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Russia: A Largely Untapped Potential

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Foreign Investment in Russia and Other Soviet Successor States

Abstract

The Russian Federation is the largest former constituent Republic of the Soviet Union. It occupies 76 per cent of former Soviet territory, and accounts for 51 per cent of its population (170.8 million inhabitants in 1991). National income produced in this country makes up about 61 per cent of the ex-Soviet total, and national income produced in industry almost 64 per cent (1988).

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Notes

  1. Osnovnye Pokazateli Balansa Narodnogo Khozyaistva SSSR i Soyuznykh Respublik. Statisticheskii Sbornik [Major Indicators of National Economy Balance of the USSR and Union Republics ] (1990) pp. 22, 34; Narodnoye Khozyaistvo SSSR v 1990 [Statistical Yearbook of the USSR] (1990) pp. 68, 358, 360.

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  2. Narodnoye Khozyaistvo SSSR v 1990, p. 668.

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  3. BIKI (24 Oct. 1991).

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  4. Narodnoye Khozyaistvo SSSR v 1990, p. 210.

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  5. O Razvitii Ekonomicheskikh Reform v Rossiiskoi Federatsii v 1992 Godu [On the Development of Economic Reforms in the Russian Federation in 1992] p. 45.

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  6. BBC Summary of World Broadcasts, Weekly Economic Report, SU/WO209 (13 Dec. 1991) p. A/17.

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  7. Journal of Commerce (16 Nov. 1990).

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  8. Law of the Russian Federation, Ekonomika i Zhizn’ (Aug. 1991) no. 34, supplement.

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  9. BBC Summary of World Broadcasts, Weekly Economic Report, SU/WO226 (17 Apr. 1992); Izvestiya (18 Mar. 1993).

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  10. MIGA’s guarantees cover 90 per cent of the value of initial investments for a fifteen year period. In addition, expected earnings can also be covered up to 180 per cent of the original investment. The premium rates range from 0.3 to 2 per cent of the amount of guarantee (Business Eastern Europe [24 Sep. 1990]).

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  11. Ekonomika i Zhizn’, no. 10 (Mar. 1993).

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  12. See Commersant (Russian ed.), no. 2 (11–17 Jan. 1993).

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  13. Interflo, 7/92, p. 26.

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  14. Business Moscow News (Russian edn), no. 5 (31 Jan. 1993) p. 13.

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  15. Ekonomika i Zhizn’, no. 20 (May 1992). One should note that a day after the Law on Subsoil was adopted, the Russian president signed a decree forbidding the free sale and purchase (including export and import operations) of certain goods and services, including precious metals and stones, and uranium (East-West Investment and Joint Ventures News, no. 12 [Jun. 1992]).

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  16. Vedomosti Rossiiskoi Federatsii, no. 11 (1992) p. 699.

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  17. State Tax Service, On Taxation of Bank Incomes, no. 10 (7 Apr. 1992); Ekonomika i Zhizn’, no. 20 (May 1992).

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  18. Business Eastern Europe (15 Feb. 1993).

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  19. Vedomosti Rossiiskoi Federatsii (1992) no. 11, pp. 699–701.

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  20. Ekonomika i Zhizn’, no. 1 (1 Jan. 1992).

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  21. Business Moscow News (Russian edn) no. 1, Jan. 1993.

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  22. In March 1993 the first positive operational results could be observed in the free economic zones of Kaliningrad and Nakhodka, in which 130 and 300 FIEs were registered respectively (Izvestiya, 18 Mar. 1993).

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  23. When spelling out guarantees for foreign investment, for example, the Law does not define what ‘national interest’ considerations, which may cause the nationalisation of foreign investors’ property, are. Equally, while according to the Law, the FIEs ‘own produce’ can be exported without licences, the notion of ‘own produce’ has yet to be defined one and a half year after the Law was enacted (see Ekonomika i Zhizn’, no. 43 [Dec. 1992]).

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  24. See The Journal of Commerce (30 Apr. 1992).

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  25. BBC Summary of World Broadcasts, Weekly Economic Report, SU/W0240 (24 Jul. 1992) p. A/1.

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  26. Financial Times (13 May 1992); International Herald Tribune (21 May 1992); Journal of Commerce (25 Feb. 1992).

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  27. East — West Investment and Joint Ventures News, no. 13 (Sep. 1992).

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  28. At the same time, these enterprises found themselves in a slightly more favourable position than other companies with foreign participation: while joint ventures with a foreign share of less than 30 per cent had to sell 30 per cent of export receipts to the State Bank at exchange rates lower than the market rate and only 20 per cent at free market rates, wholly foreign-owned subsidiaries and joint ventures in which the foreign share exceeded 30 per cent could sell all the required amounts at free market exchange rates. (Ekonomika i Zhizn’, no. 27 [July 1992]).

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  29. Izvestiya (23 Mar. 1993).

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  30. Business Eastern Europe (20 Apr. 1992).

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  31. The Economist (2 May 1992) p. 87. Later in 1992, the government decided to exempt from export tax FIEs with a foreign share in stock exceeding 30 per cent and those registered before 1 January 1992. However, this applied, reportedly, only to exports of ‘over and above plan production’. (BBC Summary of World Broadcasts, Weekly Economic Report, SU/W0242 [7 Aug. 1992] p. A/7).

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  32. Foreigners could freely take part in investment tenders as regards transport, trade and public catering (dining) enterprises, as well as small companies in industry and construction (less than 200 employees or 1 million roubles worth of assets). At the same time, their participation in auctions and price bidding needed authorisation by the State Committee on State Property Management.

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  33. In particular, they were given the right to: (i) buy controlling stakes and stock left over after the shares had been distributed to the workers of the enterprise to be privatized; (ii) acquire an additional package of shares at market prices, after 10 per cent of stock had been sold at an auction (in case the stock had appreciated); (iii) obtain rights to manage the stock packages belonging to property funds.

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  34. Ekonomika i Zhizn’, no. 29, (Jul. 1992).

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  35. East-West Investment and Joint Ventures News, no. 14 (Dec. 1992).

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  36. UN/ECE Secretariat.

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  37. Izvestiya (17 Nov. 1992).

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  38. In Estonia, for example, in mid-1992, 1633 enterprises were considered in joint ownership with foreign capital. At the same time, there were only 321 newly established joint ventures with foreign participation (Statistika Aasta-Raamat, 1992 [Statistical Yearbook] p. 54). Amongst 1300 FIEs in Latvia at the end of 1992, 647 were formed with Russian partners. On the same date, the respective figures for Lithuania were 1963 and 683 (BBC Summary of World Broadcasts, Weekly Economic Report, SU/W0267 [5 Feb. 1993] p. Cl/1–2).

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  39. This problem is discussed in East-West Joint Ventures and Investment News, no. 10 (December 1991).

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  40. When independent auditors evaluated the assets of Lenzoloto, the state gold-mining company, in dollars, the implied exchange rate amounted to 2.5 roubles per dollar (while the free market exchange rate at the end of 1992 exceeded 400 roubles/1 dollar). As was already mentioned, the Australian company Star Technology Systems Ltd. bought a 31 per cent stake in Lenzoloto worth 625 million roubles for 250 million dollars, which suggests that a rouble invested in the gold-mining enterprise weighed about 160 ‘normal’ roubles (Izvestiya [17 Nov. 1992]).

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  41. The Goskomstat data show a fall in the foreign component of cumulative statutory capital in the third quarter of 1992, which is difficult to interpret. The most trivial explanation of a mere under-reporting of FIEs to statistical bodies put aside, this drop may indicate an actual divestment by these enterprises.

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  42. O Razvitii Ekonomicheskikh Reform v Rossiiskoi Federatsii v 1992 Godu, pp. 18, 21.

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  43. Ekomomika i Zhizn’, no. 10 (Mar. 1993).

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  44. It is equally unclear, whether official estimates cover the capital flow exclusively in the form or cash, or in kind as well.

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  45. The flow estimate covers investments in cash only and excludes those in kind (Foreign Direct Investment in the States of the former USSR [World Bank, 1992] pp. 8 and 9).

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  46. The criterion used to define operational enterprises is, however, arbitrary. The authors consider FIEs to be operational if they have opened bank accounts. It is known that the opening of a bank account is a first step towards registration but does not necessarily imply the start of operations. Official Russian (as well as the former-Soviet) statistics regard as operational those FIEs which produce goods or services, or have employees on their payrolls. Despite a certain vagueness, this definition seems more reliable than that of the World Bank (PlanEcon).

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  47. J. Rutter, Recent Trends in International Direct Investment (US Department of Commerce, Aug. 1992) Appendix Table 4.

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  48. Vneshneekonomicheskiye Svyazi SSSR. Ezhekvartal’nyi Statisticheskii Byulleten’, no. 9, p. 116.

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  49. The former-Soviet (respectively Russian) classification of foreign investment activities was based on the industrial allocation of local partners, and not on the nature of FIEs’ operations themselves. (See UN/ECE Documents Trade/R.575, p. 34.)

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  50. Foreign Direct Investment in the States of the former USSR, p. 104.

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  51. Business Eastern Europe (25 Jan. 1993).

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  52. Finansovye Izvestiya, no. 19 (6–12 Mar. 1993).

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  53. Business Moscow News (Russian edn) no. 4, (Feb. 1992).

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  54. Calculated from Table 6.1 and O Razvitii Ekonomicheskikh Reform v Rossiiskoi Federatsii, pp. 46, 47.

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  55. Calculated from Table 6.1 and Ekonomika i Zhizn’, no. 4 (Jan. 1993) p. 13.

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  56. UN/ECE Document Trade/R.588, p. 23.

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  57. Calculated from Table 6.1 and O Razvitii Ekonomicheskikh Reform v Rossiiskoi Federatsii pp. 7, 8, 24. It is clear that FIE sales for roubles include deliveries not only of consumer products but investment goods as well. The sales of the latter, in contrast, are not included in the overall retail turnover figures.

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  58. Calculated from Table 6.1 and Ekonomika i Zhizn’, no. 13 (Mar. 1992) p. 14 and no. 4 (Jan. 1993) p. 15.

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  59. Business Eastern Europe (6 Apr. 1992) calculated from Ekonomika i Zhizn’, no. 13 (Mar. 1992) p. 15.

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  60. Calculated from Ekonomika i Zhizn’, no. 4 (Jan. 1993) p. 15.

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  61. BBC Summary of World Broadcasts, Weekly Economic Report, SU/WO265 (22 Jan. 1993) p. A/11.

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  62. If the foreign trade deficit of FIEs in 1992 is converted in roubles at average yearly exchange rates (193 rouble/1 dollar), it amounts to 33.6 billion roubles, which is roughly equivalent to 20 per cent of foreign investment sales for domestic currency in 1992.

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  63. O Razvitii Ekonomicheskikh Reform v Rossiiskoi Federatsii v 1992 godu, p. 59.

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  64. Business Moscow News (Russian edn) no. 11, (Mar. 1993).

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  65. Business Moscow News (Russian edn) no. 5, (Feb. 1992).

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  66. Financial Times (6 Mar. 1992).

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  67. Ekonomika i Zhizn’, no. 12, (Mar. 1991).

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  68. BBC Summary of World Broadcasts, Weekly Economic Report, SU/WO214, (24 Jan. 1992) p. A/11.

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  69. Ekonomika i Zhizn’, no. 28 (Jul. 1992).

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  70. Financial Times (6 Mar. 1992).

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  71. According to the Minister of Fuels and Energy, in 1992, joint ventures invested 150 million dollars in the energy complex and exported oil and petroleum products worth $600 m: Business Moscow News (Russian edn) no. 11 (March 1993).

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  72. Interflo, 4/91, p. 30; Moscow City Guide (Jun.–Jul. 1991) p. 72

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  73. BBC Summary of World Broadcasts, Weekly Economic Report, SU/W0218 (21 Feb. 1992) p. A/6-A/7; Business Eastern Europe (6 April 1992); Ecotass, no. 28 (22 Jun. 1992) p. 5.

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  74. BBC Summary of World Broadcasts, Weekly Economic Report, SU/WO214 (24 Jan. 1992) p. A/10.

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  75. Izvestiya (13 Dec. 1991); Business Moscow News (Russian edn), no. 4 (Jan. 1993).

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  76. Saga Petroleum, the leading non-state Norwegian oil company and Royal Dutch-Shell have set up a joint venture with a number of Russian enterprises to develop oil and gas deposits in the Timan-Pechora basin (Business Moscow News [Russian edn] no. 4 [Jan. 1993]. Total is working on two projects in the Komi Republic (Hariaga deposits). The initial investment in each of those is expected to amount to $600–700 m in the first three years of operations and over $1 bn during the next ten years. Total intends to raise total output to 35 million tonnes at an annual rate of 1.5 million tonnes. Total is also planning to invest $1.7 bn in rehabilitating four more oil deposits (Sandivey, Veyakoshor, Makarekhin and Iverobagan) in the Timan-Pechora basin and to increase their output to 40 million tonnes — BBC Summary of World Broadcasts, Weekly Economic Report, SU/WO218 (21 Feb. 1992) p. A/6–A/7; Business Eastern Europe (6 Apr. 1992); Ecotass, no. 28 (22 Jun. 1992) p. 5.

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  77. One barrel of oil will cost between $8 and $10, and Elf Aquitaine has estimated the internal profitability of the product at 17 per cent. The Western partner expects to start producing oil in 1994–5, and the product will be shared as a function of the volume of hydrocarbons extracted (40 per cent to the foreign partner if the yearly output is below 20 million tonnes; 15 per cent if the amounts exceed 20 million tonnes): Izvestiya (11 Nov. 1991); International Herald Tribune (7 Feb. 1992); Izvestiya (7 Feb. 1992); BBCSummary of World Broadcasts, Weekly Economic Report, SU/WO227 (24 Apr. 1992) p. A/8.

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  78. Journal of Commerce (30 Sep. 1991); Izvestiya (12 Feb. 1992).

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  79. BBC Summary of World Broadcasts, Weekly Economic Report, SU/WO251 (9 Oct. 1992) p. A/10.

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  80. Business Moscow News, Russian edn, no. 5 (Jan. 1993).

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  81. Izvestiya (12 Feb. 1992).

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  82. See, for example, the article by the President of the Germes concern, V. Neverov, in Izvestiya (24 Jan. 1992).

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  83. Commersant, Russian edn (25 Nov.–2 Dec. 1991).

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  84. Petroleum Economist (Dec. 1992) p. 10.

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  85. The Chtokmanovskoye deposit with total reserves in excess of 3000 billion cubic metres of gas, is seen by specialists as a potential source of gas exports to Western Europe (up to 18 billion cubic metres yearly) and of liquified gas to the United States (15–16 billion cubic metres). The extraction of 40 billion cubic metres of gas at the Chtokmanovskoye deposit will require imports of equipment for deep sea operations worth $1.72 bn. About $2.65 bn will be needed to build a turnkey plant to produce the liquified gas, while the network of pipelines connecting the new deposits with Western Europe will require investment of 360 million dollars: Business Moscow News, Russian edition, no. 5 (Feb. 1992).

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  86. The deposits, copper resources, are estimated at 18 million tonnes, and the total cost of the project at $1 bn. Half the output of the new mine is planned to be sold domestically at world prices, and the budgetary revenues at all levels of Government will reach $4.5–5.5 bn over the project’s life. Udokan Mining also has plans to market copper to China at the yearly rate of 200,000 tonnes over a period of twenty-five years from 1997. These exports should guarantee half of the financial needs of the company (Finansovye Izvestiya, no. 6 [3 Dec. 1992]; Financial Times [15 Jan. 1993]; Izvestiya [18 Jan. 1993].

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  87. Finansovye Izvestiya, no. 6 (3 Dec. 1992); Financial Times (15 Jan. 1993); Izvestiya (18 Jan. 1993).

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  88. Ekonomika i Zhizn’, no. 5 (Feb. 1993) p. 7.

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  89. Calculated from Finansovye Izvestiya, no. 14 (4–10 Feb. 1993).

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  90. Finansovye Izvestiya, no. 9 (24–9 Dec. 1992).

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  91. Commersant, Russian edn (25 Nov.–2 Dec. 1991).

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  92. Commersant, Russian edn (3–10 Feb. 1992).

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  93. See East-West Investment and Joint Ventures News, no. 14 (Dec. 1992).

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  94. Interflo (11/92) p. 19.

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  95. Financial Times (12/13 Sep. 1992).

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  96. Izvestiya (26 Oct. 1992). As V. Yakunin, the Chairman of Tokobank put it: ‘A young banking system in Russia cannot compete with the banks from Europe, the United States and Japan. Russian banks need protectionism, and not conditions equal to those granted to foreign banks’ (Finansovye Izvestiya, no. 4 [19 Nov. 1992]).

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  97. In the same way, the Statute implementing the Law on Insurance limits the share of foreigners in joint stock and limited liability companies to 49 per cent in order ‘to defend the insurance market under formation in Russia’. This stipulation excludes foreign insurers from directly operating in the Russian market through their branches (Business Moscow News, Russian edn, no. 5 [31 Jan. 1993]).

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  98. Finansovye Izvestiya, no. 5 (26 Nov. 1992).

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  99. Izvestiya (26 Jan. 1993).

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  100. This government agency issues investment guarantees and insures foreign investment projects mostly in developing countries. It also participates in the financing of FIEs, focusing on those set up by small and medium-sized companies.

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  101. Interfto (10/1991) p. 15.

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  102. BIKI (19 Oct. 1991).

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  104. United States Mission Daily Bulletin (Geneva, 18 Jun. 1992).

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  110. Eastern Europe Reporter (13 Apr. 1992) p. 314.

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  112. Business Eastern Europe (16 Nov. 1992).

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  113. BBC Summary of World Broadcasts, Weekly Economic Report, SU/WO253 (23 Oct. 1992) p. A/2; SU/WO261 (18 Dec. 1992) p. A/12.

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  118. Financial Times (17 Mar. 1993).

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  119. Finansovye Izvestiya, no. 11 (14–20 Jan. 1993).

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Authors
  1. Yuri Adjubei
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Editor information

Editors and Affiliations

  1. University of Cardiff, Wales

    Patrick Artisien-Maksimenko (Lecturer in East European Economics) (Lecturer in East European Economics)

  2. United Nations Economic Commission for Europe, Geneva, Switzerland

    Yuri Adjubei (Member, Secretariat) (Member, Secretariat)

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© 1996 Patrick Artisien-Maksimenko and Yuri Adjubei

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Adjubei, Y. (1996). Russia: A Largely Untapped Potential. In: Artisien-Maksimenko, P., Adjubei, Y. (eds) Foreign Investment in Russia and Other Soviet Successor States. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-24892-6_5

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