Foreign direct investment (FDI) flows into the Russian Federation fell drastically last year, from US$6 billion in 1997 to US$2 billion, according to the most recent figures released today by UNCTAD (see figure 1). Over the same period, however, FDI inflows into other Central and Eastern European countries reached a new high, moving from US$13 billion to US$16 billion.
FDI into the Russian Federation fell back to its 1995 level, following the country’s general economic downturn and the drying up of privatization-related inflows. In 1997, the latter accounted for over one-third of total inflows; in 1998, there were practically none.
Another reason for the collapse lay in the nature of inward FDI: according to 1997 stock data, less than 16 per cent of inward FDI was prompted by efficiency-seeking motives. Foreign investors were attracted rather by the country’s natural resources and large domestic market, with a preference for mining (16 per cent), basic metallurgy (7 per cent), food production (9 per cent) and services (51 per cent). As only a small portion of inward FDI was efficiency-seeking, the Russian Federation’s capacity to transform its inward FDI into engines of export-led growth was limited.
In 1998, inward FDI to Central and Eastern Europe other than the Russia Federation was heavily dominated by investors from the European Union (72 per cent). The United States accounted for nine per cent. And the Russian Federation accounted for a mere one per cent of cross-border FDI to its other Central European neighbours (see table 1).
Grouping all countries together, FDI flows into Central and Eastern Europe as a whole in 1998 reached 96 per cent of their 1997 level. Their resilience, except in the Russian Federation, was striking when compared with the drop in portfolio and other investment flows: while FDI increased by 25 per cent compared with 1997, portfolio and other investment inflows declined by 40 per cent.
The Russian Federation, however, experienced a similar decline in FDI flows (65 per cent) as in portfolio and other investment inflows (75 per cent).
