A Comparative Analysis of Investment Climate is in Countries the CIS - Assignment Example

ABSTRACT The commonwealth independent of state (CIS) was founded in 1991 after the dissolution of the Soviet Union. Commonwealth of Independent States was established by independent nations after signing a treaty at Minsk, Belarus, on Dec. 8, 1991, by the heads of state of three nations namely Ukraine, Russia and Belarus. They were later joined by Moldova, Azerbaijan, Armenia, Kazakhstan, Tajikistan, Turkmenistan, Georgia, Uzbekistan and Kyrgyzstan. Its headquarters are in Minsk (Dragneva, 65). The organization was formed as the successor to the USSR in its role of coordinating the foreign and economic policies of its member nations (Dragneva, 70). The treaty recognized current borders and each republic's independence, sovereignty, and equality, and established a free-market zone embracing the republics' interdependent economies and a joint defense force for member countries. CIS at first convened only a council of the heads of state of its members, but in 1992 it convened a council of heads of government and a council of foreign ministers (Dragneva, 100). Keywords Organization, investment, capital flows, international market, privatization. Introduction Since all Commonwealth Independent States have common problems inherent from Soviet Union, the formation of the organization helped them to address the problem individual as well as an organization (Shiells & Sattar, 68). With one voice in the international world, commonwealth independent of states has witness several nation injecting capital in flows in their vast oil, gas, uranium and other mineral resources in member states. Countries like China and United States of America and organization like NATO, European Union etc. have been at forefront in advancing investments in these members’ states for the purpose of exploiting them (Shiells & Sattar, 70). According to Shiells and Sattar, most commonwealth independent states have similar problems because of geopolitical and geographical location of the area (98). Since most of the countries were states within Soviet Union their market was state planned and the forces of market could not control the market forces. This meant that many countries did not have access to foreign investment leaving Russia as the only country that provide investments to member states before collapse of Soviet Union. The state had monopoly power on international trade and it also controls direct foreign investments (Shiells & Sattar, 100). 1.1 Problems of integration and way of creation of compatible and complex legislation on adjusting of foreign investments in CIS countries. The commonwealth independent states had had a weak and an undefined foreign trade regulations, foreign exchange and in flow of foreign capital to members state. This resulted in decrease of trade between the commonwealth independent states (Dragneva, 110). This can only be achieved through different institutions in Commonwealth Independent States. This institution includes taxation bodies and different legislation organization that formulate rules and regulation that guide foreign investments (Shiells & Sattar, 100). Dragneva points out that even though in some countries the rules and regulations on foreign capital flows are more liberal than the former Soviet Union; this regulation is not the same across the member countries (120). For instance, in Belaraus, Turkmenistan and Uzbekistan there is state control of production, restriction on convertibility of local currency and capital flows in these countries. On other hand, some countries like Kyrgyzstan, Georgia and Moldova are members of the World Trade Organizations which allow wider freedom in international trade and capital flows in these countries (Dragneva, 121). Nonetheless, geographic location of a country and its neighbor has also been shown to affect the process of foreign investments. Access to international market can easily speed direct foreign investments and lack of it can hinder foreign investments. A country like Kyrgyzstan which was the first a member of World Trade Organization within the CIS countries could not reap maximum benefits in form, increase in trade flows and attraction of foreign investments because of protection policy of neighboring countries like Uzbekistan and Kazakhstan and restriction of transit Kyrgyz goods imposed by these countries which adversely affect this country as far as foreign investments is concerned (Dragneva, 121). Most foreign investors find it hard to operate in this environment just because the neighboring country does not allow goods to move via there countries without some additional cost imposed on them. According to Batra, Kaufman and Stone, a country like Armenia is one of the poorest in commonwealth independent states because is a landlocked country and unfriendly neighboring countries (200). Batra, Kaufman and Stone points out that Armenia was involved in military conflict with Azerbaijan and the border between the countries is closed for trade and therefore it does not attract foreign investments in those countries (201). The country is not in good terms with Turkey which is considered most developed member in the region after the massacre of Armenian by Turks in early 1910s. This means that the trades between the countries most go via a third country in this case Georgia. This hinders foreign investor mainly from EU country like Turkey to Armenia. Armenia is also a landlocked country and its imports and exports must pass through Port Poti of Georgia (Batra, Kaufman & Stone, 201) Roger points out that bad institution and bad corporate governance can also affect foreign investments because it doe not favorable and level ground to all investors (78). Corruption has been cited as the most common issue which affects the foreign investments in CIS countries. Due to the weakness and corruption of custom regulation, import level can be higher and the tariff collection can be low (Roger, 80). Weak and corrupt institutions can also hinder direct foreign investment in their countries even in the most attractive and profitable sectors like manufacturing and mining. Besides bad institutions and governance, small domestic market can also hinder direct foreign investments. This can also be compounded by the high cost of export. This means investor will likely to reap less income from their investment thereby shunning away from particular country in Commonwealth Independent states (Roger, 93) 1.2 Integration of countries under CIS as way of creation of stable investment climate and bringing in of foreign investments As most of the countries of former Soviet Union formed commonwealth independent states of nation to retain their close ties and their geographical position in the world, they also want to break ties from their master Russia and maintain their independence. The integration of the CIS helped the countries to be identified in the international world as well as having higher bargaining power. The vast of CIS countries have different resources like natural resources, cheap skilled labor or semi skilled labor and physical infrastructure which promote resource-seeking activities. The region is endowed with mineral like gas, oil, uranium etc., agricultural products and raw materials. Investment in these countries only takes place if there is no technical skill to extract the natural resources or how they can access international market for the purpose of selling it. Therefore the host country needs various infrastructures to get the raw material to it destination market as well as out of the country. Because some of the countries are landlocked, the integration of countries under the umbrella of Commonwealth Independent States helps the countries to get their raw material to sea port for international market (Roger, 96). In addition, labor seeking investment is usually predominant in service industry as well as manufacturing sector with high labor cost therefore force this countries to look for labor in low labor cost. This labor mobility within member states enables direct foreign investments to high labor cost because they can get the required cheap labor from member states. Because integration legislation tender to favor member states citizen can easily move to other member countries without much restrictions. Most investor also tends to investor in countries or region where they can ready market for their products. Due to this factor integration has helped commonwealth independent states because the investor are assured of their goods can easily reached the required market there meeting their targets and expectations. It also entails market size, per capita income and the market growth (Dragneva, 150) 1.3 Legal adjusting of foreign investments, order of permission of spores in bilateral agreements on encouragement and mutual defense of foreign investments. The commonwealth independent states can be grouped into three cases. The case one is Goergia, Kyrgyz, and Moldova (Dragneva, 152). These countries are members of world trade organization. The second case and which most countries belong consist of countries that have applied for membership and they are still negotiating for accession terms it include Armenia, Azerbaijan, Belarus, Kazakhstan, Russia, Ukraine and Uzbekistan. While the last case consists of countries that have not applied that have not applied for world trade organization membership. It includes Turkmenistan and Tajikistani. Once a country has acceded to world trade organization, a country will have an opportunity to extract trade concessions that may seem impossible in bilateral agreements. Therefore WTO accession provides greater opportunity to extract concession from commonwealth independent states/ this is evident where there major trade imbalance in economic position between the trading companies (Dragneva, 155). Bilateral trade agreement between countries of commonwealth independent states has been on the rise since the collapse of USSR. Almost all CIS countries have signed bilateral trade agreement with each other. These agreements are aimed at providing advantageous terms and conditions for trade and economic co-operation between the countries involved. The agreements tend abolish restrictive trading practices and enhancing free trade area on imports and exports. Besides signing bilateral trade agreements among themselves, commonwealth Independent States have also signed numerous bilateral trade agreements with other third party countries like European Union, Iran, China and United States of America. The signing of these agreements has increased their involvement in world trade organization as well as enhancing trade between member states (Batra, Kaufman & Stone, 2011). Because the CIS has remained essentially a regional forum, progress toward the integration of its member nations has tended to take place outside the organization. In 1996, Belarus signed a treaty with Russia to coordinate their defense and foreign policy apparatus and to eliminate trade restrictions and eventually unite their currencies. Individual sovereignty is to be maintained, but they created supranational bodies to effect these changes. The two nations have since signed several follow-up agreements, but actual progress toward integration has been slow. They, Kazakhstan (which has a large Russian community), and Kyrgyzstan additionally agreed to pursue economic integration without customs restrictions. Tajikistan later joined the customs union, which became the Eurasian Economic Community (EurAsEC) in 2000. Several other CIS members are EurAsEC observers. In 2003, Belarus, Kazakhstan, Russia, and Ukraine agreed to form a Single Economic Space; the treaty was ratified the following year. Meanwhile, concerns over Russian domination of the CIS prompted Georgia, Ukraine, Azerbaijan, and Moldova to establish a loose international association; from 1999 to 2005 Uzbekistan also was a member. The commonwealth independent of states has made an attempted to enhance trade by forming regional trade agreements. Most of its members have officially applied for accession of world trade organization their enhancing a close integration into global market. One of the main reasons to join World Trade organization is to strengthen trade leverage over the other commonwealth independent states trading partners that remained outside the world trade organization (Batra, Kaufman & Stone, 201). 1.4 Legal adjusting of foreign investments. 1.4.1 Order of permission of spores in the legislation of states-participants the CIS In order to attract large direct investments both domestic and foreign, several legal laws and legislations have been put in place. Many commonwealth independent states have begun massive privatization of state own corporation like telecommunication sector which has lead to increase in foreign investment (Dragneva, 180). By passing privatization although with much opposition several countries have been able to realize an increase in foreign investments. This is because it enhances competition as well encourages capital in flow from outside the world. Privatization also increase performance of this cooperation’s as well as increase in service delivery. In addition to massive privatization, most commonwealth independent states have also embarked on legislation that fights corruption in various government authorities. Previously corruption made it difficult for penetration of foreign investments because unworthy tender are won by investor after offering large amount of bribes in required authorizes. By setting up this institution with investor confidence it increase in flow of capital in this country as it offers favorable climate for investors. Besides, many countries in commonwealth independent states have set free export zone in their respective countries (Roger, 154). This zone enables different investors to invest in this zone as they enjoy tax holiday enabling them to compete with goods and services from other countries. Besides attracting investors, the countries have modernized and improved infrastructure in this zone thereby enabling investor to move their products to required market with ease (Shiells & Sattar, 220) The countries within the organizations have also embarked on ensuring security within their respective countries, this has resulted in increase in foreign investments as it offers favorable environment in this country as well as ensuring there is free trade. This stability and democratic space has also enhanced many investors investing in natural resources like gas and oil which required huge capital outlay (Shiells & Sattar, 220). 1.4.2 Adjusting of investment activity in Uzbekistan After dissolution of Soviet Union, the government of Uzbekistan has been gearing for gradual change from state planned economy to market based economy. Event though the goal has not been fully realized as it used to eliminate the gap between black market and official exchange rate by introducing convertible currency. It salient protection policy and restrictive trade practices continues to have negative impact on foreign investments as it does not offer conducive climate for investments (Kaufmann & Stone, 233). However, much has to be done in terms of providing conducive and better investment climate that will encourage direct investment, freeing agricultural sectors from state control and strengthening of its monetary policy especially in banking sector. Besides, constant conflict with its neighbors like Kazakhstan, Kyrgyzstan and Tajikistan has led closure of its border with these neighboring countries. This has lead to decrease in direct foreign investment as it doesn’t offer favorable environment for doing business in this country (Kaufmann & Stone, 169) The government of Uzbekistan has been working closely with other development partners to address its problem. One the organization is the International Monetary Fund which has helped the country to address the problem of inflation. Agriculture and manufacturing are the main sectors in this country as there several natural mineral resources like gold, copper, natural gas and oil. Also the country produces enough quantity of cotton (Kaufmann & Stone, 240). However, foreign investment in Uzbekistan is needed for short term economic development as the country tries to plan for long term economic development using it vast and valuable natural resources. To stimulate and attract foreign direct investments, several legislations have been put in place since 1991 to provide tax incentives and guarantee against expropriation (Roger, 173) Uzbekistan's investment climate remains among the least favorable in the Commonwealth Independent States, with only Belarus and Turkmenistan ranking lower than it. This unfavorable investment climate has caused foreign direct investment to decline. Uzbekistan's traditional trade partners are the CIS countries, notably Russia, Ukraine, and Kazakhstan, which in aggregate account for over 40% of its exports and imports. Non-CIS partners have been increasing in importance in recent years, with Turkey, China, Iran, South Korea, United States, and the EU being the most active. As of 2006, Russia remains the main foreign trade partner for Uzbekistan (Dragneva, 231). Many small and medium-size western businesses have begun freezing their investments or pulling out. This is because investors have complained that once the required bribes are paid and an investment is guaranteed, officials begin delaying, lengthening, and altering procedures so much that making a profit is often impossible thereby shunning away from the country. Besides corruption, the country's lack of currency convertibility, despite many promising opportunities, reduced foreign investment to a low level (Shiells & Sattar, 241). All in all Uzbekistan mostly finds itself in a crossroad with an aim of controlling trade through protecting domestic market as well as encouraging foreign investors. In addition Russia has great influence on economy and investments opportunities in that country there hindering other prospective investors from investing ACKNOWLEDGEMENTS I would like to appreciate the authors of the sources that I used to get materials for this article. Especially Kaufmann & Stone in their book, Investment climate around the world: voices of the firms from world business environmental survey. Their information provided detail information on the investment in Uzbekistan and detail information on how CIS countries came together. Thanks also to various members of the school as well as my colleagues for their invaluable inputs. REFERENCES Batra,G., Kaufmann, D., & Stone, A.H. Investment climate around the world: voices of the firms from world business environmental survey. San Francisco: Wiley & Sons, 2011 Dragneva, R. Investor Protection in the CIS: legal reforms and harmonization. Brussels: Martinus Nijhoff, 2004 Roger, P. World economic Outlook: building institutions. New York: International Monetary Fund, 2005 Shiells, C.R., & Sattar. The low income countries of the Commonwealth Independent States: progress and challenges in transition. New York: Cengage Learning, 2004 Read More