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16 May 2003

The largest FDI project in the Russian Federation since 1991 is materializing with British Petroleum´s recently announced acquisition of a 50% stake in a new petroleum firm. The exceptional size of this investment -- $6.5 billion - would give a major boost to the country´s hitherto sluggish FDI inflows. With its technological capabilities and labour skills, Russia possesses sizeable untapped FDI potential to become an international engineering hub, UNCTAD says. But realizing that potential and sustaining investor interest will depend largely on whether foreign investors will be allowed to acquire equity shares or even ownership of local firms.

The BP deal augurs well for would-be foreign investors in the country´s natural resources, where foreign ownership is not usually permitted. The new joint venture will combine Tyumen Oil Company, Russia´s fourth largest petroleum firm, with its affiliate Sidanco, of which BP previously owned 25%. The amount of the deal is more than twice as high as the average total inflows of the previous three years (2000-2002), and 33% more than the previous FDI peak of 1997 (see figure 1 below and the World Investment Directory web pages).

Russia hosts a number of FDI projects, with inward FDI stock exceeding $20 billion in 2001. But inflows plummeted during the country´s 1998 financial crisis and did not recover the following four years. Furthermore, in 2001 and 2002, outflows exceeded inflows. This unusual net-capital-exporting status meant that far fewer financial resources were available precisely when they were most needed to modernize the production system.

Historically, investors have been drawn to Russia in search of three main assets: natural resources, new markets and efficiency. According to UNCTAD the country´s natural resources, particularly fuel and petrochemicals, hold considerable potential for foreign direct investment, as long as foreign investors are allowed to take equity shares and are not confined to production sharing or other contractual arrangements that block their participation in ownership (see figure 2).

This potential for attracting natural resource-seeking projects is reflected in the geographical distribution of Russia´s inward FDI stock. With 14%, the Far Eastern Sakhalin region is the second most important recipient of FDI, behind the Moscow area (44%) and well ahead of Saint Petersburg (8%). Sakhalin´s unusually high share is due to the fact that foreign investors are allowed to take ownership in natural gas and oil extraction in the region.

Market-seeking investments have focused primarily on food (Cadbury, Mars, Stollwerck), beverages (Baltika Brewery, Efes Brewery), tobacco (Philip Morris, Liggett), and telecommunications (Cyprus-based Mustcom Consortium´s investment in Svyazivest and Deutsche Telekom´s participation in mobile phone provider MTS). The scope for such investments, however, has been limited by the low purchasing power of the Russian population, as reflected in the GDP-per-capita level. Following the concentration of population, most market-seeking projects are located in or around the capital, Moscow. St. Petersburg, the second largest city, is host to fewer large FDI projects (Baltika Brewery, a Philip Morris affiliate).

Recently the country has attracted more technology-based, efficiency-type projects, mostly in the automobile industry (Volvo Truck´s assembly project in the Moscow region, General Motors´s export-oriented joint venture with AvtoVAZ to produce off-road vehicles, and Renault´s car manufacturing project in Moscow).

Prospects for the different types of inflows are related to a variety of factors. As mentioned above, the country´s ability to attract natural resource-seeking FDI depends largely on the government´s willingness to allow some form of foreign ownership, on the one hand, and on the willingness of the local (private) owners of Russian companies to accept foreigners as minority, or eventually majority, shareholders, on the other. In market-seeking investment, prospects depend mostly on how quickly the national economy recovers and what impact that has on the population´s income. Improvements in the general business environment and in such industries as pharmaceuticals, and progress in intellectual property protection, can also have an effect.

The country´s greatest untapped potential lies in efficiency-seeking FDI. With its technological capabilities and labour skills, Russia could become a major international engineering hub. Under exclusively local ownership, however, most of its industries have failed to link up with technology and knowledge flows in the world economy. Changing that situation will depend partly on the success of measures aimed at improving the business environment, the stability of the economy and the rule of law. But such measures may in themselves prove inadequate under a scenario of intense global competition for FDI projects, in which case the country would also need to upgrade its investment promotion efforts, including the liberalization of FDI and the provision of targeted incentives. If that happens, Russia could multiply its inward FDI stock within a relatively short period of time. National investment profiles are being published online as they become available based on each country´s reporting schedules. The profiles, which are part of UNCTAD´s World Investment Directory, provide quick electronic access to the latest statistics on foreign direct investment (FDI) and the operations of transnational corporations (TNCs). They include statistical definitions and sources, a listing of relevant national laws and regulations, information on bilateral and multilateral agreements and a bibliography.

For more information, please contact:
Press Office
T: +41 22 907 5828
E: press@unctad.org
Mr. Kalman Kalotay
Division on International Trade in Goods and Services, and Commodities
T: +41 22 907 5099
E: kalman.kalotay@unctad.org.


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