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Category: Business | Posted By: Ivar Kim Røkke | Rating:
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Doing Business in
RUSSIA
Foreign Direct Investment



Author:
Ivar Kim Røkke
To receive a copy of the original document, please send an e-mail to ivarkim@gmail.com









We cannot enter into alliances
until we are acquainted with
the designs of our neighbours.
Sun Tzu, The Art of War.












EXECUTIVE SUMMARY

After examination of the market environment in Russia, this report concludes that the Russian government must make changes in her political and economic environment before Russia is able to attract significant amount of FDI.
Russia has since the fall of the Soviet Union tried to be a major player in the global economy, but in her transition to a free market economy, an overall federal FDI policy has been neglected. Thus, Russia has not been able to acquire state of art technology and capital that MNCs can bring with them to help her to make the transition faster and smoother.
During the first half of the 1990s, Russia had a large scale of economic liberalisation and deregulation at national level, with a privatisation process of her industry. Despite this process, still about 50% of the Russian industry is in public ownership, and there are still restrictions of foreign ownership and participation in many of her industrial sectors.
Russia has all the natural resources needed to attract significant FDI. However, foreign investors seem to be reluctant to invest in long-term relationship in the Russian market, due to obstacles as high tax burdens, and confusing and frequently changing tax laws. Withholding of taxes of profits and other incomes are also obstacles to FDI. Consequently, Russia has attracted small amounts of FDI, in relative and absolute terms comparing to other emerging markets. Thus, Russia has not been able to benefit from the dynamics that transnational corporations can create with FDI.
President Putin, however, has brought more stability in the political system of Russia, and a federal FDI policy is now one of the main tasks of the Russian government. Hence, Russia may be able to turn her economy in the future to become a major player in the global market.


ACKNOWLEDGEMENT

I want to thank two persons for valuable help in my writing of this report:
Neva Maxim, my supervisor, gave me constructive and helpful feedback on my work throughout the process about topics that should be included or more throughout researched, and about editorial issues.
Eskil Solberg, postgraduate MBA International. We have had several discussions about the Russian economy and environment, which were very useful for my research and writing. Mr Solberg also provided me with one of the translations into English of a Norwegian written report.


TABLE OF CONTENTS

1 INTRODUCTION 5
2 BACKGROUND: MARKET AND RESOURCES POTENTIAL 6
3 FDI 8
3.1 GLOBAL DETERMINANTS FOR INCREASED FDI 11
3.1.1 Economic liberalisation and deregulation at national level 12
3.1.2 Globalisation and integration of world economies 14
3.1.3 Formation of regional groupings 17
3.1.4 Role of international organisations 18
3.1.5 Dynamics of Transnational Corporations 20
3.1.6 Spread and development of key technologies 24
3.1.7 International movements of capital 26
3.1.8 Promotional activities of regional bodies 28
4 FDI 1992-2001 32
4.1 FDI BY INDUSTRIAL SECTOR 37
4.2 FDI FROM GEOGRAPHICAL ORIGIN 39
5 CONCLUSION 41
6 BIBLIOGRAPHY 43
6.1 REFERENCES 43
6.2 RESOURCES 45
7 APPENDIX I: MAPS 46
8 APPENDIX II: TABLES OF FDI 47
TABLE 1 FDI IN RUSSIA, 1992-2001 47
TABLE 2 FDI IN RUSSIA�S MAJOR �COMPETITOR� COUNTRIES 47
TABLE 3 FDI INFLOW: RUSSIA BY INDUSTRY, 1998-2000 48
TABLE 4 FDI INWARD STOCK: RUSSIA BY INDUSTRY, 1998-2000 49
TABLE 5 FDI INFLOW TO RUSSIA BY GEOGRAPHICAL ORIGIN, 1998-2000 50
TABLE 6 FDI INWARD STOCK IN RUSSIA BY GEOGRAPHICAL ORIGIN, 1998-2000 51
9 APPENDIX III: TABLES OF BILATERAL TREATIES 52
TABLE 7 BILATERAL TREATIES FOR THE PROTECTION AND PROMOTION OF INVESTMENTS 52
TABLE 8 BILATERAL TREATIES FOR THE AVOIDANCE OF DOUBLE TAXATION 52
10 APPENDIX IV: FOREIGN TNCS IN RUSSIA 53
TABLE 9 LARGEST AFFILIATES OF FOREIGN TNCS IN RUSSIA, 1999 53
11 APPENDIX V: COUNTRY RISK EUROPE 55
TABLE 10 BMI RISK RATINGS FOR EUROPE AS OF 23 APRIL 2003 55
12 APPENDIX VI: LIST OF ACRONYMS 57
13 APPENDIX VII: TRANSLATIONS AND EXPLANATIONS 58


1 Introduction
The focus on foreign direct investment (FDI) has become central in the global economy the last couple of decades, and inter-country competition to attract FDI has become intense among those countries, which want to exploit the opportunities FDI can bring in a globalising world (see for example Fischer, 2000). This report examines FDI in Russia after the collapse of the Soviet Union in 1991.
The world FDI outflow was US$14,141 million in 1970, US$62,163 million in 1985, and it has surged from the mid 1980s during the 1990s and FDI outflow reached its peak in 2000, amounted to US$1,379,493 million (UNCTAD, 2002). Thus, countries attractive for FDI have the opportunity to gain advantages from a significant pool of foreign capital.
Multinational companies (MNCs), however, are facing both opportunities and obstacles when they are considering where to place FDI. Opportunities can arise when foreign economies provide new markets and factors of production (e.g. labour, resources, capital, and technology), and when MNCs are facing a saturated domestic market. The lack of legal institutions and law enforcement, infrastructure, and supportive government economic policies can be major obstacles to how attractive a country is for FDI.
The level of organised crime and corruption within a country can be of importance when MNCs decide where to invest. Social factors such as cultural dimensions, motivation, and leadership are also important for a MNC to have knowledge about when it operates a foreign affiliate. This report, however, will not focus on these factors.
Russia faces a new and great challenge to become an attractive market for FDI during her transition to a free market economy. The report will first examine the opportunities Russia provides MNCs from her large market potential and base of resources. Then, the report will address Russia�s earlier and contemporary situation of attracting FDI. Fischer�s (2000) �Global determinants for increased FDI� will be used as a framework to highlight how successful Russia has been in her process with her FDI policy during her transition throughout the 1990s into the new millennium. Finally, the report will analyse the FDI inflow to Russia, compared with other relevant countries, which industrial sector in the Russian market that has been most attractive to MNCs, and which countries that has been the largest contributors of FDI in Russia.
2 Background: Market and Resources Potential
Russia is a country in transition from centrally planned socialist economy towards a free market economy and democracy. The vast country, which runs from the Barents Sea in the West to the Pacific Ocean in the Russian Far East and covers 17 million sq km, is an interesting market for foreign investors and gives access to a large market of approximately 150 million consumers (Fischer, 2000, p. 1; Jeffries, 2002, p. 1). Russians are traditionally well educated and labour is inexpensive compared with Western standards (Bradshaw, 2002, p. 33). Further, the Commonwealth of Independent States (CIS) gives access to another 140 million potential customers (Fischer, 2000, p. 1).
CIS emerged December 1991 with the fall of USSR (Worden, 1996a), where the Russian Federation is the central player among the other 11 members from the newly independent states (NIS) (Fischer, 2000, p. 1). The members of CIS agreed 15 April 1994 to create a free trade area (FTA) between their countries, and the FTA is meant to be a transition to a later custom union (BSR, n.d.) . The process has been slow, and Pravda.ru (2003a) quotes Russia�s President Vladimir Putin on 23 January 2003 that �[t]he formation of a free trade zone on the territory of the CIS �has practically been completed��.
Since the process took 9 years to complete, it may be a while before the CIS becomes a custom union. The FTA agreement, however, is according to the principles of the World Trade Organization (WTO) (BSR, n.d.). Thus, foreign investors in Russia (or other CIS states) can look at the CIS region as one large market.
Russia is a large emerging market (LEM) (Fischer, 2000, p. 356) with also a big source of natural resources:
� Enormous fossil reserves of oil, coal of varying quality (Ferguson, 2003a) and the world�s largest supplier of gas (Fischer, 2000, p. 1);
� The world�s second biggest underground reserves of gold and a substantial diamond base (Ferguson, 2003a);
� Major reserves of metals (Fischer, 2000, p. 1; Jeffries, 2002, p. 1);
� A wide range of minerals as uranium, boron, lithium and beryllium used in the nuclear industry and other minerals, e.g. mica, salt, boron etc. (Ferguson, 2003a), and in summary, Russia is the world�s largest supplier of minerals (Fischer, 2000, p. 1);
� Many large rivers, which are present and potential hydro electrical resources for cheap electricity, especially a competitive advantage in aluminium production (Ferguson, 2003a).
These resources represent all materials required for a modern industrialised market economy. In addition, Russia has the �potential to . . . become a major producer of food products, consumer goods, chemicals and plastics, and machinery, if increased investment leads to renovation and innovation in its industry� (Fischer, 2000, p. 1).
Despite of these abundant resources, the inexpensive labour force and the large market of CIS, Russia has not been able to attract significant foreign direct investment (FDI), neither in absolute form, nor relative to other post-socialistic Central and Eastern European states in transition (e.g. Czech Republic, Hungary and Poland) and other LEMs (e.g. China, India and Mexico).
3 FDI
The Russian government has a big challenge to its political and economic environment to become attractive for foreign investors. The main difference between portfolio investment and FDI is that FDI implies a long-term relationship by a Transnational Company (TNC) in a foreign market, whereas portfolio investment is more short-term speculations of profit maximisation in the share market (Fischer, 2000, p. 550). The characterisation of FDI is that the TNCs want to pursue decision rights or full control in a joint venture or a subsidiary, and the equity share is usually 10% or more to be recorded as FDI (UNCTAD, 2003; Fischer, 2000, p. 550). The trend in volatile markets with high risk is that investors tend to invest more in liquid assets as portfolio ventures, where the assets can be withdrawn faster than in the case of more fixed assets as in FDI (Fischer, 2000, p. 5).
With companies facing saturated home markets in Europe (Fischer, 2000, p. 1) and a global FDI inflow in 2001 of US$735 billion (UNCTAD, 2002), Russia faces a big source of money that can help her economy in the transition, if she can attract TNCs to invest in Russia rather than in other markets. It is also in the interest of the completely global community that the Russian economy and industry are becoming competitive, because the global market will be supplied with more goods and services, and positive development can cause a pull effect on CIS and Eastern European countries and bring stabilisation to the region (Fischer, 2000, p. 4). Furthermore, access to new knowledge and state of art technology can modernise Russian factories and reduce their pollution of the environment.
The Russian Federation has an old and inefficient industry (Bradshaw, 2000, p. 1), and the need for state of art technology and new management systems in the industrial restructuring is significant to become competitive in the international arena (Fischer, 2000, p. 2). To be able to gain access to such resources, Russia faces the need for substantial financial inputs and effective micro- and macroeconomic development. Financial inflow to the economy can be achieved by international aid, loans from global organizations (e.g. IMF and the World Bank) and FDI. FDI, however, makes Russia less dependent than monetary input from institutions like the IMF. Despite that, loans and aid are good for the economy, they are of short-term importance, because the loans come with the obligation to repay later and international aid is correlated with the policy of the donors. Conversely, significant FDI inflow shows confidence in the economy, with the necessary legal property and fiscal legislations and law enforcement agencies to make a safe economic investment environment.
There has been a generally misunderstanding within Russia of the potential advantages of FDI. Prospective foreign investors have been met by local bureaucrats who are unschooled in the driving factors of an efficient market economy due to the legacy of communism. There is still a suspicious attitude among communist party members in the Duma and public officials towards Western participation in investment generally and the development and exploitation of natural resources in particular (Jones, Fallon & Golov, 2000, pp. 191-92).
The taxation and legal infrastructures have been volatile in the first decade of transition to market economy and thus discouraged foreign investors. The tax system has changed frequently, and federal and local governments have levied too many taxes relative to Western practise. Another problem faced by foreign investors is the stiff penalties for underpayment of tax, which has been imposed even for the slightest errors in a firm�s accounts. The tax penalties have been as large as two or three times the actual tax liabilities. Corrupt tax inspectors have been able to manipulate these penalties, which especially domestic industry oligarchs have made advantage of, making foreign investors less competitive in the Russian market. Normal deductible business expenses in Western economies such as interest payments, business trips, and advertising have been restricted in Russia. Foreign investors have also faced problems with malfunctioning legal and bureaucratic processes in the industrial sector, and there has been a lack of legal frameworks to protect shareholders rights (Jones, Fallon & Golov, 2000, pp. 192-93). Part 3.1 will examine more throughout obstacles and improvements in Russia for FDI.
Russia can gain competitive advantage with her rich base of resources, close ties to the big market of other CIS countries and the geo-strategic placement with common borders to the large markets of Europe and Asia, if she is able to modernise and develop an effective industry. According to Fischer (2000, pp. 2-3, 14), FDI compared with other forms of funding can help Russia with her transition to market economy in several ways:
� FDI gives access to capital, technological and managerial skills with synergy effects from diversity and different know how. Foreign investors also give a way in to other markets;
� FDI can stimulate growth in manufacturing, which can lead to a �pull effect on agriculture [and] push effect on services�. Economic growth encourages competition, which is an essence of a free market economy, and that may help developing small and medium-sized enterprises (SMEs);
� FDI contributes to more stability in the socioeconomic area (or stability in the socioeconomic area attracts more FDI (author�s comment)). The reason is that opposed to other types of foreign investments (e.g. portfolio investments) that can be rapid withdrawn and hurt the whole economy, which was the case of the economic crises of 1998;
� FDI means more assets in the market, and that increases tax revenue and deposits in the banking system. Both can enhance finance for new and existing projects.
In addition, FDI can help Russia realise her potential as a value-added exporter (Fischer, 2000, p. 3), instead of today�s situation where most of the export is raw materials (EMM, 2003, p. 13). When confidence is established in the Russian market, flight capital amounted to about US$150 billion in foreign accounts and real estate, and which is growing today with US$1-2 billion per month (Bradshaw, 2002, p. 34), may be returning and the monthly sum decreased or stopped, which will further stimulate the domestic economy.
3.1 Global determinants for increased FDI
Russia has a legacy of 58 years of centrally planned economy and closed borders from Stalin in December 1929 declared an end of the New Economic Policy (NEP) until 1987, when perestroika liberalised the economy (Jeffries, 2002, p. 110; Worden, 1996a). That is, Russia was closed to foreign investment from non-socialist states until nearly the end of the Soviet Union.
Under Party Secretary-General, Mikhail Gorbachev, the Council of Ministers opened Soviet Union for foreign investment on 1 January 1987 (Jeffries, 2002, p. 110) with his introduction of perestroika. Foreign companies, however, were restricted to an ownership of 49% equity in joint ventures. After the fall of the USSR 1-11 December 1991, the Russian Federation opened up for a more free FDI policy, and the new Foreign Investment Law (FIL) of 4 July 1991 equalised the rights of domestical and foreign investments (Worden, 1996b; Fischer, 2000, p. 328). The FIL of 1991 was replaced with the new FIL of 9 July 1999 (Fischer, 2000, pp. 328-329).
A country�s ability to attract FDI is correlated with factors such as global context of economic and technological change, its generally industry and industrial competitiveness, macro- and microeconomic conditions, TNCs willingness to invest abroad and more besides (Fischer 2000, p. 51). Research has revealed several global determinants for increased FDI, and according to Fischer (2000, p. 52) the eight most important factors are as illustrated in Figure 3.1.
Figure 3.1 Global determinants for increased FDI

Source: Fischer, 2000, p. 52
3.1.1 Economic liberalisation and deregulation at national level
Research suggests those countries with overregulated economies (e.g. state monopolies, centrally planned economy and other kind of strong interference of the state in the economy) and many trade barriers lead to isolation and stagnation. These countries are not very attractive for FDI, if FDI is allowed at all, comparing to deregulated economies with a strong private sector (Fischer, 2000, p. 54; Taguirbekov, 2002).
An enterprise is according to definition privatised if more than 50% of the shares are in private ownership (see Jeffries, 2002, pp. 118-154 for more details about the privatisation process in the non-agricultural sector). Privatisation in the non-agricultural sector started in the second half of 1992. Shares in small and large-scale enterprises were allowed in private ownership, both by Russian inhabitants and foreigners. Privatisation was banned, however, for some areas as the Central Bank of the Russian Federation (CBR), military property, radio and television centres, and mineral and water resources. Other areas including weapons, fuel and energy complex, machinery for the nuclear power industry, news agencies, corporations in rail, air and water transport, all enterprises with a dominant position in federal or local markets and those with more than 10,000 employees, commercial banking, and production of alcoholic beverage required special permission for privatisation (Jeffries, 2002, pp. 120-121).
Small-scale enterprises are the ones that are easiest to privatise and in Russia, municipal governments mostly owned them. Thus, the privatisation was mainly decentralised, and by the end of 1992, a large share of this sector of the economy was the property of private interests. Of the small-scale enterprises that were privatised, workers collectives had a share of 60%, other corporations had 27%, and individual interests controlled 13%. By the mid 1994, 77% of personal services, 75% of retail trade, and 66% of catering were in private ownership (Jeffries, 2002, p. 120). Overall, at that time, private investors owned more than 50% of all small-scale enterprises and institutions (see Table 3.1).
Table 3.1 Privatisation of Russian enterprises
1992 1993 1994 �
Privatised small scale enterprises (%) - - �50
Privatised medium and large scale enterprises (%) 0.12 35 � 41
Total no. of privatised enterprises 46,815 89,000 102,000
Source: Adapted from Jeffries, 2002, pp. 120-123; Kim & Yelkina, 2003, pp 15, 20.
� Mid 1994
� October 1993
The privatisation process in the medium and large enterprises sector was very rapid (see Table 3.1). Out of then roughly 14,500 medium and large enterprises, the industrial output of the private sector accounted for only 6.7% in the period January to October 1992, and as of December 1992, 0.12% of the industry was privatised. By the end of October 1993, however, about 35% of the medium and large enterprises were privatised. By the end of the mass privatisation program (mid 1994), approximately 82% of workers in the medium and large industrial enterprises were employed in private sector, and 41% were privatised (Jeffries, 2002, pp. 122-123; Kim, & Yelkina, 2003, p. 15).
Overall, by the end of September 1995, privatised firms in the total industrial sector accounted 77.2% and produced 88.3% of the industry�s output, and by the end of 1995, the number of privatised firms exceeded 122,000 out of 240,000 enterprises (Jeffries, 2002, p. 123; Kim, & Yelkina, 2003, p. 15).
Table 3.2 illustrates the private sector as a percentage of GDP ratio as rough mid year estimates. The large increase of the ratio in the first half of the 1990s is due to the rapid privatisation of small-scale enterprises in 1992, following with the slower privatisation process in the medium and large industry sector. GDP and industrial output increased with an annual average about 32.9% and 30.8% respectively in the period 1997-2000 (CBR, 2003). Thus, the stabilisation of the ratio in this period suggests that the industrial output in the private sector increased relatively more than the public sector�s output.
Table 3.2 Private sector as a percentage of GDP
Mid Year 1992 1993 1994 1995 1996 1997 1998 1999 2000
Private sector as a percentage of GDP 25 40 50 55 60 70 70 70 70
Source: Adapted from Jeffries, 2002, pp. 123-124
It is, however, important to mark that by the end of the 1990s; still about 50% of the Russian industry was state owned (Jeffries, 2002, p. 122), and that during 1993-1997 foreign investors contributed only US$2.6 billion on annual average as FDI in the privatisation process.
3.1.2 Globalisation and integration of world economies
Today�s business world is becoming more and more integrated with increased world trade, TNCs� expansion, and new information technologies that make the transfer of communication and money instant. There exist several trade theories with different theses, but the common factor for all of them is that the societies as a whole benefit from free or freer trade. Despite of several interest groupings (e.g. Attac and Greenpeace) are against globalisation, analysts expect that the integration of the world economies is most likely to continue through a combination of foreign trade, bilateral and multilateral agreements, and FDI by TNCs. To stay competitive in the world market, it is necessary to gain advantage from domestic as well as from foreign factors of production, managerial know how, state of art technologies, and capital resources (Fischer, 2000, p. 56).
Thus, it is important for Russia to participate in the globalisation without loosing the manoeuvring capacity of her government. The policymakers have to take the global challenge seriously, and join forces with other countries and trading blocs to supervise cross border activities and TNCs� information and capital networks (Fischer, 2000, p. 56; Taguirbekov, 2002).
Russia is eager to participate in world trade, and has made bilateral treaties for the protection and promotion of investments with 54 different countries (see Table 7, Appendix III), and bilateral treaties for the avoidance of double taxation with 32 nations (see Table 8, Appendix III). Several of the taxation treaties from before the fall of the Soviet Union are renegotiated later, which demonstrates that Russia understands the necessity to change treaties in step with the transition towards market economy.
Russia has succeeded by liberalise foreign trade to integrate her economy with the global market. In 1997, Russia was the second most integrated LEM after China, and her world export and world import accounted 1.6% and 1.2% respectively (Fischer, 2000, p. 280). After the Russian economic crises of 1998, however, this position has been taken by Mexico (see Figure 3.2). As Figure 3.2 illustrates, Russia has recovered in the export sector but not in the import sector after her economic shake down.

Figure 3.2 Foreign trade for selected countries, 2001

Source: Adapted from UNCTAD, 2002
A positive element for the Russian economy is that export accounted to 5%-6% of GDP during the Soviet era, but in 1997, it was about 20% (Fischer, 2000, p. 280), and in 2001, the ratio had increased to about 33%. Comparing with the data of 2001 for the U.S., Germany and China, the export accounted for about 7%, 30% and 23% of GDP respectively (UNCTAD, 2002; Economist.com, 2002).
Russia has had a trade surplus every year since 1991 (UNCTAD, 2002; CBR, 2003). The trade surplus, however, is a consequence of Russia becoming a major world supplier of raw materials, which are exposed to significant price volatilities on the global market (e.g. natural gas, oil, metal products, minerals and gemstones) (Fischer, 2000, p. 281). A decrease in the spot prices make Russia�s economy very vulnerable, which can change the trade surplus to a trade deficit and makes the economy more unstable and less attractive to FDI. In the category of value-added goods, Russia has a trade deficit, because she does not meet international standards of quality. Thus, other CIS countries import most of Russia�s exports of food and equipment (Fischer, 2000, p. 281); indicating that Russia lacks the necessary inflow of state of art technology and managerial know how, which can come in the wake of FDI and TNCs� expansions. Structural problems within industries, however, can be barriers to adopting new technology.
3.1.3 Formation of regional groupings
The creation of trading blocs has been the trend in the globalisation process in the last decades. The European Union (EU), the North American Free Trade Association (NAFTA), the CIS, the Association of South-East Asian Nations (ASEAN), and the proposed FTA between Australia and the US are examples of existing and intended regional economic integrations. Regional groupings are formed with the idea to integrate further the member nations� economies, to fortify the negotiating power in relation to non-member countries and other trading blocs, and reduce transaction costs, tariff and non-tariff barriers. Membership of a regional grouping implies adherence to formal legislations and frameworks adopted within the bloc. Thus more integrated, thus more important it is that the member countries converges their monetary policies and legislations (i.e. the five steps: FTA to political union). The goal is to stimulate economic growth, and develop better trade and investment infrastructure between the members. Hence, the trading blocs hope this improved relationship will create employment and attract more FDI from third countries (Fischer, 2000, p. 57).
Russia was a precursor for the formation of CIS, and as mentioned in part 2, she has the central role in this trading bloc (Fischer, 2000, p. 1).
The Asian Pacific Cooperation forum (APEC) was established in 1990 from an initiative from Australia . APEC consists today of 21 member countries (including strong economies such as the U.S., Japan and China), and their common GDP accounts for about half of the world�s total, they have a share of 47% of world trade, and contribute for most of the global economic growth (APEC, 2003). Russia became an APEC member in 2000, backed up by Japan (Ferguson, 2003b), which can be a good improvement in the not so good Russo-Japanese relation. The aim for APEC is to increase trade and liberalise trade barriers, and hence stimulate development and economic growth of the Pacific nations (APEC, 2003). There has also been proposed a future free trade and investment area by 2010 for developed members and by 2020 for developing countries, which would transfer the Pacific Rim to the world�s largest trading bloc (Fischer, 2000, p. 63; Hill, 2003, p. 248).
The common internal monetary and judicial framework within the CIS may not be sufficient with Western standards to attract more FDI inflow to Russia. However, if APEC reaches its goals, the diversity of member countries will most likely assure standards that are not barriers to FDI. Thus, Russia�s adjustment to APEC criterions will create a better FDI environment in the Russian market.
3.1.4 Role of international organisations
It is not easy to develop, get acceptance and respect, and ensure enforcement of multilateral rules among interdependent economies at different stages of economic development. Thus, there are still few multilateral agreements governing global FDI. International organisations such as the Organisation for Economic Cooperation and Development (OECD) and the WTO, however, play a significant role for making global investment standards. These organisations work towards the goal of free trade and reducing of discrimination of foreign investments to enhance and stimulate world trade (Fischer, 2000, p. 63), and they have a negotiation advantage, due to their role in global trade and economic development, to lobby governments to accept new agreements.
Russia, as a member of the OECD, has an obligation to follow certain standards and develop new legislations that make the investment environment within Russia more attractive for foreign investors.
A Russian entry into WTO will better ensure that trade will be subjected to international rules and regulations, and the volatility in the political and legal environment will decrease. This development will decrease the risk of operating in the country. There are, however, different political opinions of Russia's speed and way of adjustment to WTO. Despite mixed signals from the government, the negotiations with WTO should be concluded by the end of 2003 (Norwegian Trade Council, 2003). However, the formal framework established to regulate FDI in Russia by the government is already in accordance with the standards of the WTO (Maurseth, 1997, p. 61).
Further, United Nations Industrial Development Organization (UNIDO) is an international organisation that promotes industrial development in developing countries and in increasingly scale in the transition economies of Eastern Europe. UNIDO has established Investment Promotion Services (IPS) in selected countries. The IPS are connected on-line with UNIDO departments in the major industrialised countries, and they serves as an intermediaries between potential investors in developed nations, and developing and transition economies. Even a political agency such as the Organisation for Security and Cooperation in Europe (OSCE) has started to emphasise FDI as an important element in economic development and regional cooperation (Fischer, 2000, pp. 66-67).
Several multilateral organisations such as International Finance Corporation (IFC), an organisation of the World Bank Group, and European Bank for Reconstruction and Development provide venture capital and finance feasible projects for corporations investing in transition economies (Fischer, 2000, p. 66).
Since Russia joined the G7 meeting for the first time 10 July 1994, represented by former president Yeltsin, as a full participant in the political talks, but not yet in the economic discussions (Jeffries, 2002, p. 478), Russia has been eager to be a fully acknowledged member. With joining of the G7 (G8 after Russia joined) in 1997, Russia further shows that she want to be a major contributor to the globalisation process (G8, 2003).
3.1.5 Dynamics of Transnational Corporations
TNCs are the main source of cross-border movements of factors of production, such as capital, technology, and managerial skills. Thus, they have become essential as representatives of technological transformation and global economic growth. TNCs control about 80% of private international technological competence and account for a comparable share of world trade (Fischer, 2000, p. 67).
Table 9 (Appendix IV) provides a list of the largest affiliates of foreign TNCs in Russia. As the table illustrates, the majority of foreign TNCs have directed their FDI into sectors as finance, oil, telecommunication, and motor vehicle manufacturing. These sectors are looked upon as important for economic development and growth within a country.
The ownership and establishment structure for foreign investors are regulated by government bodies and legislations in several different ways:
� Wholly- or partially-owned enterprises through sole proprietorships;
� Partnerships;
� Branches;
� Limited liability companies (OOO);
� Privately held closed joint-share companies (ZAO);
� Publicly held opened joint-stock companies (OAO);
� Acquisition of shares in state securities or in existing businesses (UNCTAD, 2003, p. 1).
Foreign investors are also allowed to acquire wholly or partially businesses through the privatisation process, but foreign ownership may be limited in certain specific sectors (see part 3.1.1 for further details about limitations in different sectors). The Moscow Registration Chamber and the State Registration Chamber are the government bodies that make the approval of incorporation of an entity (UNCTAD, 2003, p. 1). For some special cases, preceding approval has to be obtained from the Ministry of Finance and maybe from other departments:
� Ventures with foreign participation of over 50 per cent;
� Investments exceeding 50 million roubles;
� Exploitation of natural resources;
� Investments in insurance and telecommunication services (UNCTAD, 2003, p. 1).
In addition, the CBR licences, regulates, and supervises all the activities in the banking sector (UNCTAD, 2003, p. 1).
TNCs can provide a host country with needed capital, technology, and management skills that are essential to the economic growth and development within the country. A TNC, however, does not invest in a country just because that country needs its knowledge and capital. Certain criteria have to be in place before a TNC makes the move and invest abroad. The selections of investment locations are based upon factors such as the strategic intentions in relations to global competitors and consumers in a long-term basis to maximise shareholders value. In such a context, a large market potential and pool of skilled labour, and abundance of natural resources can be overridden by high political risk (Fischer, 2000, p. 68). Table 10 (Appendix V) provides a risk rating of European countries, divided in four categories: (i) a composite rating; (ii) a political rating; (iii) an economy rating; (iv) and a business environment rating. The political rating and the economy rating are divided into short-term and long-term. �The long-term ratings are designed to reflect more structural considerations and will not change greatly in the short-term. The short-term ratings will change frequently in response to more transient influences� (BMI, 2003).
The long-term political and economy ratings and the business environment rating are below those of both the global averages and the averages for emerging markets, and far below the values for the developed countries in Europe. This suggests that it is still higher risk to invest in Russia than in many other emerging economies. The large gap between short-term and long-term ratings for political and economic risk can be explained with, firstly that President Putin has brought increased political stability to Russia, and that he has been elected for a second term is positive in the short-term. It is also considered that pro-presidential parties are going to do well in the December 14 2003 parliamentary elections. Secondly, Russia has recovered relatively well after the economic crisis of 1998, but that is mainly due to a strong oil sector. The strong dependence of the oil sector in the Russian economy makes her vulnerable to a large drop in the oil price, which may be the trend since the war in Iraq is over (BMI, 2003).
Germany�s former chancellor Helmut Schmidt stated in a speech in Moscow June 24 2003 that Russia�s lack of a legal system is a major obstacle for the West to do business in Russia (Interfax, 2003) . Russia�s Prime Minister Mikhail Kasyanov explains the improvement in the judicial framework has been hampered by excessive administrative pressure and pressure exercised by law enforcement agencies, which has complicated the task of improving Russia�s investment climate (Interfax, 2002).
According to OECD (2002, p. 2), Russia has recently a number of positive development trends in the insurance sector. As of 1 April 2002, 54 out of 1366 insurance companies in Russia have foreign participants. A working and effective insurance sector is important to attract FDI, because it reduces the risk of operating in a foreign country. Despite of the positive development of this sector, Russia faces some challenges to be sufficient for the average global investor:
� Low purchasing power of the population
� Prevention by legal persons of the expansion of new lines of insurance
� Absence of reliable investment rules; deficiency of insurance legislation
� Imperfection of methods of carrying out the insurance supervision of all players in the insurance market
� Non-transparency of the insurance market and very low capitalization of the overwhelming majority of the insurers. In particular, only 5% of the total (OECD, 2002, p. 2).
Some of the primary objectives for the OECD and Russia are to improve further the investment policy, the development and implementation of measures for the establishment of a favourable investment climate in the country, and a broadening of the range of investment instruments available for insurers. These improvements can be done with �the introduction and development of mandatory lines of insurance, in particular the following: motor third party insurance, insurance of failures and damage resulting from human error and relating to dangerous industrial objects, insurance of buildings and constructions against fire and natural disasters, insurance against serious injury during the displacement of dangerous cargoes. The development of voluntary personal insurance. Priority should be given to conventional lines of life and pension insurance� (OECD, 2002, pp. 2-3).
Private foreign investors that fear that they will be exposed for discriminatory practices by the Russian government can seek protection for individual projects that are insured and implemented under the auspices of the Multilateral Investment Guarantee Agency (MIGA), another organisation of the World Bank Group. MIGA insures FDI against political risk in the host country (e.g. inability to repatriate profits from the host country; government expropriation without compensation; firms that have been wrongfully denied access to the host country�s legal system; or in summary, insurance under MIGA covers against injustice by a host country) (Fischer, 2000, pp.63 & 67).
Other insurances are also covered by bilateral treaties for the protection and promotion of investments between Russia and the agreeing countries. Russia has signed such treaties with several countries, including such major economies as Japan, Germany, France, United Kingdom, Canada, and the U.S. (see Table 7, Appendix III for a complete list).
3.1.6 Spread and development of key technologies
Rapid development in the technology sector the last decades has been essential in accelerating business exchange. Advancement in communication and transport technologies has enabled the ability of free movement and decreased cost of people, services, goods, capital, and information. The internet is still a relatively new phenomenon that is not yet been exploited to its fully potential; internet has changed the way information is distributed and it has the potential to revolutionise for example commerce, marketing, and cooperation between Research and Development (R&D) centres across and within countries. Economic liberalisation and deregulation at national level, integration of economic and financial markets, and new technologies are together important parts in the increasing competition among countries. It is easier to attract new technology and thus FDI if a country enjoys a certain level of technology and R&D, because TNCs are interested to gain beyond the positive effects of new market potentials and factors of production, and synergy effects from own and new expertise (Fischer, 2000, p. 72; Taguirbekov, 2002).
The importance of R&D in Western advanced economies has been emphasised by both the respective governments and corporations. In industrialised countries, governments have been supplying about one-third of the total national GDP, and the rest has been funded by semiprivate and private structures. In Russia, however, public resources have provided almost all the expenses to R&D (Fischer, 2000, p. 72).
Table 3.3 illustrates R&D expenses in some major economies together with some data about number of scientists and students in those countries. While Russia has a relative high number of scientists and students, she does not spend as much on R&D as the more advanced economies.
Table 3.3 R&D expenses by major economies, 1996
Total R&D expenses
(US$ bn) Per capita
R&D expenses
(US$ bn) Share in GDP (%) Number of scientists per 10,000 inhabitants Number of students per 10,000 inhabitants
United States 149.2 593 2.77 76 258
Japan 67.0 542 3.07 91 155
Germany 32.3 511 2.81 59 147
Russia, 1996 9.6 64 0.78 93 186
Russia, 2000 - 73 1.07 - -
Switzerland 3.8 567 2.86 40 99
Source: Adapted from Jeffries, 2000, p. 72; TEK, 2002, pp. 3 & 7.
R&D expenses per capita are far below the other major economies in the table. Despite that the R&D share in the GDP has increased from 1996 to 2000, Russia still has place for improvements.
The two major problems Russia faces in her science sector are firstly the �old� pool of scientists, with an average age above 50 years old. Secondly, the low payment and expected incentives make recruitment of young people difficult. In addition, a large share of R&D is engaged in the military sector, and R&D institutes are independent and operate autonomously (Burger, 2001).
Improvements to make Russia as a significant player in the high tech industry can be done by relocating some of the R&D resources that are used in the military sector, coordinate research-centres, and by offering better opportunities for researchers and specialists. Such improvements will further attract more R&D capacity from TNCs in high tech industries (Fischer, 2000, p. 73; Taguirbekov, 2002; Burger, 2001).
3.1.7 International movements of capital
The most important factor for TNCs decision to make FDI in a foreign country is finance. Thus, access to liquid domestic and international financial markets are crucial in the global FDI structure. A country�s long-term stability in the financial sector and the performance of its industry (share prices, technology level, and access to information) are deciding elements when TNCs choose investment locations abroad (Fischer, 2000, p. 74).
The trend in the 1990s is that cross-border capital flow has been liberalised at domestic level with removal of capital restrictions, and the annual turnover on the foreign exchange (FOREX) market has grown to account for much bigger volumes than world trade and production. The FOREX market operates at a 24-hour basis some place in the world, and private banks and other financial institutions (e.g. investment brokers and security houses) provide TNCs with issuing securities and funding. Hence, TNCs are able to access capital at the most profitable rates, and in fact, some corporations such as Toyota and Siemens generate more turnover through financial transactions than their products make. Thus, an economic environment of active financial markets, effective stock exchanges, and liquid credit institutions are essential for global business activities (Fischer, 2000, pp. 74-75; Taguirbekov, 2002).
The FIL of 1991 guaranties foreign investors national treatment and it authorises free transfer of profit, investment capital, and other income in foreign currency. Prior approval, however, is needed from the CBR for capital operations (UNCTAD, 2003, p. 1).
After Russia had to apply the other G8 nations and the IMF for a bailout after the Russian financial crisis in 1998, she came under the restrictions of IMF�s 31 Articles. After accepting Article VIII of the IMF, the country started to deregulate the financial market, liberalize the foreign exchange transactions and financial capital flows . Table 9 (Appendix IV) illustrates that eleven and three of the largest affiliates operating in Russia are in the banking sector and the insurance sector, respectively. Russia also has bilateral treaties for the avoidance of double taxation with several countries (see Table 8, Appendix III). These factors are positive in attracting more FDI.
Following the mass privatisation scheme of 1992-94, several stock exchanges and over-the-counter securities markets were established to serve the private capital market. Russia, however, has not yet been able to create a financial structure able to serve a modern economy. To modernise the industry, it is necessary to develop institutions and instruments, and a reliable legal and regulatory framework, which gives confidence to domestic savings that can be channelled into long-term investments such as FDI. However, the majority of small investors lack confidence in the Russian banking and securities market, resulting in that the financial market is not sufficiently liquid (Fischer, 2000, pp. 520-21). Consequently, Russian banks have been rated low by Western rating agencies. Sberbank has been rated by Fitch IBCA to have a current long-term credit rating of BB� and Standard & Poor have rated Impexbank to CCC� /C, with positive outlook, and they are the two largest branch networks in Russia (Belkina, 2003) . These ratings mean that borrowing in Russia is more expensive with higher risk premiums than countries with better ratings, which makes Russia�s development more expensive and slower and less attractive for FDI.
3.1.8 Promotional activities of regional bodies
National governments have the key-role in territorial and security-related issues, and macroeconomic policies. While it is in the overall interest of the national governments to promote, attract, and make FDI interesting within a country, regional authorities demand, and are usually allowed to have a greater right of decision when the FDI has a local impact. TNCs interested in investing in a specific regional market in federally organised countries such as Russia, Germany, and the United States have to get approval from the local authorities. Negotiations can be about restructuring local enterprises, environmental and labour regulations, project-related taxation, and possible incentives such as tax concessions and direct contributions. In some instances, if the FDI is of strategic importance, preliminary negotiations are made with the central government. The major advantage of including regional bodies is that regional authorities know the local industry best and they are more committed, because they are the first ones to feel the impact if their region fail to integrate in a modern economy (Fischer, 2000, p. 70).
It is common that regional bodies in economies that are able to attract significant amount of FDI inflow run their own promotion centres in other countries. For example, the largest recipient of global FDI, the United States, has promotion bureaus in Western Europe and Japan, which have been very successful in attracting foreign investors and TNCs to direct FDI to the United States. Some oblasts in Russia have seen the advantage of promotion centres, and they have established information and FDI promotion bureaus in major Western countries, in particular in Germany (Fischer, 2000, pp. 70-71; Taguirbekov, 2002). The trend has been that FDI has been directed by TNCs mainly to Moscow and the Moscow oblast. However, promotion together with investor-friendly administrations in the oblasts of Novgorod, St Petersburg, and Leningrad have been producing results, and in the recent years, more FDI has been directed to these regions to the expense of the heavy-handed and rigid Moscow administration (Fischer, 2000, p. 71; Bradshaw, 2000, p. 2).
Despite the importance of regional involvement in FDI promotions, the overall structure of FDI policies should be assigned to the central government since �they involve policy decisions and the support of national structure for representing the country abroad (e.g. embassies, chambers of commerce)� (Fischer, 2000, p. 71). As will be discussed in part 4, Russia has not been very successful in attracting FDI. The major problem has been that Russia has lacked a targeted FDI policy at national level. Thus, it has also been difficult for regional bodies to attract a significant level of FDI (Fischer, 2000, p. 71; Taguirbekov, 2002).
FDI is promoted and coordinated by the Foreign Investment Promotion Centre (FIPC), which is a department of the Ministry of Economy (MOE). FIPC provides information and consultation to foreign investors and Russian organisations on investments opportunities, helps identifying potential joint venture partners for foreign investors and implementation of investment projects (fipc.ru, 1995; UNCTAD, 2003, p. 1). The MOE has also opened several promotion centres in major Western cities to back up the role of the FIPC (Fischer, 2000, p. 535). The FIPC, however, has not been very successful in its task due to several factors:
� The foreign promotion centres are understaffed, and thus they are not able to follow up on projects with potential investors;
� Foreign companies find the FIPC insufficient and bureaucratic, since it is not an independent federal agency with administrative independence. Thus, the FIPC is not recognised by TNCs as an established and credible institution;
� The majority of TNCs do not know that the FIPC exists, and foreign investors are losing time trying to locate the appropriate department among the many existing organisations, agencies, and offices involved in the resolving of FDI issues at federal and regional level;
� The FIPC has been focusing on mediation rather than proactive promotion and implementation of investment projects;
� The FIPC does not provide advisory services at enterprise level;
� Systematic promotion and information campaigns have not been carried out since Russia has lacked a targeted FDI policy at national level;
� Poor research and data gathering have resulted in late supply of strategic information to potential investors (Fischer, 2000, p. 535).
The FIPC also operates with two websites and it may be necessary to navigate both to gain the information wanted, which can be confusing and time-consuming . The most recent FDI information on the new website�s �Monthly FDI news bulletin� is from January 2001. In addition, the author�s attempt on 26 May 2003 to subscribe to the FIPC�s online services, �How to start business consulting�, has still not received any answer by 25 August 2003, which together with the understaffing problem mentioned above suggest that FIPC is not an effective promoter of FDI in Russia.
There is, however, progress in the area of a targeting FDI policy at national level. The Russian government as one of the most important economic tasks now considers the development of an attractive FDI environment in Russia. The development of new legislations together with the bilateral treaties for the protection and promotion of investments, mentioned in part 3.1.2 and 3.1.5, and intergovernmental agreements on avoidance of double taxation, mentioned in part 3.1.2 and 3.1.7, are meant to improve the investment climate in Russia . The new legislations consist of four blocs of laws in the areas: (i) taxes; (ii) structural changes; (iii) labour relations; (iv) and court reform. The adoption and implementation of these laws are aimed to stabilise the rules of games in the Russian market (Yacheistova, 2001, p. 11).
The major share of the work on improvement of investment climate is made under the auspices of the Consultative Council on Foreign Investments (CCFI), which now integrates the main foreign investors into the Russian economy. President Putin and the Prime Minister Mikhail Kasyanov personally take part in the meetings of the CCFI. Regular direct dialog is taking place between Russian politicians and foreign investors through the CCFI (Yacheistova, 2001, p. 11).
To stimulate FDI further, performance requirements are not imposed on foreign investors and TNCs by law. Performance requirements, however, may be included in the operational contracts of large TNCs in production sharing agreements and natural resources exploitation. New tax legislation came into operation from April 1999, and reduced corporate tax profits to 30% from 35%. The tax is divided into an 11% federal tax and a 19% regional tax, and from January 2001, municipal governments can grant exemption from the latter one (UNCTAD, 2003, p. 1).
Russian subsidiaries of foreign MNCs have to withhold taxes at a rate of 15% on dividends and interests paid to non-residents, and 20% on non-resident incomes such as royalties, service payments, and management fees (RBCC, 1999). Withholding taxes are an obstacle for FDI, but these withholding taxes may be reduced or the tax eliminated altogether for the countries under the provisions of the double taxation treaties mentioned above between Russia and the respective countries. As an example, Cyprus has been a popular place for MNCs to register when operating in Russia. The Russian subsidiary directs it capital flow to Cyprus, where the MNC is able to redirect the flow to a tax haven where it also is registered, such as the Cayman Islands, which has zero tax. However, only large MNCs are able to undertake this hedging approach.
The misuse of oligarchs mentioned in part 3 of avoiding taxes and tax penalties also seems to have become of a concern for the Russian government, together with generally concerns about the oligarchs� power in the Russian Economy. Russian oil giant Yukos, one of the leading companies in Russian oil industry, is under scrutiny by several Russian federal departments as of March 2003. In the wake of the imprisonment of the Minister of Finance, Platon Lebedev, accused for fraud, Yukos has become in the focus of the Ministry for Nature, the Russian Anti-Monopoly Ministry, and the Ministry of Finance for violations of environmental regulations, price conspiracy with other Russian oil companies, and underpaid taxes (Pravda.ru, 2003b). The persecution of Yukos suggests that President Putin has started to show action about his proclaimed fight against corruption and organised crime at high levels in the Russian economy.
Finally, as mentioned in part 3.1.4, the foreign economic legislation is now also modernized in accordance with WTO rules (Maurseth, 1997, p. 61), which suggests that Russia is aware that she has to improve her FDI policy, and that she is willing to do it, in order to become a modern industrialised economy.
4 FDI 1992-2001
There exist several sources of statistics about FDI in Russia, and the values can differ from each other. For example, Goskomstat shows lower values for Russia before 1996 and significantly higher values from 1997 than United Nations Conference on Trade and Development (UNCTAD) does. The values for 2000 differs 39%, but they are overall not of significant magnitude (see UNCTAD, 2002 and Bradshaw, 2002, pp. 35-36 for comparison). The differences after 1996 can be explained with that Goskomstat uses repatriated flight capital from Cyprus to calculate FDI, which represents as a major conduit for such money returning to Russia. Another explanation can be that the accumulated data are recorded over different time periods (Bradshaw, 2002, p. 34-35), which may lead to that the exchange rates used to calculate various currencies to US dollar can differ.
In the first three years of the Russian Federation (1992-1994), the FDI annual average inflow was US$867 million and the inflow per capita was only US$5, US$8, and US$5 for these three years respectively (see Table 1, Appendix II). The total inward FDI stock in 1994 was US$3.2 billion . Compared with the Czech Republic and Hungary, which had total inbound FDI in 1994 of US$4.5 billion and US$7.1 billion, and a inflow per capita of US$84 and US$112 respectively (see Table 2, Appendix II).
Russia attracted significant more FDI in 1995, and the inflow amounted US$2.1 billion, an increase of nearly 200% from 1994, and the inflow per capita raised to US$14 (see Table 1). FDI was 14% of the total inflow to Central and Eastern Europe (UNCTAD, 2002), and the leading Central European countries (Hungary, Poland and Czech Republic) attracted a bigger share than Russia did (see Table 1 & 2). The primary receiver of FDI in Central Asia, Kazakhstan, attracted in 1995 US$984 million (see Table 2). With its approximately 16.8 million inhabitants that year (UN, 2002), this was however 3.5 times more per capita (i.e. US$59) than in Russia (see Table 1 & 2).
In 1996, Russia faced an increase in the FDI inflow of 25%, up to US$2.6 billion (0.67% of global FDI inflow (UNCTAD, 2002)), and slightly higher than Hungary (US$2.3 billion) for the first time, but Hungary still had an inflow per head (US$224) 13 times more than Russia (US$17) (see Table 1 & 2).

Table 4.1 FDI in major LEMs, 1996
Country FDI inflow, US$ mn Share of total Global FDI inflow, % FDI inflow per capita, US$ Increase in FDI inflow from 1995, %
Russia 2,579 0.67 17 25
China 40,180 10.40 33 12
Mexico 9,938 2.57 107 4
Malaysia 7,296 1.89 357 25
India 2,525 0.65 3 17
Source: Adapted from UNCTAD, 2002
Table 4.1 illustrates the situation in 1996 for major LEMs: (i) China, the world�s second largest recipient after United States (Fischer, pp. 96-97; UNCTAD, 2002), attracted US$40.2 billion, a share of 10.4% of global FDI inflows and accounted US$33 per capita; (ii) Mexico and Malaysia drew US$9.9 billion and US$7.3 billion respectively (2.6% and 1.9% of global FDI inflow), and the inflow per person was US$107 and US$357 (6.3 and 21 times more than Russia); (iii) India was the only country of Russia�s major FDI competitor LEMs that attracted less global FDI, both in total inflow (US$2.5 billion) and inflow per capita (US$3).
1997 was the peak year in Russia for FDI. Goskomstat reported FDI inflow of US$5.3 billion (Bradshaw, 2002, p. 35), whilst the same data from UNCTAD (2002) was US$4.9 billion. More important than the difference in the values is that FDI inflow per capita increased with 94% to US$33 (see Table 1). This volume, however, is still a too low level for upgrading Russia�s industrial competitiveness (Fischer, 2000, p. 454), but it looked like Russia was on the right track. According to Fischer (2000, p. 454), a desirable level is an annually FDI inflow per capita of US$60-70.
The Asian and Russian economic crisis of 1998, however, stopped this positive growth. FDI inflow declined from the last year with 43% to US$2.8 billion and the value per capita was now US$19, slightly above the situation in 1996 (see Table 1). Mexico was affected of the financial crisis as well, and had an inflow of US$11.9 billion (down 15% from 1997), but recovered relatively fast. After two years, Mexico received more FDI than before the crisis and the inflow was more than twice as much in 2001 (US$24.7) than in 1998 (see Table 2).
Malaysia, one of Russia�s three major competitor LEMs felt the economy shakedown hardest, with a decline in the FDI inflow of 57% (down to US$2.7 billion). After the improvement in 1999 and 2000, Malaysia faced once again a large cut in FDI. The inflow was in 2001 down to US$554 million and the inflow per capita accounted only US$24 (see Table 2). India�s FDI inflow diminished in 1998 with 27% (down to US$2.6 billion) from the last year, but it has had a growth again from 2000. The inflow in 2001 was, however, still below the level before 1998 and the inflow per capita was still the lowest among the competing LEMs, and it was only US$3 (see Table 2). China was the LEM that was less affected by the financial crisis. FDI inflow was only 1% smaller in 1998 than in 1997, with a new decline in 1999 of 8% (down to US$40.3 billion). China has had a growth from then, and the inflow in 2001 (US$46.8 billion) was above the level before the crisis (see Table 2).
Kazakhstan felt the financial crises as well, and had a reduced FDI inflow in 1998 comparing to the last year of roughly the same percentage (41%) as Russia faced. With an inflow of US$1.2 billion, Kazakhstan was, however still the largest Central Asian recipient of global FDI. The inflow in 1998 to 2000 was almost steady, but had a large jump in 2001 to US$2.8 billion, an inflow of 31% more than in 1997 (see Table 2).
The three major recipients of FDI inflow in Central Europe (Poland, Czech Republic & Hungary) where not affected by the Asian and Russian economic crisis of 1998. Hungary had a small decline, however, but this trend started in 1996 and continued to the end of the millennium. Poland and the Czech Republic had a large growth to US$6.4 billion and US$3.7 billion respectively (an increase from 1997 of 30% and 184%) (see Table 2). Thus, the Czech Republic out-competed Russia in both FDI inflow and total inward stock, and inflow per capita (US$361) was 19 times that of the Russian Federation (US$19) and it actually reached a bigger volume than Germany (US$ 300) (see Table 1 & 2; UNCTAD, 2002).
Russia has struggled to recover the FDI level it had before the financial crisis. Annual average FDI inflow in 1998-2001 was US$2.8 billion and the value for 2001 accounted to US$2.5 billion, which is the same volume as in 1995 (see Table 1). Russia has a share of 9.3% of the total FDI inflow to the Central and Eastern European region in 2001, and she is the third biggest recipient after Czech Republic (18.1%) and Poland (32.5%) (UNCTAD, 2002). Among her major competitors as recipient of FDI, only Hungary (US$2.4 billion) and Malaysia (US$554 million) received less than Russia (US$2.5 billion), but their inflow per capita was still larger (see Table 1 & 2). China and Mexico was the significant largest recipients of FDI, and the inflow was 6.4% and 3.4% of global inflow, whilst Russiaâ�&#



 

 

 
 

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