Publication: Monitor Volume: 6 Issue: 77

Recent data point to a number of interesting foreign investment trends in Russia. As a site for foreign direct investment (FDI), Russia remains a laggard in the region, not only compared to Poland and Hungary, but to Kazakhstan as well. The data also show that FDI in Russia is concentrated increasingly in the extractive sector, rather than in manufacturing. These trends do not bode well for Russia’s long-term economic prospects, or for the likelihood of consolidating the current economic expansion. On the other hand, the data also indicate that capital outflows from Russia fell sharply during 1998-1999 and suggest that Russia’s external balance is threatened more by meager capital inflows than by massive capital flight.

Two types of FDI data are reported by the Russian authorities: (1) balance-of-payments figures reported by the Central Bank of Russia (CBR) and expressed in dollars and (2) ruble data reported by the Statistical Office which reflect the changes in the value of Russian property in which nonresidents own at least a 10-percent stake. Because the CBR figures are not affected by the investment decisions of Russian companies, these data in many respects offer a more accurate picture of overall effects of FDI on the Russian economy. However, the CBR data are not presented on a disaggregated basis. By contrast, the Statistical Office data provide information about the sectoral and geographic composition of foreign investment in Russia, as well as about Russian investment abroad.

According to the CBR data, Russia attracted only US$2.9 billion in FDI last year (Sotsial’no-Ekonomicheskoye Polozhenie Rossii, February 2000). While slightly more than the US$2.8 billion received in 1998, this figure was a far cry from the US$6.2 billion in FDI recorded in 1997, the last year before the August 1998 financial crisis obliterated Russia’s external creditworthiness. The 1999 total brought Russia’s cumulative FDI up to US$21.6 billion, or US$148 on a per-capita basis. By contrast, Hungary has amassed–by the end of 1999–US$19.4 billion in cumulative FDI, or US$1,934 on a per-capita basis. Closer to home, Estonia’s per-capita FDI at the end of 1999 was US$1,300–nearly ten times Russia’s figure. Within the CIS, Russia’s per-capita FDI figure was only 30 percent of Kazakhstan’s US$416.

As with Kazakhstan, much of Russia’s FDI has gone into the extractive sector, rather than manufacturing. According to the Statistical Office data, Russia’s fuel sector alone received 28 percent ($1.2 billion, out of US$4.3 billion) of the FDI Russia received in 1999. Foreign investments made in the Sakhalin 2 and 3 oil projects last year are thought to account for much of this figure. Food processing was Russia’s only manufacturing sector to receive significant FDI in 1999, to the tune of US$963 million. The ruble’s sharp depreciation after the August 1998 financial crisis has sharply reduced the purchasing power of Russian households and companies in dollar terms. The weak ruble also makes foreign investment in Russia’s extractive sector more attractive, as the ruble costs of producing oil and metals seem to have shrunk compared to the dollars earned in exporting them. For this reason the share of FDI devoted to Russia’s extractive sector is likely to climb further in the future.