IMF Balance of Payments Manual, 4th ed, 1977, p.136]p.136]

• Type of FDI:Type of FDI:-Greenfield Investment-Greenfield Investment-Mergers and Acquisition-Mergers and Acquisition

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Imporatance of FDI

• From Firm's POVFrom Firm's POVResource Seeking ( natural or HR)Resource Seeking ( natural or HR)Market seekingMarket seekingEfficiency seekingEfficiency seekingstrategic-asset seekingstrategic-asset seeking

• From Host Country's POVFrom Host Country's POVImproving quality of labor and infrastructureImproving quality of labor and infrastructureDevelop local skills,tech and local learningDevelop local skills,tech and local learningEnsure stable & conducive overall macro and regulatory Ensure stable & conducive overall macro and regulatory environmentenvironment

About Russia

GDP:1.7 Trillion $ (6th)GDP growth:7%Inflation:11.9%

24% increase in Foreign TradeExchange Rate:1$=23.6 Ruble

Labor Force:71.68 Million (Agr:12%,Industry:23%,Services:65%

Unemployment Rate:8.5%

GDP:1.7 Trillion $ (6th)GDP growth:7%Inflation:11.9%

24% increase in Foreign TradeExchange Rate:1$=23.6 Ruble

Labor Force:71.68 Million (Agr:12%,Industry:23%,Services:65%

Unemployment Rate:8.5%

• The Russian The Russian Federation stretches Federation stretches across Eurasia from across Eurasia from Eastern Europe to Eastern Europe to the Pacific coast. the Pacific coast. Even after the Even after the collapse of the collapse of the Soviet Union, Russia Soviet Union, Russia remains the largest remains the largest country in the world country in the world in terms of territory.in terms of territory.

About Russia

• Population-approximately 143 million.Population-approximately 143 million.

• About 73% of the population lives in About 73% of the population lives in urban areas urban areas

• 13 cities have a population of over 1 13 cities have a population of over 1 millionmillion

• Largest city in the Russian Federation Largest city in the Russian Federation is Moscow- population approximately is Moscow- population approximately 10.4 million, 10.4 million,

• Second largest St. Petersburg – Second largest St. Petersburg – population approximately 4.5 millionpopulation approximately 4.5 million

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Russia: The Transition Economy

Russian Transformation 1989-2000

• Fall of Soviet union in 1991Fall of Soviet union in 1991

• Transformation from socialism, central Transformation from socialism, central planning, government control to market planning, government control to market determined prices & privatization determined prices & privatization

• Complex transition process of repositioning Complex transition process of repositioning itself in the global trading system.itself in the global trading system.

• To create a functioning market economy out To create a functioning market economy out of the ashes of the communist regime.of the ashes of the communist regime.

• Economic slump and Political TurmoilEconomic slump and Political Turmoil

• GDP contracted 54%, industrial activity GDP contracted 54%, industrial activity reduced by 45%reduced by 45%

Yeltsin Era 1991-1999

Source: Russia Economic Survey – May 2007 ( US- Russia Business Council)

Putin’s Russia – 2000 to 2008

• On average GDP growth rate of 6.5% On average GDP growth rate of 6.5% since 2000 (primarily due to high oil since 2000 (primarily due to high oil prices )prices )

• New era of political stability to push New era of political stability to push forward economic reformsforward economic reforms

Source: Russia Economic Survey – May 2007 ( US- Russia Business Council)

Investment Climate

Legal Framework

Legal Framework

Foreign Exchange

Control

Foreign Exchange

Control

TaxationTaxationCompetition Regulation &

IPR

Competition Regulation &

IPR

Russia’s – Investment Climate

Legal Framework - FDI• Foreign Investment law -1991Foreign Investment law -1991

• First legal framework conducive to foreign investorsFirst legal framework conducive to foreign investors

• The basic tenet of the code was national treatment for foreign investors. The basic tenet of the code was national treatment for foreign investors.

• Law on Foreign investments in Russia 1999Law on Foreign investments in Russia 1999

• Elaborate framework to protect the rights of investors. Elaborate framework to protect the rights of investors.

• Grandfather ClauseGrandfather Clause - which protects the investor from unfavorable - which protects the investor from unfavorable changes in the legal and tax regulation for a period up to 7 years.changes in the legal and tax regulation for a period up to 7 years.

• Resource UsageResource Usage - Freedom from performance requirement or any - Freedom from performance requirement or any commitment to use or export local goods.commitment to use or export local goods.

• Labour lawsLabour laws - Freedom of employ any personnel of their choice - Freedom of employ any personnel of their choice regardless of their nationalityregardless of their nationality

• Capital FlowCapital Flow – Unrestricted transfer of funds in freely convertible – Unrestricted transfer of funds in freely convertible currenciescurrencies

• In case of Expropriation- followed by adequate and prompt compensationIn case of Expropriation- followed by adequate and prompt compensation

• Dispute resolutionDispute resolution – between foreign party and host country referred to – between foreign party and host country referred to international arbitration without having to go thru local court system. international arbitration without having to go thru local court system.

• Replaces old license regime with PSA contractsReplaces old license regime with PSA contracts

Taxation

• Very important fiscal incentive for FDIVery important fiscal incentive for FDI

• Streamlined taxation legislationStreamlined taxation legislation

• Non-discriminatory policy - Unitary Non-discriminatory policy - Unitary treatment of foreign & domestic investorstreatment of foreign & domestic investors

• Attractive tax ratesAttractive tax rates

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One of the lowest tax rates in Europe

Source: RBC-Rating

Foreign exchange controls

• The currency controls are imposed on the The currency controls are imposed on the transaction of both export and import transaction of both export and import type (these include transaction of capital). type (these include transaction of capital).

• There are restrictions regarding the There are restrictions regarding the amount of foreign currency which could amount of foreign currency which could be kept on the bank account of the be kept on the bank account of the residents. residents.

• Russian rouble is the only legal currency Russian rouble is the only legal currency in the territory of Russia. in the territory of Russia.

IPR- Russia

• Improved legal framework but suffers from Improved legal framework but suffers from problematic enforcementproblematic enforcement

• Member of Paris convention, Universal Member of Paris convention, Universal Copyright Convention, Berne convention and Copyright Convention, Berne convention and Geneva Convention.Geneva Convention.

• After joining WTO- abide by TRIPS, Copyright After joining WTO- abide by TRIPS, Copyright law, Trademark law, Patents law, Trademark law, Patents

Competition Regulation

• Governed by 1995 - Law on Competition and Governed by 1995 - Law on Competition and Limitation of Monopolistic Activity Limitation of Monopolistic Activity

Objectives:Objectives:

• Level playing field for all players (investors)Level playing field for all players (investors)

• Setup Anti-Monopoly regulationSetup Anti-Monopoly regulation

(Difficult in country like Russia coming from (Difficult in country like Russia coming from completely Monopolistic markets)completely Monopolistic markets)

Restricted Sectors

Investment is constrained when it comes to some fields of economy such Investment is constrained when it comes to some fields of economy such as: as:

• natural resourcesnatural resources- foreign ownership can not be more than 11 per - foreign ownership can not be more than 11 per cent of the total capital; cent of the total capital;

• bankingbanking- can not own more than 12 per cent of total banking - can not own more than 12 per cent of total banking capital.; capital.;

• communicationcommunication; ;

• insuranceinsurance- foreign participation in the insurance sector can not - foreign participation in the insurance sector can not exceed 15 per cent; exceed 15 per cent;

• aerospaceaerospace- can not exceed 25 per cent of the total capital; - can not exceed 25 per cent of the total capital;

• electric power- electric power- not more than 25 per cent; not more than 25 per cent;

• defense related industriesdefense related industries; ;

• large scale construction projects; large scale construction projects;

• Transportation;Transportation;

Special Approvals

to ventures with more than 50 percent of the total share to ventures with more than 50 percent of the total share capital ; capital ;

the amount of money which is more than 50 million Russian the amount of money which is more than 50 million Russian roubles (in case the amount of investment exceeds 100 roubles (in case the amount of investment exceeds 100 million Russian roubles – there is an additional registration million Russian roubles – there is an additional registration is required); is required);

to projects related to the Russian defense industry to projects related to the Russian defense industry (however, in some cases this investment could be (however, in some cases this investment could be prohibited by legislation); prohibited by legislation);

to natural resource exploitation; to natural resource exploitation;

Foreign investors will need a prior approval in Foreign investors will need a prior approval in case of :case of :

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Investment advantages of RussiaInvestors’ opinion

Source: questioning of foreign investors «Russia as an object of investments», polled in 2005 г. by FIAC

Russia has great potential for attracting FDI. Russia has great potential for attracting FDI. With 145 million consumers, a well educated With 145 million consumers, a well educated and capable labor force and a wealth of and capable labor force and a wealth of natural resources, it should be the leader in natural resources, it should be the leader in Eastern Europe in terms of investment.Eastern Europe in terms of investment.

Russia as an Investment Destination

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Foreign Direct Investmentin Russia, USD billion

26.726.7

2006

FDI Inflow In Russia

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The food industry has attracted the highest number of FDI projects - 45 projects, associated with $2.4 billion of investment in 2002-2003. However, in terms of total investment, the energy sector is by far the biggest recipient – accounting for $10 billion in 2002-2003. Other major sectors include wood products ($1 billion), consumer goods ($95 million), automotive OEM ($670 million), and metals/mining ($552 million) sectors.

FDI Inflow In Russia – Sector-wise Breakup

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Accumulated foreign investment

$111.8 Billion

FDI Inflow In Russia – Top Investors

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Effectiveness of governments in promoting foreign direct investment?

Effectiveness of governments in promoting foreign direct investment?

Base: 134 respondents


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Davos (WEF- 2007)

Politics of Business-Politics Triumphs Profits

• 33rdrd largest oil & 30% gas reserve largest oil & 30% gas reserve

• Its huge Oil and Gas Reserves( natural Its huge Oil and Gas Reserves( natural Resources) to give it Immense EconomicResources) to give it Immense Economic

• Putinism – pledge to make Russia strong once Putinism – pledge to make Russia strong once again and promote Moscow's international again and promote Moscow's international influenceinfluence

• Line between strategic resources like O&G and Line between strategic resources like O&G and political power is not only blurred it doesn’t exist. political power is not only blurred it doesn’t exist. E.g. Former Gazprom’s Chairman, Dmitry E.g. Former Gazprom’s Chairman, Dmitry Medvedev is current President of RussiaMedvedev is current President of Russia

• Legacy image of Cold war and instability Legacy image of Cold war and instability from Yeltsin erafrom Yeltsin era

Current Image issues arising from:Current Image issues arising from:

• YUKOS affairYUKOS affair

• Intimidating its neighbors after they Intimidating its neighbors after they elected pro-western government - Cut elected pro-western government - Cut Gas taps to Ukraine, Georgia & doubled Gas taps to Ukraine, Georgia & doubled the gas prices to Belarusthe gas prices to Belarus

Politics of Business-Politics Triumphs Profits

PR issue

• Horrors of governance and settlements still Horrors of governance and settlements still occur as with the forcible takeover of occur as with the forcible takeover of Yugraneft Corporation, a Russian subsidiary Yugraneft Corporation, a Russian subsidiary of Norex Petroleum by TNKof Norex Petroleum by TNK

• ADC’s claim against contract violation by ADC’s claim against contract violation by its Russian partner, its Russian partner, Arkhangelskgeoldobycha, Arkhangelskgeoldobycha,

• July 2001 takeover of Sawyer Research July 2001 takeover of Sawyer Research Products’ facility in Vladimir by two Russian Products’ facility in Vladimir by two Russian companies with the support of the local companies with the support of the local judiciary.judiciary.

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RisksInvestors’ opinion


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FDI confidence index A.T.Kearney in 2005

ChinaIndia

United StatesUnited Kingdom

PolandRussia

BrazilAustraliaGermany

Hong KongHungary

Czech RepublicTurkeyFranceJapan

MexicoSpain

SingaporeItaly

ThailandCanada

Dubai/UAESouth KoreaCentral Asia

Romania

ChinaIndia

United StatesUnited Kingdom

PolandRussia

BrazilAustraliaGermany

Hong KongHungary

Czech RepublicTurkeyFranceJapan

MexicoSpain

SingaporeItaly

ThailandCanada

Dubai/UAESouth KoreaCentral Asia

Romania

Maintained ranking

Moved down

Moved up

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5%

Is Russia’s investment risk

higher than?

Lo

wer

In

vest

men

t R

isk

Lower ROI

Hig

her

In

vest

men

t R

isk

Higher ROI

2006 2005

India 44% 57%

Brazil 44% 59%

Other emerging markets

35% 54%

China 41% 48%

Return on Investment vs. Level of Risk

Comparisons with Other Markets

The “IC” of BRIC

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Source: 2003 BRIC Report-Goldman Sachs

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«If you are looking for a gold mine in the sphere of sciences and technologies, pay attention to Russia».

George Schultz, Former US Secretary of State

«As far as I noticed everything is not that hard and doesn’t differ from other countries»

Andrew Kinghorn, Director of International Investments

Knight Frank

«There is much talk, particularly in the equity market, of the risks of investing in Russia, but we believe that the risks are more than counterbalanced by the opportunities, especially if you know where to find them»

Steven Jennings, chairman of investment group «Renaissance Capital»

References

• http://ns.worldbank.org.ru

• http://www.bakernet.com

• http://www.infoplease.com

• www.oecd.org

• www.fdi.net

• www.ide.go.jp

Thank YouThank You

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