FDI IN RUSSIA

R-11

• 1991 • Dissolution of Soviet Union• Boris Yeltsin elected President of Russia

• State-controlled economy into a market-oriented economy• Used shock therapy

• Policies chosen : (1) Liberalization (2) Stabilization (3) Privatization

1. Liberalization: foreign trade, prices, and currency, allowing foreign imports into the Russian marketHyperinflation : due to monetary overhang and was short of revenue and printed money to finance its debt

2. Stabilization : raised interest rates, massive cuts in state welfare spending, raised heavy new taxes

Privatization

• Well-placed bosses and technocrats in the Communist Party: liquidated the assets of their organization and secreted the proceeds in overseas accounts and investments , Open banks & business and take contract at a low prices

• Few young people: saw opportunity in the economic and legal confusion of the transition, trading of natural resources and foreign currencies, as well as imports of highly demanded consumer goods and then domestic production of their rudimentary substitutes

• Privatization of state enterprises

• Use privatization to spread ownership of shares in former state enterprises as widely as possible to create political support for his government and his reforms

• Free vouchers• Yield the government a much-needed infusion of cash

for its operating needs• “Loans for shares“: Stock shares in some of its most

desirable enterprises, such as energy, telecommunications, and metallurgical firms, as collateral for bank loans

• Limit the number of banks bidding for shares and thus to keep the auction prices extremely low

Obstacles to capitalist reform in Russia

• 1980s , gross economic output to the defense sector, at least half of the workforce was employed in defense plants, The end of the Cold War and the cutback in military spending hit such plants very hard

• Many local governments were entirely dependent on the economic health of a single employer; production in the whole country dropped by more than fifty percent

• Large industrial firms, were traditionally responsible for a broad range of social welfare functions

The crises of 1998

• Asian financial crisis in July 1997, • Decline in world commodity prices• Oil, natural gas, metals, and timber account

for more than 80% of Russian exports• Disastrous fall in the value of the currency• Massive tax evasion unable to service the

massive loans it had received

• In an effort to prop up the currency and stem the flight of capital, Kiriyenko hiked interest rates to 150% in order to attract buyers for government bonds

• IMF approved a $22.6 billion emergency loan• Despite the bailout, Russia's

monthly interest payments > monthly tax revenues

• Investors flee Russia despite the IMF bailout

The crises of 1998

Recovery

• Oil prices rapidly rose during 1999–2000.• Domestic industries such as food processing

benefited from the devaluation, caused a steep increase in the prices of imported goods.

• Russia's economy was operating on barter and other non-monetary instruments of exchange, the financial collapse had less impact on many producers.

GAZPROM

• Largest extractor of natural gas in the world and the largest Russian company

• Company produced 549.7 billion cubic metres (BCM) of natural gas(17% of the worldwide gas production) company also produced 32 million tons of oil and 10.9 million tons of gas condensate

• Gazprom's accounted for 10% of Russia's GDP in 2008

• Gazprom began to be privatized, becoming a joint-stock company.

• Stake controlled by the Russian Federation 50.002 %.• ADR holders 22.150 %.• Other registered persons and entities 27.848 %.• Crude oil production comes mostly through the

subsidiary Gazprom Neft, which was previously called Sibneft. Gazprom bought 75% of the company's shares in 2005 for $13.1 billion.

GAZPROM

GAZPROM

• Gazprom receives about 60% of its revenues from its sales to European customers.

• Russia's 2ND largest gas company Novatek, use Gazprom's facilities for transmission and processing.

• Western Europe at the prices 4.7 times higher then those for Russian consumers.

Price disputes

• Russia-Ukraine gas dispute Ceased the supply of gas to the Ukrainian market,

Ask to pay increase price acc to global increase• Russia-Belarus energy dispute Belarus undertook to pay $100 per 1,000 cubic

metre in 2007. The agreement also allowed Gazprom to purchase 50% of the shares in Beltransgaz, the Belarusian pipeline network

FDI IN RUSSIA

• Russia ranked among the largest FDI recipients since 2006• In 2008 inward FDI amounted to more than USD $73 billion while USD $52.6 billion was invested by Russian businesses abroad, including CIS countries

Industries in which FDI Invests

Countries Invested in

Russia 2008

Russian FDI Advantages

• Large natural resources• liberalization and deregulation of business activities• Stable and predictable legal environment• Improved corporate and public governance• Removal of international capital and foreign trade restrictions• Reduction of corruption• Investment incentives• Minimization of political risks• Declining unemployment rate• Rising per capita income• Increase in foreign exchange reserves• International Standards of Corporate Responsibilities

Russian FDI Limitations• Inefficiency of the government to enforce rules and regulations• Strengthening of the state control• FDI in 42 sectors are now required to get special authorizations from the

government officials• Strengthened the managerial control and ownership• Over such strategically important sectors as oil, gas, energy,

transportation, banking, forestry• Financial crisis• Downturn in Russian economy• Changes in energy prices• Public financing capacities• Labor shortage• Lack of specific skills

Investments to come

• Coca-Cola, which plans to invest USD $1.2 billion in next 3-5 years

• McDonalds, which announced plans to invest USD $120 million in 40 new restaurants

• Wal-Mart Inc., and other companies (Aervitz, 2009)

• In addition, the city of Sochi, Russia, which is located in Krasnodar region, was elected as a host city for the 2014 Winter Olympics