STATE UNIVERSITY HIGHERSCHOOL OF ECONOMICS
School of World Economyand International Affairs
Foreign LanguagesDepartment
Foreign investments inRussian economy
Syrtsov Dmitry Nikolaevich
group 462
MOSCOW 2010
Introduction
1. Strategy of foreigncapital regulation in Russia
2. Russia and foreigncapital
2.1 Russian position inthe world market of investments
2.2 Foreign capital inmodern Russia
3. Problems of foreigninvestments attraction in Russia
Conclusion
References
Introduction
During last two decades we can observe increasing growth of foreigndirect investment activity.
Every countrytries to attract foreign capital and obtain direct and indirect advantages fromforeign investment. Nowadays foreign investments play one of the main roles inthe direction of global development. That is why the subject of thispaper is the international capital flows.
GeneralPurpose:to explore some theoretical basis of foreign investments and to analyzeproblems of Russian market development. To reach this objective it is requiredto cover certain points:
— тo give a general characteristic of managementstrategy of the foreign investments in Russia;
— тo point out Russia’s position in theworld market of investments;
— тo explore the problems of attractionof foreign investments into the Russian Federation.
The topicof this research can be identified as foreign capital in Russia.
1. Managementstrategy of the foreign investments in Russia
All developedcountries are pursuing management of the foreign investments, for example restrictionsfor countries to access to strategic branches of public sector of economy, military-industrialestablishment, and other important branches. First of all, restrictions arebased on necessity to defense national producer and employment preservation. Butalso it is necessary to attract foreign investments in economically importantdirections.
Historicalexperience of the developed countries shows that foreign loans in adverseconditions can become the lever of political pressure and the reason ofconcessions in home market protection. Unlimited attraction of the foreigncapital in the form of direct investments can have almost the same consequencesfor national economy.
In transitiveeconomy, foreign capital can weaken some branches which earlier were perceivedas quite healthy, when economy was in autarchy form. That’s why globalizationprocess looks as sovereignty loss in the opinion of considerable part ofRussians.
That’s why itis necessary to manage foreign investments especially in sphere of the state’sstrategic interests and priorities. However first of all it is necessary tospecify: what is «strategic sphere» and «strategic regions» andby what criteria they are defined. And do we have standard-legal basis forrestrictive regulation of the investments in our country?
For exampleaspect of relations with investments was not observed in recently accepteddoctrine of the Russian Federation power safety; thought power resources importrestrictions are included in the similar document in EU.
In the USSRconcepts like „the strategic branch“, „strategic region“were based on the military doctrine: it is that branch which backlog reducesmilitary potential, and that region, easing of the control for which increasesmilitary threat. Threat was expected on all azimuths; and civil industries andregions social and economic level didn't enter into strategic parameters.
There is nosuch simple criterion for strategically importance in economy. Accordingly,there are no rules of equivocal foreign investment management.
This problemis actively discussed. From wide spectrum of opinions it is necessary toallocate polar positions.
The firstposition is based on thesis, that any formal restrictions shouldn’t be broughtin. It is proved that the Russian economy will get healthy only when it willbecome completely accessible to the foreign investments. According to scientistsof liberal sense, it is recognized that our state has tools for protection ofthe interests, without any management of investments.
The secondposition was showed recently. Its supporters consider that during the reorganizationRussia’s economy was excessively opened for foreign investments, and urge todevelop model of the state protectionism. They suggest to forbid the privateforeign and national investments in sphere of state competence like defense,the law and order; to involve only domestic state (51 %) and private capitalsin the major objects of transport infrastructure — railway and pipelinehighways, federal highways; not to suppose foreigners in social branches — pension funds, education, medicine, the major objects of culture; to limit theforeign capital in branches in which owing to historical factors our worldpositions while are weak, for example: civil aircraft, communication, banksystem. Also they say that due to poor development of land sales andinadequately low prices in the majority of regions it is necessary to enterinterdiction for land purchase by foreigners.
2. Russia and foreigninvestments
2.1 Russianposition in the world market of investments
By generalizingcriteria the investment legislation of Russia and the EU countries are almostsimilar. At the same time legislative fastening of conditions for foreigninvestments doesn't mean that the foreign capital operations in our country arenot bound free. The main distinction here is that liberal economy of E.U. is inthe mature phase, and Russia is at stage of its formation. World experience canbe expressed in axiom: at stage of development state should play great role ineconomy. Focused on result approach to foreign investments that is better, thanpolicy of non-interference that is proclaimed by liberal economists.
Apparently,requirements of the Russian investments restriction supporters correspond toeconomic behavior of developing country at „stage of accumulation of thecapital“ (K.Marx). However, the position of the liberals who proclaimdesirability of the state non-interference is quite explainable: there isobviously expressed doubt that the state machinery is capable to regulate adequatelysomething on microeconomic level and foreign investments especially.
It is knownthat the discontent of foreign investors with activity conditions in Russia isconnected not with absence or laws rigidity but with randomness of theirapplication. On the contrary foreign firms demand literal application ofalready available laws and this causes the offence of officials. Foreignpartners and managers are involved in some corporations only because itstrengthens protection against the unfair officials. It is indicative thatrepresentatives of all levels of the power also agree with this regrettablefact.
Moderndeveloped countries experience shows the necessity to pursue consistent andpartner policy of protection of the domestic private capital from absorption bythe foreign capital.
The Russianspecificity consists in fact that this business layer is not politically issuedand its interests are consequently reflected in state policy only in form ofdeclarations.
On the otherhand, nostalgic dreams of foreign trade activities nationalization are quiteexplainable: in the country there were serious difficulties caused by avalancheexpansion of business by people which are involved in the internationalbusiness. This problem was raised from level of foreign business regulation tolevel of the state ideology.
Russia faces similarchoice not for the first time. In genesis of the modern approach to foreigninvestments historical experience of the Russian empire of the end XIX the XXcentury is put.
S.U. Vitte isthe sign person for modern economists-statesmen. He widely used exclusiveeconomic force of the imperial power in the liberal purposes. In the end of1890th years it has supported unlimited attraction of the foreign capital inRussian industry and railway business. It was named “medicine against poverty”.
Vitte's systempromoted economy development: by 1900 Russia went on 1 place in the world onoil extraction, the network of railways grew North American speed.
However Vittebegan to assert that the commercial policy problem in Russia is reduced topersevering and consecutive protective mode… Until this mode will prepare a stronglydeveloped industry it would be possible able to sustain… Internal, and thenexternal competition»
capitalinvestment market policy
2.2 Foreigncapital in modern Russia
Foreigncorporations operating in Russia prefer short-term financial investments andmainly invest in extracting and metallurgical branches. No more than 1,5 % offoreign investments are put in scientific and technological projects. Besidesit during the real period:
— Average andsmall foreign capital was involved with high profitability and fast recoupmentof separate projects in sphere of trade, building and services. In the opinionof investors, profits are much higher than risks;
— Investmentsfrom representatives of the Russian Diaspora in foreign countries. Offshorecompanies that illegally take out and legalize capital.
For reasons ofnational safety, strategic restrictions of the foreign capital in the defensiveindustry of Russia, are quite logical: the public sector of the domestic heavyindustry demands protection against unfriendly absorption. On the contrary,preservation of the general technical backwardness will be expected consequenceof isolation. According to some high-rank officers, traditional unreadiness ofRussian (Soviet) army to any war in XIX-XX of centuries is the directconsequence of similar closeness.
Historically, Russianmilitary-industrial complex has fixed basic patents and know-how in sphere ofhigh technologies. That’s why along with restriction of «external»influence of transnational corporations it is necessary to avoid«internal» pressure of military-industrial complex state enterprises towardsbroad understanding of «strategic restrictions», meaning tofacilitate advancement on the world market of civil and double purpose domestictechnologies.
Nowadays military-industrialcomplex has inexorable pressure on all branches and levels of the Russian economy.
3. Problems of foreigninvestments attraction in Russia
Attraction ofinvestments into real sector of economy is one of the economic policy mainproblems in Russia.
Foreigninvestors which operate in the Russian market can be divided into 3 groups:
investors whichoperate in enclave part of the general legal field of national managingtreatment;
small andaverage commodity producers who possess the original production and services «know-how»
investors whoare guided by reception of profit of speculative character
In Russia, itis necessary to attract the second type of investors. They will promotecompetition among manufacturers.
Measuresfocused on creation of attractive conditions for inflow of investments include3 basic groups: base measures on creation of favorable investment climate;legal and administrative bases of foreign investors activity; specific stimulusfor inflow of investments.
Strategictarget of policy in sphere of foreign investments attraction is to provide favorableconditions for foreign investors to invest in Russian economy. The serious preparatorywork on tax change, investment and corporate legislation which could promoteintensification of investment process is needed for this purpose. The nationaltreatment of economic activities that exists in Russia is extremelyunattractive for the foreign companies. The national treatment principle inRussia should be complemented by system of privileges and guarantees forforeign investors.
Along withapplication of national treatment, realization of other foreign investmentslegal regulation principles is also necessary. First of all, it is thetreatment of the most favored nation which is applied on purpose of discriminationin relation to investors from any countries.
Russian politics according to foreign investments should be characterizedwith high transparency.
Priorities ofpolicy of attraction of foreign investments in Russia should be focused onseveral aspects:
— Financialincentives for kinds of activity which are important for economy of the RussianFederation, including export of competitive production and import of newtechnologies;
— Branchpriorities: attraction of foreign investments (1) in hi-tech branches(information technology, the space and nuclear industry; (2) branches that have«bottlenecks» character in economy; and (3) branches that developexport – machine-tool construction for the wood, oil, gas industry, power,metallurgy.
— Priorities forsome companies: it is inexpedient to stop stimulation of the large companies,but at the same time it is necessary to pay attention to the small and averageforeign companies investments attraction
— countrypriorities: activisation of investment attraction process in Russia economy, demandscountry investments inflow sources diversification at the expense ofeconomically developed countries, and the countries with dynamical emergingmarkets.
The investmentspolicy should be focused on liquidation of formal restrictions andadministrative barriers on the way of the foreign capital, on use of system ofthe guarantees focused on specificity of foreign investments and called tocompensate negative consequences of the developed investment climate.
Conclusion
Every country tries to attract foreign capital and obtain direct andindirect advantages of foreign investment. Today foreign investment plays oneof the main roles in the direction of global development. Foreign investmentplays an extraordinary and growing role in global business.
Russia has an enormous and underdeveloped endowment of natural resources,particularly in mineral resources and petroleum. There are high expectationsfor foreign investments to flow into resource development and related sectors.However, foreign inflows to Russia have tended to flow into not only theprimary sector but also into the services sector. In general, foreigninvestments are more concentrated in the central regions of the Moscow, St.Petersburg and the Republic of Tatarstan than elsewhere.
There are someproblems of investing in Russia. In Russia, government support of investment isvery low. Bureaucracy in the Russian Federation is a very strong obstacle forinvesting. The legal environment for foreign investments in Russia hashistorically been characterized by the weak enforcement of laws and contracts.Also our country has many restrictions on investing (for example investing instrategic branches).
Russia has recently considerably enhanced its position as a foreign investmentsdestination. It is very important for our country. Foreign investments are oneof the major foundations for economic growth of Russia.
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