PLEKHANOV RUSSIAN ACADEMY OF ECONOMICS

   INTERNATIONAL BUSINESS SCHOOL

   COURSWORK IN NATIONAL ECONOMY  
 
 
 

   FOREIGN INVESTMENT IN RUSSIA 
 

   Student: Leontyeva E.

   Group: 5302

   Supervisor: Piastolov S.M. 
 
 
 
 
 
 
 
 
 
 
 
 

   Moscow

   2009

 

 
     Contents  

 

     Introduction

    One of the most important factors of the development of economy is investments, i.e. long-term investments of capital with the aim of creating a new manufacturing machine or perfecting and updating it for the purpose of gaining profits.

    Today Russian economy does need foreign capital inflow. This is caused by virtually full discontinuance of financing from the state budget, lack of funds in enterprises, significant wear of equipment installed in enterprises and a number of other reasons.

    One can hardly believe that foreign investments alone can raise the economy of our huge country. On the other hand they may serve as a stimulus, a catalyst for development and growth of domestic investments. Especially this is true in case of direct investments as not only funds but also many years’ experience accumulated by investor companies in the world market come to Russia with them. Foreign investments can also help to temporarily ease monetary difficulties of the government, albeit by means of increasing foreign debts which means by growth of the country’s dependence.  Finally growth of foreign investments is an indispensable concomitant of Russia’s “building’ into the world cycle of capital flow and will facilitate the country’s integration into the world economy and finding an optimal “niche” in the world division of labor.

             In the last decades capital flow in various forms has been gaining in importance in the world economic relations. If earlier certain countries as a rule were either exporters or importers of capital, now the majority of them at the same time export and import capital. From early 90-ties mobilization of foreign investors has become the most important trend in the international politics.

             Development of mutual relations with Russia for European companies who have faced the problem of oversaturation of national markets is an excellent opportunity to expand the scope of their activities and support competitive ability. Strengthening of Russia’s positions as an important economic platform has been reflected in the growth of interest shown to it by Western transnational corporations.

            Nevertheless Russia has faced serious problems which if one approaches their solution rashly may bring about major social and ethnic conflicts on its whole territory. Russia has lost competitiveness in many industrial sectors and the majority of Russian enterprises remain ineffective due to lack of capital and not ready for international competitiveness either.

            In order to overcome these difficulties Russian politicians should concentrate on the creation of a stable macroeconomic climate which implies reduction of inflation, support for the private sector and minimization of the impact of the economic crisis on Russian economy. As never before it is important exactly now to stabilize and strengthen Russian economy having increased competitiveness of domestic enterprises, in particular, by encouraging cooperation between Russian and foreign companies. It is right now when the economic crisis endangers capital investments in many developed countries, when investments which seemed to be reliable are under threat there is a chance to attract investors to own economy.

           The revival of the real sector of Russian economy can be achieved by means of restructuring industry, obtaining advanced experience and technologies, conversion of military-industrial establishment. These actions will require rational macroeconomic and financial leadership by the state and foreign investments.

           The purpose of the present paper is to study the notion “foreign capital”, its essence and its main basic forms.

           When writing this paper I set myself the following tasks:

1. to consider main problems of attracting foreign investments into Russian economy, state of foreign investment activities in Russia, and also basic forms of investments;
2. to consider which investor countries are more active with respect to Russia, what is the share of each of  these counties in the  total volume of investments;
3. to study region-wise allocation of foreign investments in Russian Federation, which regions are leading in the quantity of foreign investments invested in them;
4. to describe investment climate in the main regions of Russian Federation;
5. to consider main risks in the field of international entrepreneurship.

           All the tasks mentioned above have been studied and dealt with. In the paper one can find answers to many questions concerning investment activities in Russia.

           In the course paper I’ve written what quantity of foreign investments fall on a certain economic sector, given statistics of basic forms of foreign investments received into the economy of Russian Federation for certain time-periods. I’ve also indicated the volume of foreign investments received as per the kinds of economic activity, the quantity of investments main investor countries invest into the economy of Russian Federation

           At present the subject of the course paper is topical as the investment policy of our state is acquiring higher and higher priority day by day.

 

    

    1. Essence and Classification of Foreign Investment

    1.1. Essence of foreign investments

 

           Today the economy of no country can develop stably without active participation in the world economic relations. Along with the international trade international flows of investment capital are gaining more and more importance on the basis of effective cooperation between countries.

           One can speak about foreign investments when foreign capital is invested into the assets of national companies and states.

           Lately the problem of attracting foreign investment capital into Russian economy has become very topical. Foreign investments are considered to be one of the most important conditions for stabilization and growth of the country’s economy. It is first of all due to the fact that financial recourses of companies are limited and under the conditions of Russian reality it is quite difficult to cover their lack by attracting additional national capital (various credits, loans, etc.) because of a number of objective and subjective reasons, such as high profit rate to the capital being invested, high level of taxation, etc.

           Mobilization of foreign investments into the country gives a number of advantages, namely:

1. the country gets an opportunity to additionally finance major investment projects;
2. foreign investments encourage, give a new impetus to the development and growth of domestic investments;
3. along with financial resources many year’s experience gained by an investor country in the world market comes into the country;
4. the inflow of foreign capital into innovational projects allows a recipient country get access to the newest technologies, technical equipment and advanced methods of organization of production;
5. in case a country experiences temporary  monetary difficulties, to  solve them albeit foreign debt of the country-recipient increases;
6. growth of foreign investments facilitates country’s integration into the world economy which in its turn ensures its stable economic development.

    1.2. Classification of foreign investments

           Foreign investments can be classified by the following signs:

1. real, financial and non-material depending on the assets into which  the capital is invested. Real investments are investments into a long-term project associated with purchase of existing or new manufacturing entities of real assets abroad which directly or indirectly participate in the production process. Financial investments are acquisition of securities or monetary assets, i.e. this is investment into financial property, purchase of debt rights for the participation in the business of other firms. Nonmaterial investments are purchase of concessions, trademarks and other nonmaterial rights.
2. by the patterns of ownership of investment resources into: public, private (non-governmental) and mixed investments. State investments are the funds of state budgets directed abroad by the decision of government departments or intergovernmental organizations. These funds can be given as state loans, credits, grants, relieves. Private (non-governmental) investments are the funds of private investors invested into investment mediums located outside territorial boarders of the country. Mixed foreign investments are investments made abroad jointly with a state and private investors.
3. Depending on investment mediums: direct foreign investments, portfolio investments and other investments. Direct foreign investments (DFI) are investments of foreign investors which give them the right to control an enterprise on the territory of another state and to take an active part in managing it. Portfolio investments are investments of foreign investors associated mainly with investing into securities with the aim of getting or increasing profits in the form of interests, dividends or difference in market-prices.  They also include investments of foreign investors into obligations, bills of credit, other debt liabilities, government and municipal securities. Other investments are bank deposits, trade credits, credits of governments of foreign countries, credits of international financial organizations, other credits, etc. /1/

    Division of foreign investments into direct, portfolio and other investments is widely-spread one in the economic literature therefore this classification should be considered in more detail.

           As far as direct foreign investments are concerned their characteristic feature is their allotment for manufacturing purposes, long-term, ability to ensure for the investor management control over an enterprise.

           Direct investments have a priority importance as they substantially impact national economy and international business in whole. The significance of DFI is in: 1) its ability to make investment processes more active by virtue of its inherent multiplicative effect; 2) its ability to promote general socio-economic stability, encourage production investments into resource base;　3) combination of transfer of practical skills and qualified management with mutually beneficial exchange of know-how making international market entry easy; 4) in the activization of competitiveness and encouraging the development of small and medium enterprises; 5) in its ability to speed up the development of sectors and regions provided correct organization, encouragement, allocation are ensured; b) in promoting growth of employment and raising the level of population’s incomes, expanding a tax base./1/

           Direct foreign investments: a) are a good additional source of means for renewal and expansion of fixed capital, realization of investment projects and programs which ensure revival and upsurge of economy,  saturation of domestic market with competitive goods and services; b) are a source of means for introduction of progressive technologies, know-how, modern management and marketing methods; c) being directed to specific objects are often supported by training of personnel who make an effective use of new technologies, market mechanisms, international contracts, etc.; d) help to gain and consolidate experience of functioning of market economy, “rules of game” inherent to it which results in the inflow of foreign capital, makes an investor confident that invested funds will return with enough profit and speed up an investment climate in the country which is favorable as for foreign so for home  investors; e)  speed up the process of integration of the economy into world economy, development of effective and integration processes, favor the use of advantages of international division and cooperation of labor, finding niches in the world economy and market;  f) unlike loans and credits they do not have a heavy incidence on the foreign debt and  even help to get  means to pay them off.

           Basic methods of portfolio investment include: a) purchase of securities on the markets of other countries; b) purchase of foreign companies’ securities in own country; c) investment of capital into international investment (unit) funds. 

           Mobilization of foreign portfolio investments is also quite an important task for Russian economy. With the help of foreign portfolio investors’ means the following economic tasks can be solved: 1) replenishment of Russian enterprises’ own capital by floatation of Russian joint-stock companies’ shares among foreign portfolio investors; 2) accumulation by Russian enterprises of borrowed current assets for the realization of specific  projects by floatation of Russian issuers’ debt securities among portfolio investors; 3) replenishment of the federal budget and the budgets of Russian Federation’s constituent territories by floatation of debt securities issued by appropriate authorities among foreign investors. 4) effective restructuring of Russian Federation’s foreign debt by converting it into agency pass-throughs (government bonds) with their subsequent floatation among foreign investors. /1/

           Other investments fall on the main share and make about 57% of investments’ volume. This group of investments (by challenge subjects) is public investments. States are major capital exporters. Export of official capital is done in the form of economic, technical and military assistance to the developing countries; the role of the state as a guarantor of private capital export increases. In many countries there are governmental organizations which insure private investors. The state takes part in the activities of international financial institutions (IMF, World Bank and its group, EBRD. /2/

    1.3 Role of foreign investments in economy.

           Foreign investments play an important role in the development of economy of any country, including Russia. Mobilization of foreign investments is an objective necessity.

    They are called forth by:

    а) international division of labor;

    b) development of international relations;

    c) integration of national economy into world economy

    Foreign investments promote/3/:

1. acceleration of economic and technical progress;
2. implementation of new forms of management; 
3. renewal and modernization of manufacturing machine;  
4. activization of competitiveness;
5. development of small and medium size enterprises;
6. training of personnel meeting the requirements of market economy; 
7. expansion of country’s export potential;  
8. replacement of import substituting production;
9. creation of new jobs, raising the level of employment, relieving social tension;
10. raising competitiveness of domestic manufacture;  
11. solving the problems of  reforming economy.

 

     2. Situation with foreign Investment in Russia today

    2.1. Conception of an investment climate.

    The investment sphere requires the creation of certain conditions for successful implementation of an investment process.

    A set of political and economic conditions which are formed in the country for investing temporary spare cash with the aim of receiving profits in future is called an investment climate.

    The factors influencing an investment climate are: 

    а) Macroeconomic (dynamics of GDP, level of inflation and interest rates, share of savings in GDP).

    b) Regulatory-legal (quality and stability of legislative base, correspondence of federal and regional  legislation, policy of central and local authorities, protection of rights of property, protection of investors’  interests, level of monopolization in economy, openness of economy, level of compliance with law and order, administrative barriers for entry into investment market, level of corporate management).

    c) Taxation (quality of taxation system and level of a tax burden).

    d) Information support (building of an information support system, completeness and accessibility of information on investment opportunities in the country on the whole, on companies in particular, topicality of information, confidence in an information source, holding of advertising information campaigns in mass media, organization of investment exhibitions, presentations, seminars, investment missions).

    e) Unpredictability, non-transparency of the country to investors. Investors understand it as absence of clear, in the form of formal procedures, generally accepted rules of conducting business in world and national markets of capital.

    е) debts on foreign liabilities to international economic  and financial institutions. 

    The factors indicated can have both stimulating and braking influence on an investment activity. E.g. reduction of the real volume of GDP has an impact on industrial production, causes as a rule its downswing, unstable state of economy in the country on the whole and as a result of this – decline of investment activities. 

    High level of inflation negatively affects enterprises’ investment capability as depreciation of amortization, increase of effective rate of profit taxation takes place. Inflation also results in the need to raise remuneration of employees and increase in demand for circulating assets. As a result possibilities for investment out of own means of an enterprise get narrower.   High interest and tax rates worsen conditions for investments into the real sector. Under the conditions of increase of GDP, low level of inflation, low interest rates and rise in populations savings investment activities develop actively. For the last years a tendency for improvement of investment climate has taken shape in our country – political stability  has been achieved, there  has been increase in GDP and industrial production, level of inflation has fallen, a number of legislative acts ensuring activization of investment process has been adopted, tax reform has been carried out, etc. All this has resulted in the increase of investments volume in Russia for the last 8 years. But in 2009 growth rate of foreign investments in Russian Federation considerably has slowed down this being explained by expanding world economic crisis.

    2.2 Investment climate in the main regions of Russia. 

 

    Regions with most favorable investment climate are mainly located in the European part of the country. The regions of North-Western, Central and Privolzhsky federal okrugs are notable for their particularly favorable climate.  Almost one third of investment potential of the country  is concentrated in them, and investment risk per region here is even lower than average Russian one. As we advance more to the East and South of Russia investment climate gradually worsens: the general potential decreases and the risk increases.  In the Far Eastern federal okrug the average investment risk of the region is almost 1.5 times higher and in the Southern federal okrug it is 1.6 times higher than in the North-West of Russia. 

    Regions of the first three abovementioned federal okrugs dominate also among the leaders on investment risks. For all the years when assessment by a rating system has been done the first ten regions by risk level have been made up by 90% from the regions of North-Western, Central and Privolzhsky federal okrugs. Only 10% of the leader regions are from Southern okrug, the rest okrugs have not been able to raise their leaders of the All-Russian level.