report_26_eng_preview

Centre for IntegratIon StudIeS

report 26

2014

MONITORING OF MUTUAL INVESTMENTS IN THE CIS2014

MONITORING OF MUTUAL INVESTMENTS IN THE CIS 2014

Centre for Integration Studies

Saint Petersburg

2014

© Eurasian Development Bank, 2014

Editor of the series of reports: E. Vinokurov, PhD (Econ)Managing Editor: K. OnishchenkoLayout: Y. PodkorytovTranslation: EGO Translating Company

Authors: Corresponding Member of the Russian Academy of Sciences, DSc in Economics, A. V. Kuznetsov (lead author), PhD in History, Y. D. Kvashnin (IMEMO RAN).IMEMO RAN officers A. V. Gutnik and K. V. Slesareva took part in information gathering.Project coordinator: A. M. Anisimov, EDB Centre for Integration Studies

MONITORING OF MUTUAL INVESTMENTS IN THE CIS 2014. — EDB Centre for Integration Studies, 2014. – p. 40

This is the fifth report on the results of the long-term research project devoted to monitoring of mutual direct investments in the CIS countries and Georgia. The project has been implemented by the EDB Centre for Integration Studies in partnership with the Institute of World Economy and International Relations, Russian Academy of Sciences since 2011.

The current report provides detailed information on the scope and structure of mutual investments of CIS countries up to the end of 2013. The report provides information on the most important trends in the first half of 2014, including the situation in Ukraine and its impact on the Russian direct investments in the country. It also presents an analysis of the prospects for mutual direct investments of the Eurasian Economic Union countries.

Design, layout and publishing: Airoplan design studio. www.airoplan.ru. 8a Zaozernaya, St. Petersburg, Russia.

All rights reserved. Any part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic,mechanical, photocopying, recording, or otherwise on the condition providing proper attribution of the source in all copies. Points of view or opinions in thisdocument are those of the author and do not necessarily represent the official position or policies of Eurasian Development Bank.

EDB Centre for Integration Studies

7 Paradnaya street, St. Petersburg, 191014, RussiaTel.: +7 (812) 320 44 41 E-mail: [email protected]

TABLE OF CONTENTS

LIST OF TABLES AND FIGURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

ACRONYMS AND ABBREVIATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

1. STATUS WITH MUTUAL INVESTMENTS IN THE CIS AT THE END OF 2013 . . . . . . . . . 14

1.1. Mutual investments dynamics and extent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

1.2. Mutual investments structure up to the end of 2013 . . . . . . . . . . . . . . . . . . . . 18

1.3. The role of integration in the CIS for mutual FDI in the region . . . . . . . . . . . . . 21

2. MUTUAL FDI IN THE CIS UNDER THE INFLUENCE OF THE FUNDAMENTAL

EVENTS OF 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

2.1. The consequences of the events in Ukraine for Russian FDI . . . . . . . . . . . . . 25

2.2. Prospects of mutual FDI of the Eurasian Economic Union countries . . . . . . . 32

INSTEAD OF A CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

LIST OF TABLES AND FIGURES

Table 1. The scope of mutual FDI at the end of 2013 (MIM CIS data) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Table 2: Russian FDI stock in the region in 2008–2013 (comparison between CBR and MIM CIS data) . . . 17

Table 3: Top 15 investor companies in the MIM CIS database in late 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Table 4: Mutual direct investments index (MDII) of the CIS and Georgia in 2011–2013: the first 20 couples . 23

Figure 1: Dynamics of Russian, Kazakh, Ukrainian, Belorussian, Azerbaijani and Georgian FDI stock in

the region in 2008–2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Figure 2: Termination of investment projects in the MIM CIS database by years. . . . . . . . . . . . . . . . . . . . . . 17

Figure 3: Sectoral structure of Russian FDI stock in the CIS and Georgia at the end of 2013. . . . . . . . . . . . 18

Figure 4: Sectoral structure of Kazakhstan FDI stock in the CIS and Georgia at the end of 2013 . . . . . . . . . 19

Figure 5: The share of Russian FDI in neighboring countries at the end of 2013. . . . . . . . . . . . . . . . . . . . . . 24

5

ACRONYMS AND ABBREVIATIONS

CBR — The Central Bank of the Russian Federation (Bank of Russia)

CIS EDB — Centre for Integration Studies of the Eurasian Development Bank

CIS — Commonwealth of Independent States

CU — The Customs Union of Russia, Belarus and Kazakhstan

EDB — Eurasian Development Bank

EAEU — Eurasian Economic Union

FDI — foreign direct investments

GDP — Gross Domestic Product

IMEMO RAN — Institute of World Economy and International Relations, Russian Academy of Sciences

IT — Information Technology

MDII — mutual direct investments index

MIM CIS — Monitoring of mutual investments in the CIS countries and Georgia

MNC — multinational corporation

MPI–Eurasia — monitoring of direct investments of Russia, Belarus, Kazakhstan and Ukraine in Europe and East Asia outside of the CIS and Georgia

RB — Republic of Belarus

RK — Republic of Kazakhstan

RSCI — Russian Science Citation Index


6

Summary

• The database of monitoring of mutual direct investments in the CIS and Georgia has been maintained since 2011. As of September 2014, it contains comprehensive infor-mation obtained from open sources on 1,100 investment transactions in the region committed since 1992. Just as in previous years, the MIM CIS data diverge from the official statistics, which is clearly illustrated by the Russian FDI. This is primarily due to the extremely high value of the investments made through offshore companies and other trans-shipping jurisdictions.

• According to updated information in the MIM CIS database, at the end of 2013 mu-tual FDI stock in CIS and Georgia amounted to $49.1 billion. After steady growth of this rate for several years, FDI stock decreased by $5.5 billion (or 10%) in 2013. In particular, Russian outward FDI stock in the region decreased during 2013 by 9% from $45.7 billion to $41.6 billion, including the 11% drop in Ukraine. Among the significant investor countries, it was only in Belarus and Azerbaijan that the fall was not observed. At the same time Belarus launched its first major foreign project — Be-lorusneft acquired oil company Yangpur in the Yamal-Nenets Autonomous District for $110 million.

• Almost 85% of mutual FDI in the region were the investments from Russia ($41.63 billion), and another 9% from Kazakhstan ($4.37 billion). The major re-cipients of mutual FDI are Ukraine (over 30%), Kazakhstan (19%), Belarus (16%) and Russia (9%).Russia accounts for 58% (or $4.32 billion) of total FDI stock from other countries of the CIS and Georgia in the region. The key areas of mutual FDI remain the Russian-Ukrainian, Russian-Kazakh and Russian-Belarusian relationships. Without Russia, the most notable is the flow of capital from Azerbaijan into neighboring Georgia. Kazakhstan FDI to Georgia and Kyrgyzstan are also notable.

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

2008 2009 2010 2011 2012 2013

Russia

Kazakhstan

Azerbaijan

Ukraine

Belarus

Georgia

$ m

illio

nDynamics of Russian, Kazakh, Ukrainian, Belorus-sian, Azerbaijani and Georgian FDI stock in the re-gion in 2008–2013

SUMMARY

7

• The number of discontinued mutual FDI investment projects in the region has been growing steadily in recent years. However, we should not forget that the peak of new projects was recorded in 2006–2008, and even in 2003–2005 there were more acquisitions or greenfield projects than in 2009–2011. In addition, the most gen-eralized indicator dynamics can be affected by individual transactions. Thus, both Russian FDI stock in non-ferrous metal industry, and the volume of Russian invest-ments in Kazakhstan in 2013 decreased significantly only because Mechel sold the company Voskhod Chrome as a part of its business restructuring plan in order to save its financial situation.

• The structure of mutual FDI of the CIS countries and Georgia is determined to a large extent by investments of Russian companies. In turn, their sectoral struc-ture is associated with foreign trade specialization of Russia, as well as the domi-nant incentives for Russian MNCs to make direct investments in various regions of

UkraineKazakhstanBelarusRussiaOther CIS countries and Georgia

30%

19%16%

9%

26%

Recipients of mutual FDI stock in the region, 2013, %

Recipient country

FDI stock of investor countries, $ billion

Russia Kazakh-stan

Azerbai-jan

Ukraine Belarus Georgia All 12 countries

Azerbaijan 1.37 – × – 0.01 – 1.38

Armenia 2.20 0.01 – – 0.00 – 2.21

Belarus 7.90 0.02 – 0.01 × 0.01 7.95

Georgia 0.46 0.53 1.09 0.18 0.00 × 2.27

Kazakhstan 9.27 × – – 0.05 – 9.33

Kyrgyzstan 0.64 0.50 – – 0.00 – 1.15

Moldova 0.41 – – 0.07 0.01 – 0.49

Russia × 2.96 0.04 0.89 0.39 0.03 4.32

Tajikistan 1.03 0.07 – – – – 1.10

Turkmenistan 0.02 – – 0.00 0.00 – 0.03

Uzbekistan 3.64 0.08 – 0.00 – – 3.75

Ukraine 14.70 0.19 0.12 × 0.05 0.03 15.08

Total 41.63 4.37 1.25 1.14 0.52 0.07 49.06

The scope of mutual FDI at the end of 2013 (MIM CIS data)


8

the world. In particular, the greatest interest for them in the CIS is markets and re-sources, partly in conjunction with improvements in efficiency (through lower labor and transportation costs). However, they are rarely interested in technology.

• The sectoral structure of FDI in the CIS countries and Georgia of Kazakhstan — the second largest investor country in the region — is quite different. The transport complex ranks first (23.4%), while playing almost no role for Russian MNCs. Another 22.8% of FDI falls on the agri-food complex. Tourist complex ranks third. However, in this case Kazakhstan only has a high specific indicator in absolute terms — the Russians have invested twice as much in foreign hotels in CIS countries and Georgia. Noteworthy is the fact that FDI in real estate play an important role in many Ka-zakh investments (for example, in the transport sector — investments in airports and warehouse facilities, and in the agri-food complex — in agricultural land).

• The structure of FDI in most other countries of the region is not quite diversi-fied, because overall investment stocks are small. For example, from $1.14 billion

0 5 10 15 20 25 30 35 40 45

Prior to 2007

2007

2008

2009

2010

2011

2012

2013

1H 2014Termination of investment projects in the MIM CIS database

1.2%

37.1%

5.2%7%

2.1%0.6%

0.2%

9.3%1%

1.5%

14.2%

5.3%

11.3%3.7%

0.2%

Agri-food complex Fuel complex Iron and steel industryNon-ferrous metal industryMachine-building complex Chemical complex Other manufacturing industries UtilitiesConstruction complex Transport complex Telecommunications and IT Wholesale and retail trade Finance sector Tourist complex Other service industries

Sectoral structure of Russian FDI stock in the CIS and Georgia at the end of 2013

SUMMARY

9

Ukrainian FDI stock by the end of 2013, almost $0.5 billion accounted for the agri-food complex, and out of $1.25 billion of Azerbaijan’s FDI stock, $0.82 billion was in-vested in the transport sector.

• The top 15 mutual FDI participants includes only one company from Kazakhstan and one company from Azerbaijan, the rest are Russian. Two major Russian oil and gas MNCs — Gazprom and LUKOIL — account for 14% of the total mutual FDI stock in the region. They are followed by Russian service sector representative — VimpelCom, which is also characterized by extensive geographic diversification of business. The Russian company ranking fourth — VS Energy clearly stands out against the back-ground of these MNCs (with all their specifics). Firstly, in contrast to the classical MNCs listed above, it is a diversified holding company. Secondly, all of its assets are located in the same country (this situation is typical also for Energy Standard).

• For the first two years, the MIM CIS analyzed the dynamics and structure of mu-tual investments based only on the absolute scale of investments in the respective countries, industries, and projects. However, from the end of 2013 FDI have been weighed against the size of the economy of the countries involved in the corpo-rate integration. In addition, the dynamics of mutual FDI is compared with the economic growth of the CIS countries. This allows a better assessment of the role

Company Country Sector FDI stock, $ bil-lion

Number of countries

with subsidi-aries in the

region

Main recipient

country in the region

Country share, %

Gazprom Russia Fuel 7.08 8 Belarus 73

LUKOIL Russia Fuel 7.03 7 Kazakhstan 43

Vimpelcom Russia Telecommunication and IT

3.61 8 Ukraine 50

VS Energy Russia Utilities, tourist com-plex etc.

1.96 1 Ukraine 100

MTS Russia Telecommunication and IT

1.94 5 Belarus 41

Atomredmetzoloto Russia Non-ferrous metal in-dustry

1.60 2 Kazakhstan 99

VEB Russia Finance 1.52 2 Ukraine 72

RUSAL Russia Fuel, non-ferrous metal industry


INTER RAO UES Russia Utilities 1.24 6 Tajikistan 44

Energy Standard Russia Utilities etc. 1.13 1 Ukraine 100

VTB Russia Finance 0.99 6 Ukraine 67

Ivolga-holding Kazakhstan Agri-food 0.95 1 Russia 100

Sberbank Russia Finance 0.77 3 Ukraine 53

Evraz Russia Iron and steel industry 0.77 2 Ukraine 85

SOCAR Azerbaijan Fuel 0.72 2 Georgia 84

Top 15 investor companies in the MIM CIS data-base in late 2013


10

of integration within the CIS and of subregional associations for mutual FDI in the region.

• The mutual direct investments index (MDII) proposed by us allows the evaluation of the bilateral investment relations in the post-Soviet space, taking into account: the total amount of investment; direction of investment flows; size of the economy of each investor country; and investment dynamics over the past three years. The most intense is the investment cooperation between Azerbaijan and Georgia. Given the size of the economies of these Transcaucasian states, this interaction is greater than the one between Russia and its neighbors — Ukraine, Kazakhstan and Belarus. Among the most significant pairs, steady growth MDII for two years have been observed only in the pairs Kazakhstan-Kyrgyzstan, Russia-Armenia, Azerbai-jan-Ukraine, Belarus-Ukraine, Armenia-Belarus. In the pairs Azerbaijan-Georgia, Ukraine-Moldova, Armenia-Georgia and Belarus-Kazakhstan in 2012 an increase of MDII is still observed in general. It is very likely that for Armenia this is due to the integration rapprochement with the CU. At the same time, for many pairs the in-fluence of the usual “neighborhood effect” should not be ruled out.

• Despite the decline of MDII across almost all of the pairs involving Russia, the

Country-leader of the investment pair in

terms of FDI

Second country of the investment pair

Mutual FDI stock at the end of 2013, $

billion

MDII in 2013

MDII in 2012

MDII in 2011

Azerbaijan Georgia 1.09 14.75 15.92 14.18

Russia Ukraine 15.58 12.90 17.18 16.00

Russia Kazakhstan 12.23 9.64 14.13 15.66

Russia Belarus 8.29 8.06 8.53 9.13

Russia Uzbekistan 3.66 3.04 4.13 3.41

Kazakhstan Kyrgyzstan 0.50 2.47 2.04 2.20

Kazakhstan Georgia 0.53 2.24 2.49 2.66

Ukraine Georgia 0.21 1.99 2.62 2.86

Russia Azerbaijan 1.41 1.19 1.25 1.36

Russia Armenia 2.20 1.09 1.00 1.03

Ukraine Moldova 0.08 0.77 0.64 0.69

Armenia Georgia 0.01 0.66 0.97 0.35

Azerbaijan Ukraine 0.12 0.62 0.59 0.37

Russia Tajikistan 1.03 0.55 0.59 0.65

Kyrgyzstan Uzbekistan 0.03 0.52 0.57 0.64

Belarus Ukraine 0.06 0.51 0.50 0.46

Kazakhstan Ukraine 0.19 0.46 0.60 0.63

Armenia Belarus 0.01 0.41 0.20 0.03

Belarus Kazakhstan 0.07 0.40 0.48 0.39

Russia Kyrgyzstan 0.64 0.32 0.44 0.39

Mutual direct in-vestments index (MDII) of the CIS and Georgia in 2011–2013: the first 20 pairs

SUMMARY

11

share of Russian investments in the total FDI stock in the post-Soviet countries remains the highest against the background of most of the other FDI recipients. The reversal of MDII dynamics for Ukraine is connected with Ukraine’s refusal from integration rapprochement with Russia. Negative MDII dynamics in the Rus-sia-Uzbekistan pair is mainly due to suspension of MTS business in the country in 2012–2014; and in the Russian-Kazakhstan pair due to the sale of Mechel subsidiary. Reduction of Russian FDI stock in Kyrgyzstan correlates with periods of instabil-ity in the country.

• Destabilization of the political situation in Ukraine in late 2013, the removal from office of President Viktor Yanukovych, and the subsequent sharp deterio-ration in Russian-Ukrainian relations had a strong adverse impact on Russian-Ukrainian investment relations. This led to a precipitous drop in mutual invest-ment. However, the likelihood that the new Ukrainian government decides to start widespread confiscation of private assets in response to Crimea events remains low, despite this issue being actively discussed in the Ukrainian media. Weakening of in-vestment ties between Russia and Ukraine is a reciprocal process, which concerns not only Russian direct investments in Ukraine, but also Ukrainian investments in Rus-

over 60%

40–60%

10–20%

5–10%

1–5%

less than 1%

The role of Russian FDI in neighboring countries at the end of 2013, %


12

sia. As the political crisis is still in progress, and military operations in the east of the country continue, it is not possible at present to give specific forecasts.

• Establishment of the Eurasian Economic Union should have a positive impact on Russian FDI in Kazakhstan and Belarus, and later also in Armenia and Kyr-gyzstan, who are planning to join the EEU. However, the situation is not entirely straightforward for mutual FDI of these countries, confirming the lack of invest-ment effect of the CU that is expected in the medium term. There are various ob-stacles for the rapid buildup of Russian FDI in Belarus and Kazakhstan. Kazakhstan FDI stock in Belarus is very small. This also applies to foreign investment in Belarus. There has been a recent general slowdown in FDI exports from Kazakhstan.

• Russian FDI account for almost half of all FDI in Belarus with its strong state presence in the economy. Potential additional Russian investments in oil refining, financial sector and service sector do not mean serious changes in FDI status in man-ufacturing of Belarus.

• In Kazakhstan, Russian investors face strong competition with MNCs from other countries — Chinese MNCs in the resource sector and the Western technology suppliers. Infrastructure projects are one of the most promising areas for joint in-vestment by Russia and China both in Kazakhstan and other Central Asian coun-tries. However, at the moment, the major investment projects of Russian and Chinese MNCs are associated with the fuel sector, primarily oil and natural gas production, where they are competitors.

INTRODUCTION

13

Introduction

EDB Centre for Integration Studies, in partnership with the research team of the In-stitute of World Economy and International Relations (IMEMO) RAN, at the end of 2011 started monitoring of mutual direct investments of the CIS countries and Georgia. Taking into account previous studies of corporate integration in the Post-Soviet area, an analytical product was created in less than three years. It is in demand both among the scientific community with more than 30 references to the works based on the results of MIM CIS appearing in the RSCI, and among practitioners involved in integration devel-opment on the territory of the former USSR.The first part of the report contains new results of the analysis of the collected and con-stantly updated and refined (especially with additional disclosures of corporate report-ing) MIM CIS database. As in previous reports, detailed information is presented on the dynamics, scale, geographical and sectoral structure of mutual direct investments of the CIS and Georgia. Statistics published in the CIS EDB annual reports, which have been obtained using the original author’s technique (CIS EDB, 2013a), are gradually becom-ing a popular independent source of information on FDI in the region.The second part of the report is traditionally “thematic”. This time it is dedicated to the analysis of the consequences of the fundamental events in the post-Soviet area that occurred in the first half of 2014. The report firstly analyses the impact on mutual FDI associated with the political crisis in Ukraine. The report then investigates the prospects of mutual FDI associated with the most important positive development in the region — the signing of the agreement on the establishment of the Eurasian Economic Union be-tween Belarus, Kazakhstan and Russia in 2015.


14

1. Status with mutual investments in the CIS at the end of 2013

MIM CIS database, which already includes more than 1,000 projects, allows the presen-tation of a detailed picture of mutual investments in the region. Currently, detailed in-formation has been collected on the scope and structure of FDI stock at the year end for 2008–2013. MIM CIS uses its method for calculating the investments according to their actual location, and not the first formal recipient country of FDI. It is not far behind the Central Bank (CBR, 2013) in terms of efficiency, and sometimes is ahead of it.However, it should be noted that as new sources of information emerge, some previ-ously published figures, as well as calculations of structural indicators and various in-dices carried out on their basis, must be clarified. Minor changes are being made in the methodology — for example, the industrial classification has been refined this year. So, instead of the Soviet concept of “agro-industrial complex” the more correct term “agri-food complex” was used. In the past the production of mineral fertilizers always referred to the chemical complex in the MIM CIS, and production of agricultural machinery — to machine-building complex. In addition, glass production was moved from the sector “construction complex” in the “other manufacturing industries”, as there are enterprises manufacturing automobile and glass bottles (Kuznetsov, 2013b). Finally, with enhance-ment of the MIM CIS database “new” industries appear — for example, this year oil re-lated services were specified as a part of the fuel complex.

1.1. Mutual investments dynamics and extent

The reduction of Russian FDI in Ukraine was mentioned in (CIS EDB, 2013a) in the summer of 2013. It had surpassed all predictions even before the change of power in February 2014. During 2013 Russian FDI stock in Ukraine decreased by 11% — from $16.5 billion to $14.7 billion. Moreover, a number of Russian investment projects were discontinued in other CIS countries, and impairment of certain continuing operations was observed. As a result, Russian FDI stock in the region decreased during the year by 9% — from $45.7 billion to $41.6 billion. Thus, in 2013 the steady growth of Russian FDI stock in the CIS countries and Georgia was interrupted, and in terms of quantitative parameters the situation has returned to mid-2011 (see Figure 1).A significant reduction in FDI of other CIS countries occurred in 2013 as well. Thus, not only the Russian FDI in Ukraine reduced significantly, but Ukrainian investments in Russia dropped as well — by 10% from $1 billion to $0.9 billion. In other countries Ukrainian FDI remained the same and even increased in Moldova. Overall, however, their volume in the CIS and Georgia, excluding Russia amounted to only $0.26 billion.Kazakhstan outward FDI stock in the region declined in 2013 as well, reducing by more than by quarter — from $5.8 billion to $4.4 billion. This was almost exclusively due to the sale of certain assets in Russia. In particular, the shopping centre Metropolis in Mos-

1. STATUS WITH MUTUAL INVESTMENTS IN THE CIS AT THE END OF 2013

15

cow was sold by Kazakh Capital Partners Group to an American company Morgan Stan-ley, while logistics parks of the bankrupt group Eurasia Logistics were sold in various re-gions by decision of courts. As in the case with Ukraine, 2013’s reduction of FDI stock in the Kazakhstan-Russian pair was mutual. Kazakhstan investments decreased not only in Russia. However, on the contrary, in Kyrgyzstan they have grown substantially.Among the major investor countries, only Belarus and Azerbaijan showed no decline of investment stock. In the case of Belarus, the emergence of the first truly large-scale foreign investment project should be especially noted: Belorusneft acquired a 100% stake in the oil company Yangpur in the Yamal-Nenets Autonomous District for about $110 million. However, there was some reduction in the Belarusian FDI in distribution networks, which are to be subjected to a radical transformation according to the decision made in 2014. Azerbaijan investments increased in Georgia and Ukraine, mainly due to the activities of state-controlled investors.It should be noted that both the Azerbaijani and Armenian investors are actively devel-oping mostly small projects that are well below the threshold set by us for mandatory ac-counting in the MIM CIS. For example, according to various media, more than 700 Azer-baijani companies operate in Kazakhstan that have invested more than $130 million in the country, but the largest project mentioned did not attract even $10 million. This is logical, since the given data implies insignificant average size of FDI in a project — less than $200,000. The same type of activity is demonstrated by Armenian firms, for ex-ample, in Georgia. In addition, there are significant expatriate community investments, where it is difficult to establish a “foreign” nature of the investments, as it is not known whether the company owners — ethnic Azerbaijanis and Armenians — have Russian (or some other) citizenship. In the case of Georgia, the problem, however, became evident even in the MIM CIS (see Figure 1): compared to 2011, by the end of 2013, the country has ceased to be a significant source of FDI, as Bidzina Ivanishvili actually replaced his political career with doing business in Russia.At the end of 2013, compared with a year earlier, mutual FDI stock of the CIS countries and Georgia decreased by 10% — from $54.6 billion to $49.1 billion. Almost 85% of this

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

2008 2009 2010 2011 2012 2013

Russia

Kazakhstan

Azerbaijan

Ukraine

Belarus

Georgia

$ m

illio

n Figure 1: Dynamics of Russian, Kazakh, Ukrainian, Belorussian, Azerbaijani and Georgian FDI stock in the region in 2008–2013


16

amount was the investments from Russia ($41.63 billion), and another 9% from Kazakh-stan ($4.37 billion). The major recipients of mutual FDI are Ukraine (over 30%), Ka-zakhstan (19%), Belarus (16%) and Russia (9%). Russia accounts for 58% (or $4.32 bil-lion) of total FDI stock from other countries of the CIS and Georgia in the region. The key areas of mutual FDI remain the Russian-Ukrainian, Russian-Kazakh and Russian-Belarusian relationships. Without Russia, the most notable is the flow of capital from Azerbaijan into neighboring Georgia. Kazakhstan FDI to Georgia and Kyrgyzstan are also notable (see Table 1).The observed decline in FDI raises the question of whether this trend is associated with several problematic cases, or it is wide-scale in nature. As indicated by the analysis of the MIM CIS database, the number of discontinued investment projects (mostly resold to local investors or foreigners from countries outside the region) has been growing steadily over the past few years (see Figure 2). However, we should not forget that the peak of new projects was recorded in 2006–2008, and even in 2003–2005 there were more ac-quisitions or greenfield projects than in 2009–2011. We can assume that there is even an average “life” for some types of mutual FDI projects, but it requires further investigation.As in previous years, the MIM CIS data diverge from the official statistics, which is clear-ly illustrated by the Russian FDI (see Table 2). This is primarily due to the extremely high volume of investments made through offshore and other trans-shipping jurisdic-tions. Such a strategy has always been typical for companies from post-socialist coun-tries (Kalotay, 2012). Usually, however, experts believed that investor companies were protecting themselves primarily against attacks on their assets in their home country. Although businessmen often indicated a decrease in non-economic risks due to registra-tion of their holding companies in countries with ample opportunities for the protec-tion of investors against expropriation in developing countries. It seems that the second

Recipient country FDI stock of investor countries, $ billion

Russia Kazakhstan Azerbaijan Ukraine Belarus Georgia All 12 coun-tries

Azerbaijan 1.37 – × – 0.01 – 1.38

Armenia 2.20 0.01 – – 0.00 – 2.21

Belarus 7.90 0.02 – 0.01 × 0.01 7.95

Georgia 0.46 0.53 1.09 0.18 0.00 × 2.27

Kazakhstan 9.27 × – – 0.05 – 9.33

Kyrgyzstan 0.64 0.50 – – 0.00 – 1.15

Moldova 0.41 – – 0.07 0.01 – 0.49

Russia × 2.96 0.04 0.89 0.39 0.03 4.32

Tajikistan 1.03 0.07 – – – – 1.10

Turkmenistan 0.02 – – 0.00 0.00 – 0.03

Uzbekistan 3.64 0.08 – 0.00 – – 3.75

Ukraine 14.70 0.19 0.12 × 0.05 0.03 15.08

Total 41.63 4.37 1.25 1.14 0.52 0.07 49.06

Table 1. The scope of mutual FDI at the end of 2013 (MIM CIS data)


17

argument turns out to be very important. This is against the background of a sharp de-terioration of political relations between Russia and Ukraine after the change of power supported by the United States and the EU (as the new leadership of Ukraine declared the rejection of integration with Russia), as well as accession of the Crimea and Sevas-topol to the Russian Federation. In case of further deterioration in Russian-Ukrainian relations, Ukrainian authorities, most likely, will not be able to find any legal grounds for confiscation of many Russian assets because they are not formally Russian.The largest absolute gap between the official data and MIM CIS data is observed in Ukraine (over $10 billion), Kazakhstan, Belarus and Uzbekistan. In the case of Ukraine,

0 5 10 15 20 25 30 35 40 45

Prior to 2007

2007

2008

2009

2010

2011

2012

2013

1H 2014Figure 2: Termination of investment projects in the MIM CIS database by years.

Country End of 2008, $ billion

End of 2009, $ billion




End of 2013, $ bil-lion

MIM CIS MIM CIS

CBR MIM CIS

CBR MIM CIS

CBR MIM CIS

CBR MIM CIS

Ukraine 11.2 11.9 4.2 13.9 4.3 14.9 4.5 16.5 5.4 14.7

Kazakhstan 9.0 10.3 1.7 10.0 2.0 10.7 2.6 10.9 2.5 9.3

Belarus 2.8 4.0 5.7 5.2 5.7 7.4 4.7 7.7 3.8 7.9

Uzbekistan 2.4 2.9 0.8 2.9 1.0 3.6 0.9 4.3 0.3 3.6

Armenia 1.8 1.9 1.5 2.0 1.8 2.1 1.4 2.2 1.6 2.2

Azerbaijan 1.2 1.2 0.1 1.3 0.0 1.4 0.1 1.4 0.1 1.4

Tajikistan 0.3 0.7 0.2 0.8 0.3 0.9 0.6 1.0 0.7 1.0

Kyrgyzstan 0.4 0.4 0.1 0.6 0.1 0.6 0.1 0.7 0.2 0.6

Moldova 0.5 0.5 0.3 0.5 0.4 0.6 0.4 0.6 0.6 0.4

Turkmenistan 0.0 0.0 0.3 0.0 0.2 0.0 – 0.0 – 0.0

CIS total 29.6 33.8 14.9 37.2 15.8 42.2 15.3 45.4 15.2 41.2

Georgia 0.2 0.3 0.3 0.3 0.3 0.4 0.2 0.4 0.4 0.5

Table 2: Russian FDI stock in the region in 2008–2013 (comparison between CBR and MIM CIS data)


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it is primarily due to investments in power generation (Konstantin Grigorishin’s Energy Standard operates through Switzerland, and VS Energy owned by Alexander Babakov and his partners — through the EU), and partly due to investments in iron and steel in-dustry and banking industry. In Kazakhstan, investments of ARMZ (part of Rosatom) in uranium mines stand out, which are formally controlled by a Canadian holding company.

1.2. Mutual investments structure up to the end of 2013

To a large extent the structure of mutual investments of the CIS countries and Georgia is determined by Russian investment companies because they dominate. In turn, their sec-toral structure is associated with the foreign trade specialization of Russia, as well as the dominant incentives for Russian MNC to make direct investments in various regions of the world. In particular, of the four major groups of motives according to J. Dunning (Dunning, 1998), the greatest interest for Russia in the CIS are markets and resources, partly in conjunction with improvements in production technology (through lower labor and transportation costs), but they are rarely interested in technology.It is quite natural that the fuel complex at the end of 2013 accounted for over 37% of the Russian FDI stock in the region (see Figure 3). Almost half of these funds were applied to the production of oil and natural gas. The second most important industry in this sector was the transportation and sale of gas. At the same time, the share and even the absolute scale of investment in oil and gas processing have fallen significantly during the last couple of years.Among the other sectors, communications and IT (mainly telecommunications), finan-cial sector (mainly banking) and utilities (almost exclusively electric power industry) can be pointed out. All three sectors are characterized by high activity of Russian inves-tors in the CIS countries, whereas in foreign countries only a few representatives of Rus-sian business made FDI in these sectors (Kuznetsov, 2011).Iron and steel industry, being very important for Russian investment expansion abroad, occupies a very modest place within the CIS. Its share is only around 5%, which is com-

1.2%

37.1%

5.2%7%

2.1%0.6%

0.2%

9.3%1%

1.5%

14.2%

5.3%

11.3%3.7%

0.2%

Agri-food complex Fuel complex Iron and steel industryNon-ferrous metal industryMachine-building complex Chemical complex Other manufacturing industries UtilitiesConstruction complex Transport complex Telecommunications and IT Wholesale and retail trade Finance sector Tourist complex Other service industries

Figure 3: Sectoral structure of Russian FDI stock in the CIS and Georgia at the end of 2013.


19

parable with its share of the chemical complex. It is less than the share of non-ferrous metal industry, represented in the region primarily by investments in mining and pro-cessing of uranium ores. At the same time, the Russian FDI stock in the mining of ores of various non-ferrous metals and gold shrunk considerably in 2013. However, this is mainly due to Mechel’s sale of its enterprise Voskhod Chrome in Kazakhstan, which was part of a business restructuring plan to save its financial situation. This transaction al-most fully explains the drop of Russian FDI stock in Kazakhstan, as highlighted in the previous section.The sectoral structure of FDI in the CIS countries and Georgia of the second largest in-vestor country in the region — Kazakhstan — is quite different (see Figure 4). Transport complex ranks first, while playing almost no role for Russian investors (although we can recollect Russian Railways or UTair). Almost 23% of the investments are concen-trated in the agri-food sector, which has slightly over 1% in the structure of Russian FDI. Tourist complex ranks third. However, in this case Kazakhstan only has a high spe-cific indicator — in absolute terms — as Russia has invested twice as much in foreign hotels in CIS countries and Georgia. As mentioned in our previous publications on MIM CIS (Kuznetsov, 2013a), attention is drawn to the fact that FDI in real estate play an im-portant role in many Kazakh investments (for example, in the transport sector — invest-ments in airports and warehouse facilities, and in agri-food complex — in agricultural land).The structure of FDI in most other countries of the region is not quite diversified, be-cause overall investment volumes are small. For example, from $1.14 billion Ukrainian FDI stock by the end of 2013, almost $0.5 billion accounted for the agri-food complex; and out of $1.25 billion of Azerbaijan’s FDI stock, $0.82 billion was invested in the trans-port sector. However, they were carried out by different investors –SOCAR invested in the oil terminal in Georgia, CJSC Azerbaijan Railways and the State Oil Fund of Azer-baijan invested in the Baku-Tbilisi-Kars railway and Azersun Holding (with a foreign co-owner) started construction of logistics centre in the free economic zone Seaport Ak-tau in Kazakhstan.

22.8%

0.7%0%

6%0.2%

6.4%

0.5%3.5%

4.3%23.4%

2.2%0%

12.9%

17.1%

0% Agri-food complex Fuel complex Iron and steel industryNon-ferrous metal industryMachine-building complex Chemical complex Other manufacturing industries UtilitiesConstruction complex Transport complex Telecommunications and IT Wholesale and retail trade Finance sector Tourist complex Other service industries

Figure 4: Sectoral structure of Kazakhstan FDI stock in the CIS and Georgia at the end of 2013


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The structure of mutual direct investment in the CIS is largely predetermined by the list of leading investor companies. Among the 15 largest firms, one is from Kazakhstan and another one from Azerbaijan, the rest are from of Russia (see Table 3). Two major oil and gas Russian MNCs — Gazprom and LUKOIL — account each for over 14% of the total mutual FDI stock in the region, and approximately 17% of Russian FDI in the CIS countries and Georgia. Another leading Russian MNC, operating in the service sec-tor — VimpelCom — ranks third. Like the previous two companies, it is characterized by extensive geographic diversification of business. It is noteworthy, however, that all of these companies made a significant amount of FDI into a single country (a different one in each case).The Russian company ranking fourth — VS Energy — clearly stands out against the background of these MNCs (with all their specifics), Firstly, in contrast to the classical MNCs listed above, it is a diversified holding company that includes companies from completely unrelated industries (for example, hotels in more than ten Ukrainian cities and many regional energy companies). Secondly, all of its assets are located in the same country (this situation is typical also for Energy Standard).RUSAL deserves special mention: with explicit specialization in the aluminum business,

Company Country Sector FDI stock, $ billion

Number of countries with

subsidiar-ies in the

region

Main recipi-ent country in

the region

Country share, %

Gazprom Russia Fuel 7.08 8 Belarus 73

LUKOIL Russia Fuel 7.03 7 Kazakhstan 43

Vimpelcom Russia Telecommunica-tion and IT

3.61 8 Ukraine 50

VS Energy Russia Utilities, tourist complex etc.

1.96 1 Ukraine 100

MTS Russia Telecommunica-tion and IT

1.94 5 Belarus 41

Atomredmetzoloto Russia Non-ferrous metal industry


VEB Russia Finance 1.52 2 Ukraine 72

RUSAL Russia Fuel, non-ferrous metal industry


INTER RAO UES Russia Utilities 1.24 6 Tajikistan 44

Energy Standard Russia Utilities etc. 1.13 1 Ukraine 100

VTB Russia Finance 0.99 6 Ukraine 67

Ivolga-holding Kazakh-stan

Agri-food 0.95 1 Russia 100

Sberbank Russia Finance 0.77 3 Ukraine 53

Evraz Russia Iron and steel in-dustry

0.77 2 Ukraine 85

SOCAR Azerbaijan Fuel 0.72 2 Georgia 84

Table 3: Top 15 investor companies in the MIM CIS database in late 2013


21

its largest investment project in the CIS is the joint venture Bogatyr Komir. It has been created with the Kazakh holding Samruk-Energo for coal mining from Severny and Bo-gatyr coal strips of the Ekibastuz coalfield, and subsequent sales to power plants.The leading CIS investor companies do not include large Russian MNCs — ferrous in-dustry leaders in terms of foreign assets value, such as Severstal, NLMK or TMK (UNC-TAD, 2014; Kuznetsov, 2013). This is because their foreign activity is mainly concen-trated in the United States and the EU.

1.3. The role of integration in the CIS for mutual FDI in the region

For the first two years, the MIM CIS analyzed the dynamics and structure of mutual in-vestments based only on the absolute scale of investments in the respective countries, industries, and projects. However, from the end of 2013 FDI have been weighed against the size of the economy of the countries involved in the corporate integration. Obviously, the equal mutual FDI stock of two large and two small countries indicate tighter corpo-rate integration in the second case. In addition, the dynamics of mutual FDI compared with the economic growth of the CIS countries is compared. This allows a better assess-ment of the role of integration within the CIS and of subregional associations for mutual FDI in the region. The first attempt to create a mutual direct investments index of the CIS countries and Georgia (CIS EDB, 2013 с, Kuznetsov, Kvashnin, 2014) in the cur-rent report is complemented by the new statistics.The mutual direct investments index (MDII) proposed by us allows the evaluation of bilateral investment relations in the post-Soviet space, taking into account several pa-rameters:

1) total amount of investments;2) direction of investment flows;3) size of the economy of each investor country; and 4) investment dynamics over the past three years.

For this purpose, MDII is calculated using the following formula:

I = (A + B + 0.5(A – A + B – B)) (GDPA + GDPB) 1000k, where

k = (ln A)2 + 3 (ln B)2 ÷ (ln A)2√ √ ;

I — Mutual direct investments index;A — FDI stock of country A in the country B at the end of the year under review; B — FDI stock of country B in the country A at the end of the year under review; A > B;A — FDI stock of country A in country B, three years earlier; B — FDI stock of country B in country A three years earlier; GDPA — GDP of country A in the year under review; GDPB — GDP of country B in the year under review.


22

As can be seen from the formula, it is based on the ratio of FDI stock to GDP, which is traditional for FDI analysis. Using this indicator, experts can evaluate the role of all for-eign businesses in the economy receiving capital (or the significance of foreign subsidiar-ies for the national business in the study of capital export).Globally, at the end of 2013 the ratio of FDI stock to GDP was 34–36%, having increased by 2% over the year (UNCTAD, 2014, web tables 7 & 8). Post-socialist countries are still characterized by a lower degree of internationalization of the economy. As in the case of MDII not the whole bulk of the foreign capital is analyzed, but only direct investments of individual countries. The size of the index can be an order of magnitude smaller, so in-stead of percentages we use per mille (respectively, the coefficient in the formula is 1000, not 100). In MDII calculation we decided to give more weight (namely, one and a half) to mutual investments according to expert judgment. This allows the better monitoring of the impact of current events on the post-Soviet space on the dynamics of FDI. Intro-duction of the coefficient k to MDII calculation formula may cause debate. As can be seen, k varies from 1 to 2, i. e., in some cases MDII indicator is increased. This is done to give greater weight to the second partner in the investment pair in terms of investment amount, so as to avoid too much emphasis on pairs where one country is clearly dominat-ing. Logarithms are also introduced to calculate the coefficient k. This is done to take better account of the mutual nature of investments in the presence of countries in the CIS with too unequal economic weight. To do this, all zeroes A and B are assumed equal to 1.Analysis of the MDII value shows that the most intense is the investment cooperation between Azerbaijan and Georgia (although revaluation of data on FDI in the construc-tion of the Baku-Tbilisi-Kars railway showed that it still does not exceed 20, as assessed by us in 2013). Given the size of the economies of these Transcaucasian states, this inter-action is greater than the one between Russia and its neighbors — Ukraine, Kazakhstan and Belarus (see Table 4).In 10 pairs MDII in 2013 exceeded 1. Russia was a party of 6 pairs, Kazakhstan and Georgia — 3 pairs, and Ukraine and Azerbaijan — 2 pairs. In this respect, nothing has changed as compared to 2012. More interesting is the analysis of the MDII dynamics. In most cases, unfortunately, the figures in 2013 compared to 2011 were declining.Among the most important pairs, steady growth of MDII for two years has been observed only in pairs of Kazakhstan-Kyrgyzstan, Russia-Armenia, Azerbaijan-Ukraine, Belarus-Ukraine, and Armenia-Belarus. In the Azerbaijan-Georgia, Ukraine-Moldova, Armenia-Georgia and Belarus-Kazakhstan pairs in 2012, an increase of MDII is still observed in general. It is very likely that for Armenia this is due to the integration rapprochement with the CU. At the same time, for many pairs the influence of the usual “neighborhood effect” should not be ruled out.Particularly strong in 2013 was the fall of MDII in pairs Russia-Ukraine (25%), Russia-Uzbekistan (26%), Russia-Kyrgyzstan (27%), Armenia-Georgia (32%) and Russia-Ka-zakhstan (32%). In 2012 a substantial growth of indices was recorded in all pairs except the last pair. Apparently, the reversal of MDII dynamics for Ukraine is connected with the refusal of the country from integration rapprochement with Russia (although, as we


23

know, the decision on the association with the EU was not unanimous, and it was pos-sible to implement only in 2014 at the expense of a deep political crisis). Negative MDII dynamics in Russia-Uzbekistan pair is mainly due to suspension of MTS business in the country in 2012–2014, and in Russian-Kazakhstan pair due to the sale of Mechel sub-sidiary. Reduction of Russian FDI in Kyrgyzstan correlates with periods of instability in the country. In the case of the Armenian-Georgian relations, the reason is just sluggish dynamics of mutual FDI lagging behind GDP dynamics of both countries.Despite the decline of MDII across almost all of the pairs involving Russia, the share of Russian investments in the total FDI stock in the post-Soviet countries remains the highest against the background of most of the other FDI recipients. This includes Rus-sia’s neighbors (see Figure 5).To calculate the share of Russian FDI in the total FDI stock at the end of 2013, addi-tional data were collected on actual localization of Russian assets, not only in the CIS, but also in other Eurasian states. This project was initiated by the EDB Centre for In-tegration Studies in partnership with IMEMO RAN last year (CIS EDB, 2013b). The countries that outside investors are unwilling to invest in due to the high political risks (including foreign policy risks) are Abkhazia, South Ossetia, and also Tajikistan. They

Country-leader of the in-vestment pair in terms

of FDI

Second country of the investment pair

Mutual FDI stock at the end of 2013, $

billion

MDII in 2013

MDII in 2012

MDII in 2011

Azerbaijan Georgia 1.09 14.75 15.92 14.18

Russia Ukraine 15.58 12.90 17.18 16.00

Russia Kazakhstan 12.23 9.64 14.13 15.66

Russia Belarus 8.29 8.06 8.53 9.13

Russia Uzbekistan 3.66 3.04 4.13 3.41

Kazakhstan Kyrgyzstan 0.50 2.47 2.04 2.20

Kazakhstan Georgia 0.53 2.24 2.49 2.66

Ukraine Georgia 0.21 1.99 2.62 2.86

Russia Azerbaijan 1.41 1.19 1.25 1.36

Russia Armenia 2.20 1.09 1.00 1.03

Ukraine Moldova 0.08 0.77 0.64 0.69

Armenia Georgia 0.01 0.66 0.97 0.35

Azerbaijan Ukraine 0.12 0.62 0.59 0.37

Russia Tajikistan 1.03 0.55 0.59 0.65

Kyrgyzstan Uzbekistan 0.03 0.52 0.57 0.64

Belarus Ukraine 0.06 0.51 0.50 0.46

Kazakhstan Ukraine 0.19 0.46 0.60 0.63

Armenia Belarus 0.01 0.41 0.20 0.03

Belarus Kazakhstan 0.07 0.40 0.48 0.39

Russia Kyrgyzstan 0.64 0.32 0.44 0.39

Table 4: Mutual direct investments index (MDII) of the CIS and Georgia in 2011–2013: the first 20 couples


24

are followed by Belarus, Uzbekistan and Armenia. Very high figures, with the share of Russian investors is at the level of 10–20%, are characteristic for Ukraine, Kyrgyzstan and Moldova. They have only a few foreign counterparts to be compared with — such as Bosnia and Herzegovina through investments of Zarubezhneft in Republika Srpska.Georgia indicated the lowest share of Russian companies in the total FDI stock in the region. But even this value is similar to the countries popular among Russian investors, like the Baltic States, Mongolia, Iraq, Serbia, Montenegro, Bulgaria and Greece.

over 60%

40–60%

10–20%

5–10%

1–5%

less than 1%

Note: The state borders are given according to Russian maps as of 2013

Figure 5: The share of Russian FDI in neighboring countries at the end of 2013.

2. MUTUAL FDI IN THE CIS UNDER THE INFLUENCE OF THE FUNDAMENTAL EVENTS OF 2014

25

2. Mutual FDI in the CIS under the influence of the fundamental events of 2014

In February 2014 there was a large-scale political crisis in Ukraine. This is not the first case of regime change in the post-Soviet area after the collapse of the USSR. Territorial losses also happened to the countries of the region — both those supported by part of the international community (the independence of Abkhazia and South Ossetia from Georgia was recognized by several members of the UN) and unrecognized (especially Transnistria and Nagorno-Karabakh). The uniqueness of the current situation in Ukraine lies in the active foreign policy engagement of the United States and the EU.Once political and economic sanctions were introduced against Russia, it is extremely difficult to accurately predict the course of events, but it is possible to assess the implica-tions for mutual FDI in the region.Despite the tension in Russian-Ukrainian relations, the Russian Federation continues to develop the integration project of the Eurasian Economic Union. Already from 2015 it can encompass in its full format not only Belarus and Kazakhstan, but also in the future Armenia and Kyrgyzstan.

2.1. The consequences of the events in Ukraine for Russian FDI

In the early 2010s the inflow of foreign investment was one of the main factors ensuring the positive growth of the Ukrainian economy. Growth of investment attractiveness of Ukraine was largely related to the relative political stabilization after Viktor Yanukovych’s coming to power and the gradual improvement of the business environment. According to the an-nual World Bank survey “Doing Business Report”, from 2011 to 2013 Ukraine had moved in the overall ranking from 152nd to 112th position (World Bank, 2013). State Statistics Ser-vice of Ukraine fixed a quite rapid increase in FDI stock, from the end of 2010 to the end of 2013 they increased 30% — from $44.7 billion $58.2 billion. Investments from Russia also grew significantly — according to official statistics, from $3.4 billion to $4.3 billion. However, according to the alternative method of calculating the direct investment used in the prepara-tion of the MIM CIS database, the growth of Russian investments in the Ukrainian economy was much more significant (CIS EDB, 2012). On the eve of the current crisis in Russian-Ukrainian relations, they amounted to $16.5 billion ($2.5 billion more than in 2010).Ukrainian investment in Russia has traditionally been an order of magnitude less. How-ever there was a positive trend even in this area: from 2010 to 2013 they grew from $194 million to $362 million, according to official information, and from $653 million to $981 million, according to the MIM CIS. According to B. A. Heifetz, despite the obvi-ous imbalance in investment in favor of Russia, investment cooperation between the two countries played “an important role in maintaining and expanding sustainable economic relations between them,” strengthened “informal integration of our countries or integra-tion from below” (Heifetz, 2013).


26

Destabilization of the political situation in Ukraine in late 2013, removal from office of President Viktor Yanukovych, and the subsequent sharp deterioration in Russian-Ukrainian relations had a strong adverse impact on Russian-Ukrainian investment re-lations, and led to a precipitous outflow of mutual investment. The immediate reason for this was the referendum held in the Crimea, following which the peninsula actually came out of Ukrainian jurisdiction, and on March 21, 2014 became a part of Russia. In economic terms, the accession of the Autonomous Republic of Crimea and Sevastopol to Russia as subjects of the Federation, unrecognized by the Ukrainian government, meant the transfer of all state property on the peninsula from Ukraine to Russia. The first assets nationalized even during the transition period (i. e., between the declaration of independence of the Crimea and its accession to Russia) were steel energy company Chernomorneftegaz, producing gas in the Black Sea shelf (its cost is estimated at $1 bil-lion), the Crimean assets of Ukrtransgaz, and the Theodosia Oil Terminal marine port. Later nationalization was announced of more than 130 tourist sites, a number of utili-ties, and other assets that formerly were Ukrainian state property. Kiev’s response was given in the statement of Minister of Justice Pavel Petrenko regarding the inventory of state property of Russia in Ukraine, which “may be subject to compensation for losses on those possible judgments to be made by Ukrainian and international courts” (March 24, 2014.).However, the likelihood that the new Ukrainian government decides to start widespread confiscation of private assets due to Crimea remains low, despite the fact that this issue is being actively discussed in the Ukrainian media. And this is connected not only with the operation of the bilateral agreement on investment protection, but also with the fact that the economic benefits of this measure are highly questionable. Many of the companies with Russian investments transfer significant funds to the Ukrainian budget and provide jobs for hundreds of thousands of people. Expropriation of Russian private investments will also lead to further deterioration of the investment climate, growth of concerns of in-vestors from other countries (including EU countries) about doing business in Ukraine. It should be kept in mind that many of the Russian companies working in Ukraine essen-tially became international corporations a long time ago (for example, 43% of the voting shares of VimpelCom belong to the Norwegian Telenor, and Wimm-Bill-Dann is now a part of PepsiCo). Accordingly, confiscatory measures will impact not only Russian but also Western European business. At the same time, confiscatory measures should not be completely ruled out: in the event of escalation of the conflict in eastern Ukraine and in-tensification of disintegration processes, the status of Russian private investors would dramatically deteriorate. Nationalization scenario cannot be ruled out as well (with com-pensation of the market value of the company to the owner) with respect to the compa-nies with Russian investments that were unprofitable and have been idle for more than a year. The most striking examples are Lisichansk refinery, which has not been operating since March 2012, and also Zaporozhye Aluminium Smelter, closed “for scheduled main-tenance” (the first failed attempt to nationalize it was made two years ago).The situation is quite different with the Russian state-owned companies, of which ma-jor investors in Ukraine are VTB, Sberbank and Rosneft. As Ukrainian subsidiaries of both state-controlled banks are among systemically important banks in Ukraine, their


27

nationalization may cause a severe blow to the entire banking system, so this scenario is unlikely. The Odessa Refinery seems to be in the most difficult situation; it is owned by VTB as collateral for a loan issued by a Russian bank to VETEK Company owned by Ukrainian businessman Sergey Kurchenko (previous owner of the plant was LUKOIL). The Ministry of Internal Affairs of Ukraine initiated investigation of the legality of the transaction following which the head of VETEK was put on the international wanted list, and nationalization procedure began in respect of the refinery.As to private companies, the Russian company VSMPO-Avisma faced troubles. In late March, Dnepropetrovsk court invalidated lease agreement with the Demurinsk mining and processing plant owned by it, based on which it was planned to build a titanium mine.According to a study conducted by the Gaidar Institute, the crisis in Russian-Ukrainian relations has already affected the bilateral trade and economic ties. Among the compa-nies working with Ukraine, 20% reported a decrease in demand for their products in Ukraine, another 8% of companies indicated a problem with the supply of raw materials from Ukraine (Koptyubenko, Zabavin, 2014). Most of the Russian investors are biding their time, hoping for settlement of the internal political situation in the country. Op-portunity to increase investments in Ukraine is no longer considered by the majority of Russian companies, on the contrary, many of them (in particular, VTB, Yandex, Alfa-Bank, MTS) have significantly reduced advertising costs, that speaks on their disap-pointment in the Ukrainian market prospects.However, the conditions for withdrawal from the Ukraine market are not quite favorable as well: due to economic uncertainty, the sale of assets in most cases means to recognize losses, and not all companies are willing to do this. In this situation, in pole position were those Russian companies that withdrew their investments before the change of govern-ment, for example, like X5 Retail Group did, which sold the supermarkets Perekryostok to Ukrainian company VARUS (however, the deal was closed in the spring of 2014).There are, of course, exceptions but they confirm the general rule. Thus, Energy Stand-ard Corporation (composed of Zaporozhtransformator, Sumskoye NPO named after Frunze and Turboatom) is still successfully operating in the Ukraine. However it should be borne in mind that, firstly, this holding has manufacturing facilities exclusively in Ukraine; and secondly, its owner Konstantin Grigorishin, a citizen of Russia, is firmly rooted in the Ukrainian business elite and, according to some reports, is one of the spon-sors of Euromaidan.One of the few foreign companies who dared to expand their presence in Ukraine was the consortium Alfa-Group, acquiring for €202.5 million the Ukrainian subsidiary of Bank of Cyprus. According to the consortium, quoted by Interfax on April 18, 2014, they con-tinue to rely on “further growth and strengthening of the banking business in Ukraine, including through non-organic growth”. It remains to be seen how successful will be this strategy. But it is already clear that the investment expansion of Alfa Group displeases part of the political establishment, as evidenced by the proposal of a number of deputies of the Verkhovna Rada to establish a commission of inquiry to investigate the activities of Alfa-Bank, a suspect in the financing of federalization supporters in eastern Ukraine.


28

Extraordinary checks on laundering of proceeds from crime and financial aid to terrorists also were carried out with respect to Sberbank, but no violations were found.Against the background of radicalization of political life there are serious concerns about a possible boycott of Russian products by Ukrainians and the aggressive actions of na-tionalist organizations against enterprises with Russian capital (after attempts by com-munity activists to block filling stations LUKOIL in Kiev, the company announced at the end of July 2014 on the arrangements for sale of its Ukrainian unit, composed of 240 filling stations and six tank farms to the Austrian company AMIC Energy Manage-ment GmbH). In mid-March 2014, armed men captured a batch of 50 KAMAZ trucks in Chernigov, which resulted in a loss of 100 million rubles to the Russian company. Later the trucks were returned to the original owner, but the story of their capture raised con-cerns about the safety of doing business in Ukraine, and the company decided to sell all of the Ukrainian truck sales and maintenance assets (the deal amounted to 58 million ru-bles). KAMAZ still plans to supply their products to the Ukrainian market, but through partner dealer organizations.Due to the lack of statistical data, it is difficult to assess the impact of the crisis in Ukraine on investments within the framework of cross-border cooperation. However, the dynam-ics must be negative given the fact that: the three Ukrainian regions neighboring Russia (Lugansk, Donetsk regions and Kharkiv regions to a lesser extent) were swept by riots and acts of war; many local enterprises suspended production; infrastructure facilities were severely affected; and there were a significant number of temporarily displaced persons. Serious challenges for investment cooperation can be posed by strengthened control over the Russian-Ukrainian border and restrictions on the entry of Russian citi-zens in the territory of Ukraine. In the medium term, there will be two more negatives in addition to those already mentioned. Firstly, the intensification of the economic crisis in Ukraine and, as a consequence, restriction of the internal market (this would mean that only those companies that are export-oriented would be able to attract Russian capi-tal). Secondly, the slowdown of the Russian economy (according to pessimistic forecasts, Russia’s GDP in 2014 may show zero growth) consequently, Russian business will have available funds for investment abroad.Weakening of investment ties between Russia and Ukraine is a reciprocal process. It con-cerns not only Russian direct investments in Ukraine, but also Ukrainian investments in Russia. At least three cases are known when the Ukrainian business has been forced to withdraw from doing business in Russia, or face judicial problems threatening to close it. The most famous of them is the decision of the Deposit Insurance Agency (DIA) on the appointment of an interim administration (while maintaining the license) of Moskom-privatbank owned by Privatbank — the largest credit institution in Ukraine. This bank is controlled by one of the richest people in Ukraine — Igor Kolomoisky. After the change of power in Ukraine, he was appointed governor of Dnepropetrovsk region. According to DIA, this was due to “lack of liquidity and absence of full independent information infra-structure”; but the management of Privatbank explained this Russian regulator’s decision by the pressure from the Russian authorities, who were displeased with the support that Kolomoisky rendered to the new government in Kiev. In early April, Moscomprivatbank was sold to the Russian Binbank. The deal amounted to 6 billion rubles. The price was


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at least not less than the market, which was recognized both by independent experts and representatives of Privatbank. The deal to sell the Russian subsidiary of Privatbank is also interesting in that it is largely represented by an exchange of investment assets: ac-cording to the official website of Binbank, “settlements will be carried out by cash and Ukrainian assets of [its main shareholder] Michael Shishkhanov”.Another Ukrainian enterprise which attracted attention from the Russian regulatory authorities was the confectionery corporation Roshen, owned by Peter Poroshenko, elected in May 2014 as the new president of Ukraine. In Russia Roshen owns the Li-petsk confectionery factory, having invested in it more than 3 billion rubles. Up until recently, construction of another factory was planned costing 7 billion rubles, which was to become one of the largest Ukrainian business investments in the Russian economy. In mid-March 2014 bank accounts of the Russian subsidiary LLC Roshen were arrested (the pretext was the long-held legal proceedings with the Russian company Rot Front on the production of counterfeit goods). A search and seizure of documents began, regarded by Roshen management as a corporate raid, and the suspension of the Lipetsk plant was announced. By early April, settlement of the situation around the factory was reached, at least for a time. It is possible that Poroshenko’s statement of intent to sell the confection-ary business if he wins the election played its role.The crisis in Ukraine has already led to a partial withdrawal of Ukrainian investments from Russia. The agricultural holding Kernel, which owns several businesses in Rus-sia, sold for $10 million its oil extraction plant in Stavropol Krai. The actual decline of Ukrainian investment in 2014 has already exceeded 13%. The outflows should be ex-pected to continue.A separate issue is the fate of Ukrainian private assets in Crimea. After the actual trans-fer of the peninsula under Russian jurisdiction, the property of Ukrainian individuals under Russian law has the status of Ukrainian investments in the Russian economy. It is therefore subject to the Agreement on encouragement and mutual protection of invest-ments signed in 1998. According to its fifth article, “investments of investors of one of the contracting parties, carried out in the territory of the other contracting party shall not be expropriated, nationalized or subjected to measures equal to expropriation, except in cases where such measures are taken in the public interest in accordance with legisla-tion, are not discriminatory and are accompanied by the payment of prompt, adequate and effective compensation” (the Agreement between the Government of the Russian Federation and the Cabinet of Ministers of Ukraine on the Promotion and Reciprocal Protection of Investments dated 27 November 1998).In Crimea the private assets include some utilities, branches of Ukrainian banks and in-surance companies, telecommunications companies, and chain stores. On April 21, the Central Bank of Russia has stopped operations in Crimea and Sevastopol of subdivisions of Privatbank, All-Ukrainian joint-stock bank, Impex Bank and Kievskaya Rus Bank. Five other banks have announced the closure of their branches in the peninsula. Man-agement of CBR emphasizes that revocation of licenses is because the Ukrainian banks have ceased from mid-March to meet their obligations to depositors and does not mean the loss of property rights in banks. The banking system of Crimea has traditionally been


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well represented by subsidiaries of Russian banks operating in Ukraine (Sberbank, VTB 24, Bank of Moscow, Alfa Bank). According to the President-Chairman of the Board of VTB 24 Mikhail Zadornov, the combination of operations of these banks in the Crimea with operation in Ukraine is not possible. Their operations are planned to be transferred to other banks, which will work exclusively in the two new subjects of the Russian Fed-eration (Russian National Commercial Bank, Black Sea Bank for Reconstruction and Development).LUKOIL also announced the reorganization of its business in the Crimea: Ukrainian Lukoil-Ukraine has sold 13 of the Crimean filling stations to Krasnodar Lukoil-Yugneft-eproduct. Eurocement, which has a production facility in the Kharkiv region, was forced to close its sales office in Simferopol. Crimea is about to receive large-scale govern-ment investment in the next few years, and could have become one of the major markets for Eurocement. From August, Ukrainian telecommunications companies with Russian capital, under the threat of sanctions from the Ukrainian authorities, will actually have to stop their service on the peninsula.Following the accession of Crimea and Sevastopol to Russia, termination of business in the region was announced by many Ukrainian and international retailers and catering companies (chain stores Intertop and Plateau, restaurants Sushiya and others). Repre-sentatives of “Crimean Vodka Company” that owns the plant in Simferopol announced their decision to move to the mainland. Most likely, this decision was prompted by the need to obtain a new license from Russia for the production of alcoholic beverages, and the difficulties associated with its delivery to the Ukrainian market. The question of termination of activities is also considered by Ukrainian food networks (Novus, ATB, Velika Kyshenya). The fate of Crimean car dealers owned by large Ukrainian dealer net-works (AIS, Bogdan, UkrAuto) remains unclear: the introduction of import duties on cars imported from Ukraine in Crimea can make their business unprofitable. In mid-March 2014, in the spotlight of the Ukrainian media, armed men captured the enterprise Bogdan Auto in Simferopol. It is difficult to make a prediction as to how to reduce the presence of private business in the Ukrainian Crimea, but most likely, its share in the economy of the peninsula would be negligible, and the vacated spaces will be filled by Russian enterprises.The uncertain economic and political situation negatively affected the investment plans not only of Russian companies, but also corporations from other CIS countries. Thus, Ka-zakhstan’s largest insurance company Eurasia in February 2014 announced the suspen-sion of its operations in Ukraine, while reaffirming the commitments taken by it prior to Maidan events. It should be noted that a similar decision was made by IC Eurasia with re-gard to insurance and reinsurance business in Venezuela, where civil strife also happened. This demonstrates the willingness of the company to minimize risks, and to focus on more stable insurance markets. Reduction of bilateral trade, associated with both the decline in demand for Kazakhstan’s products, and safety considerations, will have a negative impact on the dynamics of investment flows from Kazakhstan. A particularly strong impact of the crisis may be on small enterprises with Kazakh capital: on the eve of the change of power in Kiev there were about 60,000 Kazakhstan citizens in Ukraine, many of whom were engaged in commercial activities. Most of them have already left the country.


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The only CIS state to increase investment in Ukraine during the crisis was Azerbaijan. In the spring of 2014, oil and gas company SOCAR opened filling stations in Khmelnytsky and Poltava regions, bringing the total number to 37. Total investments of SOCAR for 2009–2013 exceeded $160 million, and the company plans to further expand business in Ukraine. The success of SOCAR in the Ukrainian market is largely due to the fact that the Azerbaijani company focused on the rapidly growing segment of premium fuel. It im-ports oil from Polish, Belarusian and Lithuanian refineries, which meets environmental standards “Euro-5” and “Euro-6.” Despite political instability, SOCAR expects to in-crease its filling stations network by 50% during 2014, and in the long term use Ukraine as a springboard to penetrate the markets of the European Union. If competing Russian oil companies are forced to leave the Ukrainian market, it is possible that the investment expansion of SOCAR will continue even with a substantial reduction in consumer de-mand for gasoline. Despite this, to talk about some kind of breakthrough in investment relations between Ukraine and Azerbaijan would be premature. Firstly, the development of a network of filling stations for the time being is happening in the framework of the strategy adopted before the change of government in Kiev. Secondly, Ukraine is consid-ered by SOCAR as an important, but not the main country for investments even in the post-Soviet space (for example, 106 gas stations already operate in Georgia, and 9 more are under construction). Thirdly, besides the development of gas station networks, Azer-baijani companies still do not carry out any large investments in other sectors of the Ukrainian economy.Will investments from the EU be able to compensate for the losses incurred by Ukraine due to suspension of inflow (and possibly outflow, in the near future) of Russian invest-ment? In the next few years, it should not be expected. And the reason is not only the deterioration of the investment climate in Ukraine in connection with the ongoing cri-sis and the threat of a prolonged economic downturn. According to experts, the rapid development of the Russian-Ukrainian investment ties has been largely due to the so-called neighborhood effect. In the case of Russia and Ukraine, “it was not only due to minimum social and cultural obstacles to start doing business abroad, but also to the use of industrial contacts established during the Soviet era, as well as family relations or acquaintances, which had been contributed, for example, by getting education in the neighboring republic of the former USSR” (Kuznetsov, 2012). For many Russian compa-nies, opening a representative office in Ukraine was seen as the natural way of business development; capital investment decisions were made without proper evaluation of the effectiveness of investments. It was believed that the cultural and historical proximity of the two countries would help successfully organize the work in the neighboring coun-try, despite the obvious administrative barriers and objective weakness of the Ukrainian economy. There is no such risk appetite among Western European companies. So, even with a favorable scenario for Ukraine, the increase of investments will be slow.The resumption of Russian-Ukrainian investment cooperation will be associated with a significant number of factors. They include: domestic political and economic stabiliza-tion in Ukraine (Kiev authorities have high hopes for IMF loans, without which the country could face the threat of default); overcoming the crisis of confidence in the bilat-eral relations and conduct in both countries; and targeted policies to improve the invest-


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ment climate. The role of the latter is actively discussed both in the government and at the expert community level. Among the problems hindering the inflow of investments, the most often cited is pervasive corruption: in Corruption Perceptions Index 2013, Ukraine was the last among the European countries and ranked 144th in the overall ranking, being behind such countries as Uganda, Papua-New Guinea and Nigeria (Trans-parency International, 2013).Indeed, the success of investing in Ukrainian businesses is now too dependent on the ability of foreign companies to negotiate with the local authorities. In the conditions of political uncertainty, the risks associated with investment activities become unaccepta-ble. The forthcoming reform of the judicial system (put forward by the European Com-mission as one of the conditions for granting loans) could solve this problem, but bring-ing the judicial system in line with EU standards may take a long time. Another measure aimed at attracting investment is the creation of industrial parks with preferential con-ditions for doing business guaranteed by the state. On April 15, already five such parks were registered — in the Ivano-Frankivsk, Khmelnytsky, Zhytomyr, Poltava regions and in Lviv. All these regions are located in the central and western parts of Ukraine, where investors from Russia are not as active as in the east. The exception is the Poltava region; where until recently, Russian companies have been actively represented in oil re-fining and food industries. The geography of industrial parks indicates that they are set up not so much for Russian, but for foreign investors.In conclusion of this review of the influence of the situation in Ukraine on investment dynamics in the CIS, it should again be emphasized that currently, due to ongoing armed conflicts in the east of the country it is not possible to make specific predictions. The im-portance of Ukraine as one of the leading FDI recipients in the post-Soviet area means that the data on withdrawal of investments of the CIS countries from Ukraine need con-stant refinement. Assessment of the impact of the crisis on FDI stock in Ukraine, and analysis of the related redistribution of investment flows within the CIS, should be one of the key areas of development of the MIM CIS project for the next one or two years.

2.2. Prospects of mutual FDI of the Eurasian Economic Union countries

In May 2014, an agreement was signed on the establishment of the Eurasian Economic Union from January 1, 2015. Most likely it should have a positive impact on Russian FDI in Kazakhstan and Belarus, and possibly also in Armenia and Kyrgyzstan, which are planning to join the union in the future. However, the situation is not quite clear for mutual FDI of these countries, confirming the lack of effect of the CU for investments expected in the medium term.Russian FDI accounts for almost half of all FDI in Belarus. As before, the largest invest-ment project is the acquisition of gas transportation company Beltransgaz by energy giant Gazprom for $5 billion. Obviously, in the foreseeable future no new comparable projects will appear. The second in terms of volume direct investment project in Be-larus — the sale of 49% of the mobile operator MTS — is six times smaller. Belarusian authorities did not rule out the possibility of sale of the remaining 51% of the shares, but


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still demand an unreasonably high price for them, according to experts. However, it does not exceed $1 billion; and in fact, at an auction on February 6, 2014 there were no buy-ers willing to offer even $863 million. This means that in the event of the sale of MTS’s stake for $700–800 million (according to the media, the Russian investor wants to pay even less) Russian FDI stock in Belarus will grow by no more than 10%. Investments in Mozyr Oil Refinery can be slightly bigger (to date, Slavneft owns 42.6% of the shares, and the state — 42.8%). But it is unlikely that the most probable buyer — Rosneft — is going to pay $4 billion, which Belarus expects to gain from privatization.A certain increase in FDI in Belarus is also possible due to the expansion of business of Russian banks — for example, in 2012 the total authorized funds of their subsidiaries in-creased by $237 million, and in 2013 — by another $85 million. Also FDI of some other members of the Russian service sector can grow with expansion of the capacity of the Belarusian markets. Potential additional Russian investments in oil refining, financial sector and service sector do not mean serious changes in FDI status in manufacturing of Belarus.As for Kazakhstan’s FDI (as well as Armenian), their scope in Belarus is rather insignifi-cant. The most significant investments were made by BTA Bank, but the statutory fund of its subsidiary bank is about $24 million. This also applies to foreign investment in Belarus.In Kazakhstan, Russian investors face strong competition with MNCs from other coun-tries: Chinese MNCs in the resource sector; and the Western technology suppliers. In-frastructure projects are one of the most promising areas for joint investment by Russia and China, both in Kazakhstan and other Central Asian countries. These projects require both large FDI, and foreign policy support. The simultaneous participation of the Russia and China may increasingly guarantee the security of investments. At present, major in-vestment projects of Russian and Chinese MNCs are associated with the fuel sector, pri-marily oil and natural gas production, where they are the obvious competitors.Russian MNCs are markedly inferior to the Chinese in terms of FDI scale in the oil and gas business. For example, LUKOIL invested about $3 billion in Kazakhstan. Gazprom’s FDI are gradually growing in this country, having exceeded $0.3 billion. About $0.2 bil-lion was Russian FDI in Kazakh section of the Caspian Pipeline Consortium (if judged by contribution of participating companies and the length of the pipeline). For comparison: the Chinese giant CNPC invested more than $12 billion in oil and gas production in Ka-zakhstan, and another $6.2 billion in construction of pipelines in Kazakhstan to supply Central Asian resources in China (another $1.7 billion was received by Uzbekistan). In addition, $1.4 billion was invested in the production of hydrocarbons in Kazakhstan by Sinopec, about $0.95 billion both by CITIC and China Investment Corp., and $0.7 bil-lion by a number of smaller companies. In addition, unlike the Russians, Chinese inves-tors made FDI in Shymkent refinery.Nevertheless, FDI of many Russian companies in Kazakhstan are growing. In 2013, ARMZ Holding particularly stood out with investments in uranium mines, and in 2014 a new joint venture was launched in the steel industry, where Evraz owns 65% and has in-vested over $100 million. Projects have been launched in other manufacturing indus-


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tries, but it does not change the general commodity-oriented nature of investment coop-eration between Russia and Kazakhstan.As for Kazakhstan’s investments, recently there has been a general slowdown in FDI ex-ports from the country. Thus, according to UNCTAD, in 2006, the Kazakhstan FDI stock abroad doubled, in 2007 they grew by 2.4 times, in 2008 — by 32%, in 2009 — by 55%, in 2010 — by 38%, in 2011 — by another 44%. Thus, in late 2011, the indicator exceeded the level of the end of 2005 by 20 times! Much of these investments were made in Russia. At the same time, in 2012–2013, the FDI stock of Kazakhstan grew by only 2% per year (UNCTAD, 2014). It is quite obvious that export of capital of any country is determined by the processes taking place in its economy. Another thing is that in the analysis of Rus-sian FDI the question of alternative vectors of investment expansion is also raised, while Kazakhstan’s business is more aimed at the development of the post-Soviet area. In other words, the overall decline in investment activity of Kazakhstan businessmen abroad im-mediately reflected on FDI in the CIS countries.In Armenia, the potential expansion of Russian MNCs in the narrow domestic market is limited: about 40% of total FDI stock in the country was made by Russian investors (how-ever Armenia and Belarus in 2013 were characterized by the highest positive dynamics of Russian FDI stock among all post-Soviet countries). Kyrgyzstan for a long time will be characterized by an unstable political situation (like neighboring Tajikistan), regularly accompanied by redistribution of property. This is also not likely to contribute to im-provement of investment attractiveness for Russian companies. Counter significant FDI flows from Armenia and Kyrgyzstan in any of the CU countries are hardly possible, given the limited international competitive advantage of enterprises in these two countries.In summary, it can be noted that, among all foreign countries, for many years post-Soviet countries were considered by Russians as the most comfortable area for doing business. However, a qualitative leap in the Russian investment expansion in the region never hap-pened. It must be remembered that without full corporate integration (integration “from below”), political and economic projects of rapprochement with the CIS neighbors initi-ated by Russia will be doomed to fail in the long run. This means that it is high time to develop a full-fledged state regulatory policy, and in some cases even to stimulate legal export of capital from Russia, especially into the neighboring countries.

INSTEAD OF A CONCLUSIONOF THE FUNDAMENTAL EVENTS OF 2014

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Instead of a conclusion

It is hardly worthwhile to summarize in some special way another report on the results of the ongoing monitoring of mutual FDI of the CIS countries and Georgia. However, it is worth noting the important research problems, without the resolution of which it is im-possible to reach significant progress in the future in obtaining new results on mutual FDI in the CIS countries and Georgia, and on the whole Eurasian corporate integration.In our opinion, there are two such problems. Firstly, the analysis of mutual FDI needs to be extended outside the CIS, which means integration of the MIM CIS with another CIS EDB project — MPI-Eurasia. As the events in Ukraine show, without understanding the competition between Russia and the EU it is impossible to analyze any integration aspect in the European part of the CIS, including direct investments of private business, as often they are far from foreign policy. The Asian vector of analysis of mutual FDI in the Eurasian integration region has the same importance, since as the Chinese concept of the “Great Silk Road” in Central Asia is filled with practical content, the rivalry between Russian and Chinese MNCs will either increase, or they would find acceptable formats of investment cooperation.Secondly, the MIM CIS needs more detailed study of the in-country specifics of the for-mation and transformation of business groups. For Russia, these processes are fairly well studied (e. g., Pappe, Galukhina, 2009). Quite different is the situation in Ukraine, Bela-rus and Kazakhstan, as well as in other CIS countries. Ukraine is constantly evolving as a result of political upheavals. To a large extent, it is the financial health of parent com-panies (or redistribution of property at home), and not the integration efforts of the CU that determine the overall dynamics of mutual FDI in the CIS countries and Georgia.

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REFERENCES

CBR (2013) Direct investment from the Russian Federation abroad by instrument and countries in 2010–2013 (at the beginning of the year). November 1st. Available at: http://www.cbr.ru/statistics/print.aspx?file=credit_statistics/dir-inv_out_country.htm&pid=svs&sid=ITM_58823 CIS EDB (2012) Monitoring of direct investments in the CIS countries. Report of the Cen-tre for Integration Studies No.6. St. Petersburg: EDB. Available at: http://eabr.org/r/research/centre/projectsCII/invest_monitoring/ CIS EDB (2013a) Monitoring of direct investments in the CIS countries — 2013 Report of the Centre for Integration Studies No.15. St. Petersburg: EDB. Available at: http://eabr.org/r/research/centre/projectsCII/invest_monitoring/ CIS EDB (2013b) Monitoring of direct investments in Belarus, Kazakhstan, Russia and Ukraine in the countries of Eurasia. Report of the Centre for Integration Studies No.19. St. Petersburg: EDB. Available at: http://eabr.org/r/research/centre/projectsCII/in-vest_monitoring/ CIS EDB (2013c) Monitoring of direct investments in the CIS countries — 2013 Report of the Centre for Integration Studies No.21. St. Petersburg: EDB. Available at: http://eabr.org/r/research/centre/projectsCII/invest_monitoring/Dunning, J. H. (1998) Location and the Multinational Enterprise: A Neglected Factor? Journal of International Business Studies. No.1. P. 45–66.Heifetz B. (2013) Russia — Ukraine. Informal integration. Direct investment. No.2. S. 28–35.Kalotay, K. (2012) Indirect FDI. The Journal of World Investment & Trade. No.4. P. 542–555.Koptyubenko D. Zabavin Yu (2014) Ukrainian crisis has hit every third Russian company. Available at: http://top.rbc.ru/economics/28/04/2014/920935.shtml Kuznetsov A. (2011) Evolution of Russian MNCs: from regional to global companies. Bulletin of the Federal State Institution “State Registration Chamber with the Ministry of Justice of the Russian Federation.” No.4. S. 4–14.Kuznetsov A. (2012), Russian-Ukrainian investment ties. Internet publication “Perspec-tives”. Available at: http://www.perspektivy.info/rus/desk/rossijsko-ukrainskije_inves-ticionnyje_svazi_2012–08–31.htm Kuznetsov A. (2013) Global Expansion of Russian Multinationals after the Crisis: Results of 2011. NY: Vale Columbia Centre on Sustainable International Investment. Available at: http://ccsi.columbia.edu Kuznetsov A. (2013a) Mutual direct investments in Russia and Kazakhstan. Bilateral political and economic relations between Kazakhstan and Russia: Proceedings of the VII Scientific and Practical Conference KISS — IMEMO. Almaty: KISS under the President of Republic of Kazakhstan. S. 48–53.

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Kuznetsov A. (2013b) Changes in the sectoral structure of mutual direct investments of the CIS countries. Eurasian Economic Integration. No.1. S. 7–18.Pappe Ya., Galuhina Ya. (2009) Russian big business: the first 15 years. Economic Chroni-cles of 1993–2008. Moscow: Publishing House of the HSE.Transparency International (2013) Corruption Perceptions Index 2013. Available at: http://cpi.transparency.org/cpi2013/results/ UNCTAD (2014) World Investment Report 2014 — Investing in the SDGs: An Action Plan. N. Y., Geneva: United Nations. Available at: http://www.unctad.org World Bank (2013) Doing Business 2014. Washington, DC. Available at: www.doing-business.org/~/media/GIAWB/Doing%20Business/Documents/Annual-reports/Eng-lish/DB14-Full-Report.pdf

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S Comprehensive assessment of the macroeconomic effect of different forms of intensive economic cooperation by Ukraine with the member states of the Customs Union and the Single Economic Space within the framework of the Eurasian Economic Community (EEC)The main goal of the project is to assess a macroeconomic effect of the creation of the Customs Union and Single Economic Space of Russia, Belarus and Kazakhstan, and to determine prospects of the development of integration links between Ukraine and the CU. The project was conducted by the team of five research institutions. The results presented in

the Report have been widely recognized and become standard. Available in Russian and English.

http://www.eabr.org/e/research/centreCIS/projectsandreportsCIS/ukraine/

Studies of Regional Integration in the CIS and in Central Asia: A Literature SurveyThis report, published under auspices of the EDB Centre for Integration Studies, summarizes both international studies in the area of regional integration within the former Soviet Union and Russian language materials on this issue, reviewing the research papers and publications in the area of economics, political studies, international relations and international political economy, law and area studies.Available in Russian and English.

http://www.eabr.org/e/research/centreCIS/projectsandreportsCIS/CIS_CentralAsia/

Assessment of the economic, institutional and legal impact of labour migration agreements within the framework of the Single Economic SpaceThe project included analysis of two labour agreements that came into force on January 1, 2012 within the SES of Russia, Belarus and Kazakhstan. It analyzes their economic and social inpact on labour migration processes, labour market and productivity, strengthening of the regional economic relations.

http://www.eabr.org/e/research/centreCIS/projectsandreportsCIS/labour_migration/

EDB integration barometer 2012The EDB Centre for Integration Studies in cooperation with the Eurasian Monitor International Research Agency examined the approaches of population to regional integration.Available in Russian and English

http://www.eabr.org/e/research/centreCIS/projectsandreportsCIS/integration_barometer/

Threats to public finances of the CIS in the light of the current global instability (in Russian) The Report deals with the assessment of the risks for the government finances of the CIS countries in the light of current world instability. The report was conducted at the request of the Finance Ministry of the Republic of Kazakhstan, and presented at the permanent council of the CIS Finance Ministers.

http://www.eabr.org/e/research/centreCIS/projectsandreportsCIS/risks/

Monitoring of Mutual Investments in the Member States of the CISThe monitoring of mutual CIS investments provides analytical support for work conducted by state and supranational agencies on developing a suitable strategy for deepening integration processes throughout the post-Soviet space. The Centre in partnership with IMEMO (RAS) has created and is regularly updating the most comprehensive database up to date.Available in Russian and English

http://www.eabr.org/e/research/centreCIS/projectsandreportsCIS/invest_monitoring/

Customs Union and cross-border cooperation between Kazakhstan and RussiaResearch on the economic effects of the development of industrial relations under the influence of the Customs Union in the border regions of Russia and Kazakhstan.

http://www.eabr.org/e/research/centreCIS/projectsandreportsCIS/kaz_rus_e/

Unified trade policy and addressing the modernization challenges of the SES The Report presents an analysis of the key economic risks arising under the agreement by SES participants of a foreign trade policy, formulates proposals on the main thrusts of SES Common Trade Policy, and names measures for its reconciled implementation.

http://eabr.org/e/research/centreCIS/projectsandreportsCIS/trade_policy/

SES+ Grain policyGrowth in grain production is propelling Kazakhstan, Ukraine and Russia to the leadership ranks of the global grain market. The Report systematically analyzes trends in development of the grain sector and actual policies and regulations in SES countries, Ukraine and other participants of the regional grain market.

http://www.eabr.org/e/research/centreCIS/projectsandreportsCIS/grain_policy/

Technological Сoordination and Improving Competitiveness within the SESThe report presents a number of proposals aimed at improving SES competitiveness within the international division of labour.

http://www.eabr.org/e/research/centreCIS/projectsandreportsCIS/technological_coordination/

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uThe Customs Union and Neighbouring Countries: Models and Instruments for Mutually Beneficial Partnership The report proposes a broad spectrum of approaches to the fostering of deep and pragmatic integrational interaction between the CU/SES and countries throughout the Eurasian continent.

http://www.eabr.org/e/research/centreCIS/projectsandreportsCIS/cu_and_neighbors/

Labour Migration and Human Capital of Kyrgyzstan: Impact of the Customs UnionThe report focuses on the effects of Kyrgyzstan’s possible accession to the Customs Union (CU) and Single Economic Space (SES) on the flows of labour resources, the volume of cash remittances, labour market conditions and professional education and training in this country.

http://www.eabr.org/e/research/centreCIS/projectsandreportsCIS/labor_migration_kyrgyzstan_cu/

Tajikistan’s Accession to the Customs Union and Single Economic Space Tajikistan’s accession to the CU and the SES will have a positive economic impact on the country’s economy. The Report includes a detailed economic analysis of the issue using various economic models and research methods.

http://www.eabr.org/e/research/centreCIS/projectsandreportsCIS/Tajikistan_CU_SES/

Monitoring of Mutual Investments in the CISThe report contains new results of the joint research project of the Centre for Integration Studies of EDB and the Institute of World Economy and International Relations of the Russian Academy of Sciences. It is aimed at the maintenance and development of the monitoring database of mutual direct investment in the CIS countries and Georgia. A general characteristic of mutual investments in the CIS at the end of 2012 is provided.

http://www.eabr.org/e/research/centreCIS/projectsandreportsCIS/

EDB Integration Barometer — 2013 The EDB Centre for Integration Studies in cooperation with the Eurasian Monitor International Research Agency examined the approaches of population to regional integration.

http://www.eabr.org/e/research/centreCIS/projectsandreportsCIS/integration_barometer/

Cross-Border Cooperation between Russia, Belarus and Ukraine Cooperation between 27 cross-border regions of Belarus, Russia and Ukraine has significant potential; however the existing frontiers and barriers are a significant factor that fragments the region’s economic space.

http://www.eabr.org/e/research/centreCIS/projectsandreportsCIS/project16/

Customs Union and Ukraine: Economic and technological cooperation in sectors and industriesThe authors of the report study the issue of industrial and inter-industry links between the SES economies and Ukraine and come to a conclusion that cooperation between enterprises has been maintained in practically all segments of the processing industries, while in certain sectors of mechanical engineering this cooperation has no alternatives.


Monitoring of direct investments of Belarus, Kazakhstan, Russia and Ukraine in Eurasia The Eurasia FDI Monitoring project supplements another research by the EDB Centre for Integration Studies —Monitoring of Mutual Foreign Investment in the CIS Countries (CIS Mutual Investment Monitoring).


Armenia and the Customs Union: Impact of Accession This report provides the assessment of the macroeconomic impact of Armenia joining the Customs Union.


ARMENIA AND THE CUSTOMS UNION: IMPACT OF ECONOMIC INTEGRATION

RepoRt 202013

System of Indicators of Eurasian Integration The System of Indicators of Eurasian Integration (SIEI) is designed to become the monitoring and assessment tool for integration processes within the post-Soviet territory.

http://www.eabr.org/e/research/centreCIS/projectsandreportsCIS/siei/ index.php?id_16=37610

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S Eurasian Integration.Challenges of Transcontinental RegionalismEvgeny Vinokurov, Alexander LibmanBasingtoke: Palgrave Macmillan

“Vinokurov and Libman have pulled together a tremendous range of information and insight about Eurasian economic integration. Their eminently readable book tackles an important and timely topic, which lies at the heart of global economic and political transformation in the 21st century.”Johannes Linn, Brookings Institute

http://eabr.org/e/research/centreCIS/monographsCIS/

Holding-Together Regionalism: Twenty Years of Post-Soviet Integration (Euro-Asian Studies)An in-depth analysis of one of the most im-portant and complex issues of the post-Soviet era, namely the (re-)integration of this highly interconnected region. The book considers the evolution of «holding-together» groups since the collapse of the Soviet Union in 1991, looking at intergovernmental interaction and informal economic and social ties.

http://eabr.org/e/research/centreCIS/monographsCIS/

Quantifying Economic Integration: of the European Union and the Eurasian Economic Union: Methodological ApproachesThe objective of the project is to discuss and analyse economic integration in Eurasia, both on the continental scale “from Lisbon to Shanghai,” and in the EU-EEU dimension “from Lisbon to Vladivostok.”


ДоклаД № 23

2014

КОЛИЧЕСТВЕННЫЙ АНАЛИЗ ЭКОНОМИЧЕСКОЙ ИНТЕГРАЦИИ ЕВРОПЕЙСКОГО СОЮЗА И ЕВРАЗИЙСКОГО ЭКОНОМИЧЕСКОГО СОЮЗА: МЕТОДОЛОГИЧЕСКИЕ ПОДХОДЫ

Центр интеграЦионных исслеДований

Pension Mobility within the Eurasian Economic Union and the CISIn the report the experts evaluate the prospects of implementing effective mechanisms in the region to tackle pension problems of migrant workers.


ЦЕНТР ИНТЕГРАЦИОННЫХ ИССЛЕДОВАНИЙ

ДОКЛАД № 24

2014

МОБИЛЬНОСТЬ ПЕНСИЙ в рамках Евразийского экономического союза и СНГ

EDB Integration Barometer — 2014The results of the third research into preferences of the CIS region population with respect to various aspects of Eurasian integration suggest that the “integration core” of the Eurasian Economic Union (EEU) continues to form and crystallise.

http://www.eabr.org/e/research/centreCIS/projectsandreportsCIS/integration_barometer/index.php?id_16=42460

Центр интеграЦионных исследований

Доклад № 252014

ИНТЕГРАЦИОННЫЙ БАРОМЕТР ЕАБР2014