Foreign Direct Investments into Russia - Term Paper Example

FOREIGN DIRECT INVESTMENTS INTO RUSSIA Introduction One of the most important problems of Russian economy reforming and modernization is attracting the foreign investments. Taking into consideration the lag of Russian economy according to various positions, Russia needs foreign stock, which could bring the new technologies and modern methods of managing and could assist the development of native Russian investments. The experiences of many countries show that the investment boom in economy begins with the foreign stock coming. One of the most important reform hopes in Russia was the attracting of the foreign investments from the western countries. The last decades allow to make some certain conclusions and to estimate the possible perspectives of the foreign investment policy in Russian economy. In the second part of the XX century the most dynamic form of the foreign economical relations of different countries is outflow of capital. The best form for the countries-importers, including Russia, are the direct investments that help to increase the gross domestic product, budget receipts, employment, to bring the managing experience, to use all the advantages of the competitiveness, to improve the structure of export. Contextualization of the research project The priority of the export investments over the products outflow for the well-developed countries is caused by the following factors: the transferring the hard industry plants to the countries with the cheap man power reduces the production costs and assists increasing the competitiveness; the investments into the extractive industries provides with raw materials; producing goods in the country of consumption reduces the transport costs of the investor; the investments into the manufacturing industry help to overcome the customs and administrative barriers; transferring the harmful manufacturing into the other countries solves the national ecological problems. The world leader in foreign direct investments in export and in import is the USA. In export investment policy the American international corporations are the European market oriented, and with the reforming of the foreign economy of Russia the American Stock is directed there. Nowadays the priority directions of stock export became the developed countries, at the same time there was a great increase in investments into Russia in august 1998. The determining factors of this increase were: the cheapness of skilled labour force, availability of the different natural resources, potentially high capacity of market, the state advantages for the western investors. (Bessonova E.) The production of foreign corporations took the leading position at Russian consumer market thanks to the following reasons: worldwide popularity of the merchandise marks, high consumer quality of production, artificial overstating of the rouble rate, highly skilled professional, marketing, and PR-work. Speaking about the foreign investments into Russian economy it is worth mentioning that there are some points which negatively effect the development of Russian economy. the investments of some international corporations were mainly directed to the active Russian companies(“Procter and Gamble”, “Johnson and Johnson”, “Henkel”, “Nestle”), what did not assist the competitiveness but replaced Russian products by the foreign. So the outflow of the western investments would negatively influence on the products of living essentials. The income got by the foreign companies in Russia enriches the budgets of the countries-exporters that does not assist the increasing of the composite demand in the country. The western investments into Russian economy are not balanced by the investments of the very Russian citizens? There is no class of the effective owners, neither large nor small, and this does not create conditions for the self-development of Russian economy. There is a not equivalent exchange in the structure of the commodity circulation and in the international economic relationship: on the one hand – the regime of the most favour concerning the products of the well-developed countries and from the other hand – the strict protectionism of these countries towards Russian export. These two factors do not assist the development of Russian economy. The priority spheres of investing are the fuel-energy spheres, and lately the machine-building branches. But it should be taken into consideration that the importance of the industrial component, the economical success rapidly reduces at the background of the increasing importance of the information component (Smarzynska B.). Two factors impact the size of the western investments: 1. Political and economical instability and corruption in Russia; 2. Observing the most important geopolitical interests by the leading countries towards the slackening of Russia. Foreign investments into Russia and literature review The investments are the financial and material means, intellectual property that were transferred from one state into another with the aim of gaining the profits. The investments can be divided into three categories (Blonigen B. A.): direct investment(the foreign investor gets the complete control over the company or actively participates in managing) portfolio investment (the foreign investor does not participate actively in managing but gets income. Usually this category of investment is for the equity market); to the other investments refer the investments into the banks, commodity credits etc. The boundary between the two first categories is relative. Usually it is considered that investments of 10 – 20 and more per cent are direct and 10 – 20 and less are portfolio. The active attracting the foreign investments into the Russian economy began at the times of the USSR during the period of reorganization. In the year of 1987 the first documents concerning the joint companies were concluded. The most important document, which regulates the activity of foreign investors and is valid nowadays, was concluded 1991. The main result of this document was the equal national regime for all companies (foreign and Russian). According to this act all foreign companies have all the rights and duties what Russian companies have (excluding some special branches of economy). The process of privatization in Russia in 1992 – 1993, active development of Russian equity market and creating the regulatory base created the reasons for the development of the foreign portfolio investments into Russia. At the same time though there was some progress, the contradictions and incompleteness in the regulatory base remain one of the most important obstacles for attracting the foreign investments into Russia (Smarzynska B.). The statistics of investments into Russian economy is contradictory. The Department of economy, The Central Bank o Russia, the Statistics department and foreign institutes which deal with statistics give different data. If to use the data of the Statistics department, the size of investments from the foreign stock gained 12 milliards dollars, 10.7 of which are direct. The result of the small size of the investments into Russia is the small role of the companies with the foreign investments which already exist in Russia. They are 2 per cent of the general size of the manufacturing in Russia. The reason for this situation is the negative investment climate in Russia that has the following characteristics: high general political instability, mainly instability of the regulatory base; rapid setback in production; incompleteness of the regulatory base for economy branch and for the branch of the foreign investments; high taxation; lack of the qualitative infrastructure; lack of the single state policy in the branch of attracting the foreign investments. (Bessonova E.) The basic ways of attracting the foreign direct investments into Russian economy are: attracting the foreign stock in the business form by creating the joint companies; registration of the companies on the territory of Russia that refer to the foreign stock; attracting the foreign stock based on concession or the agreements about sharing production; creating the free economic zone, directed to the attracting the foreign investors in some certain regions of the country. At the first stage of attracting the foreign investments to the economy of the former USSR, in 1987 – 1991, among these forms creating the joined companies dominated. Such companies were created in the form of the adjourn corporations (limited companies or closed joint-stock companies). Further, when the disadvantages, such as arbitrary estimation of the parties’ investments, impossibility of controlling by the foreign partner, illiquidity of the investment into the statutory fund, became obvious, the main form of investment in Russia became the public corporation (especially during th process of privatization). These forms of the direct investing are active now, though the role of investments into the different financial and insurances has increased. Investing into Russian economy the foreign companies and banks have the following aims (Corden W. M): gaining the high income form the manufacturing the goods which are deficit in Russia or are too expensive; using the factors of manufacture, the prices for which is lower that the world: the cheap labour force, low price or some raw materials; using the rich mineral deposits and other natural resources; buying the potentially effective Russian companies for low price and with the aim to gain a high income; promoting the foreign production at the Russian market; using the old equipment which is impossible to do in well-developed countries; investing means be Russian origin like the foreign. Recently efforts have been aimed at setting standards for, and improving the legal basis of, the investment process in Russia, and the gradual creation of a transparent and complete information environment for investors. Now the following points are envisaged (Bevan A. A., Estrin S): imported technological equipment and spare parts for such equipment are to be relieved of VAT; materials brought into Russia as contributions to the authorised funds of enterprises with foreign participation as part of the fixed productive assets are to be relieved of customs duties; foreign investors investing more than $100 million into Russian industry are entitled to bring materials into Russia with a 50% reduction of customs duties. On December 30, 1995, the President of Russia signed the federal law "On production sharing agreements". This opened opportunities for practical implementation of large scale projects, first of all in the sphere of attracting foreign capital into mineral resources mining. The total volume of the expected investments into these projects is estimated at tens of billion dollars. In 1995 and 1996 the elaboration of the fundamental drafts of the federal laws was carried out. Among these are drafts on introducing changes and amendments into the RSFSR laws On foreign investments in the RSFSR, On the free economic zones, and On concession agreements concluded with Russian and foreign investors as well as changes and amendments to the fiscal and customs laws. These drafts are under presently under consideration by the State Duma. The Russian Government decided to improve the investment climate not only for foreign but for domestic investors as well. In the first stage such actions brought about some worsening of working conditions for foreign investors in Russia. This caused the Chernomyrdin Government to make special efforts to encourage the in-flow of foreign investment. In 1994 the Foreign Investment Advisory Council (FIAC) was formed in Russia under the Russian Government Chairman, and this included the largest foreign investors in Russia at the time. The activities of the FIAC made it possible to improve conditions for attracting foreign capital as reflected in annual doubling in volume of the capital brought in from abroad. In 1995 the Foreign Investment Promotion Centre of Russia - FIPC - was formed with a network of investment promotion offices abroad. In addition, recommendations of the FIAC made it possible to create a broadly inter-connected system of regulatory and legal documents controlling investment activities in the market. As a result of the activities of the FIAC a number of advantages are available in Russia which play a positive role in improving the investment climate in Russia. The Government set the task of attaining general economic growth as early as possible in 1997 and of achieving annual growth rates of 4 to 5 per cent by the end of the century. This will be done through tax reform, transformation of the agricultural sector and in the social sphere, continuation of privatisation, development of the stock market and the banking sector, strengthening other important market institutions, active industrial and structural policy and investment promotion. The task of the Russian Government is to annually double volumes of the foreign capital invested into the Russian economy (Smarzynska B.). Speaking about the foreign investments that are made into Russian economy it should mentioned that Russia is known for being the exporter of the raw resources, and being the importer of the foreign high-tech production and services. At the same time such a structure of the investments says that such categories of the foreign investors are ready to invest into Russia, even if there are great risks and negative investment climate. First of all these are: large international corporations, which evaluate investments into Russian economy as the way to Russian resources and inner market. Investments into Russia are a small part of the global long-term investing strategy. To such companies belong the range of large foreign investors in Russian fuel-energy complex (Exxon, Amoco, Occidental Petroleum), chemical industry (Procter & Gamble), food industry (Coca-Cola, BAT Industries, Philip Morris), financial business (Chase Manhattan Bank, Citibank, ABN-AMRO), in the sphere of telecommunications (Siemens, Alcatel, US West); middle and small foreign stock, attracted into Russia by the ultrahigh profitability and quick payback of some projects, mostly this is in trade, building and service sphere. The enumerated advantages cover the disadvantages of the negative investment climate of Russia; the investors from the number of representatives of the Russian Diaspora in the foreign countries, and the companies which invest into Russian economy the outflown stock from Russia. Usually this stock is invested into the projects with quick payback. According to Russian Government data, foreign direct investment into Russia in the first half of 2003 was up 35 percent over the same period in 2002. The U.S. is the leading source of cumulative foreign direct investment into Russia, and the more than $600 million of U.S. direct investment into Russia in 2002 was 15 percent of all foreign direct investment in Russia. U.S. direct investment in Russia has historically been concentrated in energy, but recent trends point to diversification. Numerous U.S. companies have expressed an interest in expanding or establishing new significant investments in Russia in various sectors, including wood processing and paper production, diesel engines production and sunflower seed oil processing. Russian firms are also investing in the United States. For example in June 2003, Stillwater Mining Company of Columbus Montana and MMC Norilsk Nickel signed a Stock Purchase Agreement, completing the largest single transaction by a Russian company with an American corporation. Stillwater is the only U.S. producer of palladium and platinum and the largest primary producer of palladium in the Western Hemisphere, as well as the largest primary producer of platinum group metals outside of South Africa. Norilsk Nickel is the worlds largest leading mining company and the worlds largest producer of nickel and palladium. The investment climate in Russia is less or more positive, but it could be better. There are two major issues. The first is the foreign business community believes that the Russian government should be much more active with respect to significant improvement in infrastructure. For example, to finally solve the problem of Russian roads. The improvement of the local airport system. This is absolutely crucial to developing the Russian economy on a sustainable basis. And part of the infrastructure program should include the Russian government giving the private sector, both Russian and American, financial incentives to invest a lot of money into improving infrastructure. There is certainly corruption in Russia. It is a serious obstacle to significant economic growth.  The issue of the court system in general, not only with respect to corruption, but in terms of the effectiveness of the court system, can make a serious problem in Russia for business. There have been significant improvements in some areas of the judicial system, but there is still much more improvement required. And it would be a major stimulus to foreign investment and Russian investment if people felt when they went to court they would be getting a fair decision (Smarzynska B.). The major improvement could be a clarification of what the rules of investment are. For example, in the energy sector that is obviously a strategic sector for Russia. During the past two years it has become very confusing as to what extent can a foreign company invest in the energy sector. The Russian government is talking about putting limits on the ability of foreign companies to invest in certain oil sites in Russia. Conclusion To increase the number of the direct investments into Russian economy is possible by working out the state programme or the attracting the foreign investments. Taking into consideration the experience of other countries Russia should undertake the following: to create the active system of the advantages for the foreign investors in certain branches and regions; the strict separation of property between the federal and local authorities; creating the stable economical and international trade law, including the regulatory base concerning the concessions and production sharing; making amendments in the tax structure, taxation reducing; property land law; Creating the mechanism of insurance for the foreign investments. It is a pity to mention that nowadays not all of the actions can be completed. Though taking into consideration the competitiveness along with the other countries possible the situation can be improves very soon. References cited Arkin V.I. and Slasttnikov A.D.: Waiting to invest and tax exemptions. Working Paper WP/97/033.CEMI Russian Academy Sciences, 1997 Baldwin R. E., Ottaviano G. I. P. 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