2010 – Russia’s Wasted Year for Foreign Direct Investment

Marx once said that history repeats itself once as farce, and twice as tragedy.  I am not sure what level we are at now, but I have been feeling a strange sense of deja vu reading the news out of Russia recently.  I caught a glimpse of a fellow Metro rider’s Wall Street Journal – an article entitled “Russia Moves to Woo Investors.”  The article quotes Russian metals oligarch Vladimir Potanin (shown to the right as Darth Vader), who is deeply pained that the Russian leadership’s pronouncements on foreign investment are just talk and would “like to see deeds follow those words.”  This itself is farce, given the level of state protection and bailout funds received by Potanin’s Interros group.  If there ever was a beneficiary of Russia’s piss-poor investment climate, it was folks like Potanin.

Same Old Story

The WSJ article goes on to outline the same sad story of Rossiya Inc. – lots of raw materials, no innovative capacity, etc etc.  It then segues to a quote from Medvedev about the need to improve the investment environment, and then some specific proposals regarding Russia’s law on investment in strategic sectors of Russia’s economy.  This is where I started thinking back to a year ago, when I wrote a post on how Russia should use 2010 to show that it was serious about improving its investment climate.  I noted that the “first test” of this resolve would be amendments to the strategic sectors law, which my sources indicated would occur in early 2010.  Of course, the amendments were never even officially released, much less introduced to the Duma or signed into law.  The one set of amendments provided to interested parties in Russia – and which I published here – were not much more than superficial changes that codified existing practice.  Since they were unofficially released, we have heard continual hints from FAS and other officials that a second, much more interesting set of amendments is also in the works, which will address substantive criticisms of the law (e.g., the designation of fish as strategic).  As far as I know, nobody has seen a copy of these amendments.

Putin + Math = FAIL

Even more eerie, was PM Putin’s incomprehensible statement last week that the volume of foreign direct investments into Russia during 2010 amounted to $40 billion.  Note that last year, Putin claimed Russia received $35 billion in FDI inflows, which I pointed out was about $25 billion too much.  And this year, according to Rosstat the actual FDI inflows for January-September 2010 amounted to approximately $8.2 billion (versus $10 billion over the same period last year).

2010 – Results

So, at the end of 2010, what are our results?  Still no amendments to the strategic sectors law, Putin still has no idea about the differences between the various types of foreign investment, and foreign direct investment inflows (by my humble calculations) dropped by approximately 20 percent, despite a general resumption of investment flows to emerging markets.


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One Response to 2010 – Russia’s Wasted Year for Foreign Direct Investment

  1. marknesop says:

    Actually, it was “renowned Russian economist Vladislav Inozemetsev” who originally suggested 2010 would be a “lost year” for Russia. He forecast economic growth of 0 to 1%.

    http://gabrielaionita.wordpress.com/2010/02/02/vladislav-inozemtsev-%E2%80%9Din-economic-terms-for-russia-2010-will-be-a-lost-year%E2%80%9D/

    According to TradingEconomics, growth rate adjusted for inflation was a quite respectable 5.2%.

    http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=RUB

    That’s against the USA’s growth rate of 3.2%.

    http://www.tradingeconomics.com/economics/gdp-growth-annual.aspx?symbol=usd

    The jobless rate in the USA is higher, and Russia has a positive current account balance while that of the USA is a dramatic negative. That’s at a point when economists agree the American economy is recovering. Yet I didn’t see any suggestions that 2010 was a “lost year” for the USA.

    Economics is the kind of field where you can almost always find substantiation to make pretty much any point you wish to make; it’s just a matter of citing statistics that support your contention. For instance, inflation in Russia is 8 times what it is in the USA. The American economy is so proportionally huge that it dwarfs Russia’s progress. However, it’s difficult to argue this was a lost year for Russia. And a lack of FDI merely forces Russia to rely on an energy economy, while western analysts insist they are too reliant on an energy economy. It has become a self-fulfilling prophesy, which can only be refuted by encouraging FDI. I don’t see much of that.

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