GROUP 12

What is FDI ?
Definition : "Direct investment refers to investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor, the investor's purpose being to have an effective voice in the management of the enterprise." Type of FDI:

Greenfield Investment
Mergers and Acquisition

From investors point of view

Resource Seeking ( Natural or HR) Market seeking Efficiency seeking Strategic-asset seeking

From Host Countrys point of view

Improving quality of infrastructure Develop local skills, tech and local learning Ensure stable & conducive overall macro and regulatory environment 2

About Russia
The Russian Federation stretches across Eurasia from Eastern Europe to the Pacific coast. Even after the collapse of the Soviet Union, Russia remains the largest country in the world in terms of territory.

GDP:2.3 Trillion $ (6th) GDP growth:.4.3% (2011) Inflation:3.7% 24% increase in Foreign Trade Exchange Rate:1$=23.6 Ruble Labor Force:75.55 Million (Agr:10%,Industry:31.9%,Services:58.1% Unemployment Rate:6.3% (2012)

About Russia
Russia is the world's largest country in terms of territory Unique Geographic Position with worldwide sea routes and rail and road transits

Vast natural resources

32% of explored world reserves of natural gas (1st place) 35% world gas production and exports (1st place) 23% of explored world reserves of coal (1st place)

23% of world forest resources (1st place)

Technologically advanced research and production capabilities. A highly educated workforce, and world-renowned human capital A consumer market of approximately 143 million.

About 73% of the population lives in urban areas. 13 cities have a population of over 1 million

Case Study

Case Study
Five years after the launch of economic reforms in 1991 designed to transform Russia's lumbering state-directed economy into a modern market system, Russia was experiencing unprecedented capital flight. In 1996, some $22.3 billion left the country, most of it illegally. In contrast, a mere $2.2 billion in foreign investment flowed into the country.

According to data from the European Bank for Reconstruction and Development, between 1989 and 1996, foreigners invested just $5.3 billion in Russia, compared to foreign investment of about $11.5 billion in another much smaller former Communist state, Hungary.

Case Study
Complex & Changing Tax Code: Often at the expense of foreign companies. Weak and untested contract safeguards Endless regulations Favoritism: A playing field made uneven by trading and tax favors granted by the Russian government to Russian companies Manipulations: Privatization of several large-scale companies has seen the majority of stock sold to incumbent managers and employees for a fraction of the price the stock could fetch on the open market Foreign investors not allowed to bid for certain assets

Russia Needs Capital

To upgrade its crumbling infrastructure, which is suffering from years of neglect and mismanagement under communism
Russia has the largest oil and gas reserves in the world and it is finding it difficult to get these reserves out of the ground and to the international market Russian oil output plummeted after the collapse of the Soviet Union from 569 million tons in 1988 to 305 million tons in 1996. In an attempt to reverse this slide, the government of Boris Yeltsin in November 1997 announced that Russia's oil and gas industries were open to foreign investment. Among other things, the decree signed by Yeltsin allowed foreign investors to buy 100 percent of Russian oil companies.
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Case Study - Updates

Case Study Update

Fall of Soviet union in 1991 Transformation from socialism, central planning, government control to market determined prices & privatization undertaken by then President Boris Yeltsin Increased budget deficit: Amidst extraordinary political resistance by rent seekers, ranging from old state enterprise managers to novel oligarchs, Russia had an average budget deficit of 9 percent of GDP from 1993 until 1998. Financial Crash: The lasting excessive budget deficit inevitably caused Russia's horrendous financial crash in August 1998 with both a default on treasury bills and a huge devaluation. Half of Russia's banks went out of business. Many foresaw the end of Russia's market experiment.

Yeltsin Era 1991-1999 Economic slump and Political Turmoil under Yeltsins economic reforms

GDP contracted 54%, industrial activity reduced by 45%

Source: Russia Economic Survey ( US- Russia Business Council)

Putins Era 2000 to 2008

New era of political stability to push forward economic reforms (tax reforms, elimination of red tape, privatization of agricultural land) On average GDP growth rate of 6.5% since 2000

Source: Russia Economic Survey ( US- Russia Business Council)

FDI Inflow In Russia Foreign Direct Investment in Russia, USD billion

26.7

16.7 12.5 7.9 3.5 2002 2003 2004 2005

2006

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Summary
Russian economy has overcome crisis of 1998-99 Russia has paid off biggest share of foreign debt Reduce presence of Oligarchs in politics and consolidate energy sector with higher govt control As on date Russia is 4th largest FDI destination in Europe behind UK, France and Germany Number of FDI projects in Russia grew by 18%

Moscow is ranked 7th in top 10 cities for FDI in Europe enhanced by SEZ within the region, tax incentives, easy access to real estate and lower VAT on imports
Russia now enjoys The Four Fives: 5 percent unemployment, 5 percent inflation, a 5 percent current account surplus, and a 5 percent economic growth forecast for 2012. In addition, Russia enjoys foreign currency reserves of $500 billion. Real incomes for Russians are up 11 percent and retail sales are up 7 percent
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Question 1

What were the effects of Yeltsins economic reforms from socialism, central planning, government control to a market determined prices & privatization ?

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Yeltsins Economic Reforms - Reality

The crisis turned out to be a Blessing in Disguise. In effect Russia's financial crash completed the market transformation. 3 vital fiscal reforms undertaken Slashed Public Expenditure: As financing out of tax revenues was no longer available, the budget deficit had to be eliminated. From 1997 until 2000, the government slashed public expenditures by 14 percent of GDP and abolished subsidies

Reinforced central state power: The federal government could undertake a radical centralization by shifting revenues from the regional governors to the federal government.
Reforms: The newly strengthened state could beat the weakened oligarchs. The government started applying the tax laws to big enterprises, especially the oil and gas companies, which had previously enjoyed individually negotiated taxes.

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Question 2

Was Putin effective into leapfrogging Russia on the progressive path as statistics reveal ?

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Back To Old Ways

After initial good work, post 2003 Putin's economic policy changed track
He ousted his reformist Prime Minister, Mikhail Kasyanov, and chief of staff, Aleksandr Voloshin, relying ever more on his cronies from the St. Petersburg KGB. The signal event was the confiscation of the Yukos oil company. In 2003,Yukos was Russia's largest and most successful company, but Putin clamped down on it ruthlessly and lawlessly, engineering its confiscation.

Renationalisation: The Yukos affair started a wave of renationalization. State enterprises have been buying big, successful private companies either at a high prices in voluntary deals, accompanied by rumours of sizable kickbacks, or the sales are forced and the prices are low.
Despite promises made by Putin to join WTO by 2003, he has dodged the issue all these years
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Politicization of Business

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Instances of corruption
Royal Dutch Shell, Europe's largest oil company, in 2006 ceded control to state-run OAO Gazprom of its biggest project in the country, the $22 billion Sakhalin-2 oil and gas development, amid threats by regulators to revoke the permits on environmental grounds. Russian health officials last year warned Nestle, the world's largest food company, that it was violating safety rules at its Russian plants. It was a move to favour local rivals or extort money Ikea, among Russia's largest foreign investorshad ploughed some $4 billion into the country since opening its first store in 2000. Samara regional authorities, they say, are creating artificial obstacles, such as a requirement that the mall be able to withstand near-hurricane force winds, even though there's no history of such weather conditions there Wal-Mart Stores and Carrefour, the world's two biggest retailers, quit the Russian market after saying they could not repeat the success they had had in other countries due to bureaucracy and corruption. Both companies are expanding in China and Brazil.

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Risks - Investors opinion

Administrativ e barrie rs (lice nse s, pe rmits, re d tape ) Corruption Inade quate and inconsiste nt le gislation Se le ctiv e inte rpre tation and application of laws Inade quate prote ctions against une thical busine ss tactics

84% 78% 71% 67% 39%

Source: questioning of foreign investors Russia as an object of investments, polled in 2005 . by FIAC 22

Assessment Of Putins Term

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Assessment of Putins Tenure

Russia has gone through 4 major developments in the eight years (2000-2008) 1st, Russia's GDP has grown year on year. Russia economic growth attributed to exploitation of its natural resources. Growing revenues not on account of increased production but increased prices 2nd, the country has moved from being partially democratic to authoritarian rule by Freedom House (2007) standards. 3rd, it has stayed equally corrupt according to the measurements by the World Bank (2007), the European Bank for Reconstruction and Development (2007) and Transparency International (2007), while corruption has abated elsewhere (see also Anderson and Gray 2006). 4th, it has politicized the business. Legacy image of the cold war. Intimidating its neighbors after they elected pro-western government - Cut Gas taps to Ukraine, Georgia & doubled the gas prices to Belarus
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2008 - 2012
In 2008 Dmitri Medvedev, a former Gazprom chairman and Putin's head of staff, was elected new President of Russia. President Dmitry Medvedev preached a sensible program for Russia's modernization for the last four years though he never could do much to implement it. Putin comes back in 2012 amidst voices of rigged campaign Putins credibility is low and there is widespread discontent Putins position is precarious and will now return to the reform program he adopted in 2000, which emphasized market deregulation and judicial reform. Signing of WTO accord after 18 long years of debate is the amongst the 1st things he has done after getting elected. How much of it does he adhere to remains to be seen. As the skilful politician he is, one can expect Putin will take the air out of the protests by carrying out the necessary liberal economic and legal reforms while maintaining authoritarian power

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Question - 3

What are the pre-conditions to favorable FDI ?

Political stability Tax administration Access to finance An open economy plus access to promising markets Clear-cut guarantees of property rights Infrastructure electricity, road, rail, airports, water Labor laws

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Effectiveness of governments in promoting foreign direct investment?

Russian Fe de ration China India Poland 12%
79% 24% 76% 97% 3% 83% 17% 88%

Spain Estonia Brazil

21% 81% 19% 65% 35%

Base: 134 respondents

Ine ffe ctiv e Effe ctiv e

Source: questioning of foreign investors Russia as an object of investments, by FIAC 27

Question - 4

What were the reason for Chinas success in comparison to Russia ?

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Reasons for Chinas success

China avoided Russia under Yeltsins ad-hoc big bangexperiment which market capitalism which resulted in rise of powerful oligarchs ,corruption and loss of state revenue

One notable theory is that decentralization of state authority allowed local leaders to experiment with various ways to privatize the state sector and energize the economy
Economic reforms introducing capitalist market principles began with
The decollectivization of agriculture, The opening up of the country to foreign investment, and Permission for entrepreneurs to start up businesses.

Farmers were able to keep the land's output after paying a share to the state. This move increased agricultural production, increased the living standards of hundreds of millions of farmers and stimulated rural industry
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Reasons for Chinas success

The second stage of reform, in the late 1980s and 1990s, involved
The privatization and contracting out of much state-owned industry and The lifting of price controls, protectionist policies, and regulations, although state monopolies in sectors such as banking and petroleum remained

Deng created a series of special economic zones for foreign investment that were relatively free of the bureaucratic regulations and interventions that hampered economic growth. These regions became engines of growth for the national economy

China's success is also due to the Export-led growth strategy

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Key Results For China

Economists estimate China's GDP growth from 1978 to 2010 at 9.5% a year. Average wages rose six fold between 1978 and 2010 Absolute poverty declined from 41% of the population to 5% from 1978

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Thank You

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