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Yurii Zaycev

PhD in Economics, Senior Research Fellow at the Institute of Applied Economic Studies, Presidential Russian Academy of National Economy and Public Administration

The integration of Russian corporations into global cooperation chains suggests their wider presence in booming, emerging markets. However, this process involves high risks related, among other things, to the investment environment of these countries. Mitigating these risks is of concern both to Russian companies and the Russian government with regards to its implementation of international development assistance policies. With this end in mind, an analysis of the existing and possible forms of cooperation between the Russian government and business seems quite opportune.

International investors are becoming increasingly excited about the high growth rate of Latin American and Southeast Asian countries, as well as about optimistic forecasts across Africa. The integration of Russian corporations into global cooperation chains suggests their wider presence in booming, emerging markets. However, this process involves high risks related, among other things, to the investment environment of these countries. Mitigating these risks is of concern both to Russian companies and the Russian government with regards to its implementation of international development assistance policies. With this end in mind, an analysis of the existing and possible forms of cooperation between the Russian government and business seems quite opportune.

Russian Companies Abroad

Beginning from the 2000s, Russian business has been a major exporter of foreign direct investments (FDI) [1]. Over the past seven years, the global FDI market has contracted in half versus the pre-crisis level, i.e. from USD 1.9 trillion to USD 1.0 trillion. Nevertheless, in 2009 Russia became a net FDI exporter, reaching the eighth largest provider globally [1]. In 2012, Russian FDI exceeded USD 51 billion, while flows into Russia amounted to USD 18.6 billion.

Most FDI went to Cyprus (34.1 percent), the Netherlands (14.7 percent), Saint Kitts and Nevis (6.8 percent), British Virgin Islands (6.3 percent), Switzerland (5.8 percent), the U.S.A. (2.5 percent) and Great Britain (1.8 percent). The key recipients of Russian FDI are offshore countries and territories that serve as a transit platform for the movement of capital to other destinations. The foreign assets of major Russian companies are concentrated in the EU (46 percent) and CIS (22 percent), and the United States and Canada (19 percent) – mostly in their extracting sectors. The leaders are LUKOIL (23 percent), Gazprom (19 percent) and Norilsk Nickel (15 percent) [7] (see Table 1).

Table 1.Russian Companies by Foreign Assets (2012)

Russian company Foreign assets, USD million Foreign country Investments from Russia
accumulated abroad,
USD million
LUKOIL 20,805 Cyprus 29,553
Газпром 17,236 Switzerland 8,020
Norilsk Nickel 12,843 United States 7,760
Evraz 6,221 Great Britain 5,901
Severstal 5,130 Belarus 5,901
RUSAL 4,533 Luxembourg 4,944
MTS 3,812 British Virgin Islands 4,820
VimpelCom 3,572 Austria 1,574
Novolipetsk Steel 1,594 Ukraine 1,461

Sources: Federal State Statistics Service, Moscow School of Management SKOLKOVO, author's calculations

Russian companies are underrepresented in emerging markets; their share of FDI in the poorest countries of Africa, Latin America and Southeast Asia is still quite low. For example, the figure is under eight percent in subtropical Africa and less than one percent in the Middle East and North Africa [2]. In emerging and fast-growing markets, Russian investors are aggressively squeezed out by their U.S., Chinese and Australian rivals. According to UNCTAD, in 2011 ten out of twenty largest FDI recipients were developing economies [3]. The rise in FDI is primarily connected to fast economic growth in Asia, Latin America and Africa.

The key recipients of Russian FDI are offshore countries and territories that serve as a transit platform for the movement of capital to other destinations.

Russian business has traditionally perceived Latin America as a faraway area with great institutional and commercial risks, which to a great extent explains the quite insignificant Russian assets and projects in the region. However, in the post-crisis period, Russian firms have displayed increased interest in the Brazilian oil and metallurgy sectors, with investments of USD 200 million made by Mechel, USD 49 million from Severstal and USD 1 billion from TNK BP [3].

In Africa, Russian companies – RUSAL, Renova, LUKOIL, etc. – face operational and institutional difficulties, although Russian businesses are assertively expanding in the local extractive sectors, with the share of Russian capital in Africa reaching 11 percent. In Southeast Asia, Russians have focused on Cambodia and Laos [4].

The integration of Russia business into the system of global economic relations means its deeper involvement in value chains that, in turn, suggests expanded production in developing markets depending on availability of critical production factors. However, political risks and the inefficient system of state support to capital exporters with a focus on companies with government participation considerably complicate the invasion of foreign markets by Russian businesses.

Investment Climate in Developing Countries

Photo: www.master-of-finance.org
Africa: from top to bottom

The poor investment environment is a key barrier to Russian business expansion in the developing world because it poses a host of political risks, low-quality infrastructure and the absence of effective practices for regulating property rights. The situation has aggravated after the 2008-2009 global crisis, since recipients of FDI have become more vulnerable and competition for FDI has intensified.

Analysis of over 30,000 FDI-related projects by the International Finance Corporation indicates that government information on investment environment factors and donors' programs significantly shape investors' decisions on starting operations in a country [5]. Moreover, according to research from Oxford University, each dollar spent on improving the investment climate attracts 189 USD in FDI, while 78 USD invested in strengthening investment climate factors creates one job [6].

In the developing countries, such factors as best practices for ensuring intellectual property rights, market flexibility, a low level of corruption, and human capital and infrastructure are normally underdeveloped. In most cases, these are public goods offered by developing countries' governments but they are inadequate. The shortage of public goods can be compensated through programs in international development assistance (IDA) implemented by Russia in cooperation with other donors and the private sector. Such cooperation may help build a platform for commercial operations in highly promising developing markets.

The IDA processes may be separate from projects on investment climate improvement. Because of this, these projects should be coordinated by government and businesses through multilateral and bilateral mechanisms.

A favorable investment environment facilitates competition among market players which then affects the costs of goods and services in the poorest economies. Moreover, business growth means a larger tax base which allows the governments to spend more on healthcare and education. State support of these sectors is a key prerequisite for the development of human capital and economic growth.

The IDA processes may be separate from projects on investment climate improvement. Because of this, these projects should be coordinated by government and businesses through multilateral and bilateral mechanisms. Russia possesses immense potential in view of the export of private capital, which might become an advantage and a strategic factor for the realization of its foreign economic policies.

Mechanisms for Russian Business Support in Developing and Fast-Growing Economies

Photo: cdn.static-economist.com

The Russian government is taking various steps to support national business abroad, with cooperation agreements concluded between the Ministry of Foreign Affairs and the Chamber of Commerce and Industry, Delovaya Rossiya, Opora Russia, Association of Russian Banks, Union of Oil and Gas Producers of Russia, Russian Engineering Union, Vnesheconombank, Russian Railways, RUSNANO, LUKOIL and Norilsk Nickel.

Nevertheless, diplomatic cooperation is by no means a magic wand to ensure support for Russian firms in developing markets. Public-private partnership (PPP) and corporate social responsibility (CSR) programs augment the IDA projects implemented by Russia and other donors and help generate similar positive socio-economic effects.

Public-private partnership is a very efficient way to expand the operations of Russian transnational corporations (TNCs) in these countries through cooperation with Russia's development institutions that support business abroad. PPP mechanisms can become an effective tool for integrating businesses into government IDA-related projects.

In fact, the tool of PPP in IDA promotes the creation of a unique product able to promptly resolve problems within the poorest countries, i.e. helping solidify factors encouraging sustainable development.

PPPs also are effective for engaging Russian TNCs in government projects in the realm of IDA. Despite their diverse and unique character, PPPs appear quite helpful for achieving the UN Millennium Development Goals and implementing the international development agenda after 2015. Moreover, cooperation with the private sector within the PPP framework opens up a path for realizing the Monterey Consensus of the International Conference on Financing of Development (March 18-22, 2002) as far as it relates to the diversification of financing development schemes.

Public-private partnership in international development assistance offers a number of positive effects. First, PPP projects solve the problem of inefficient state regulation and market failures, as well as mitigate the risks related to financing development programs, offering an alternative for handling development problems.

Second, PPP mechanisms within IDA present a novel approach for combining the resources and competencies of traditional and new IDA participants, who may share equally the risks and benefits of implementing non-hierarchical projects, while retaining their own goals and tasks at the same time.

Third, PPP projects generate added value through optimization and synergy-related effects, which would be impossible if partners operated separately. In fact, the tool of PPP in IDA promotes the creation of a unique product able to promptly resolve problems within the poorest countries, i.e. helping solidify factors encouraging sustainable development. As far as the production of economic effects is concerned, both in the near and distant future such projects are not likely to be replaced by alternatives, in view of the low growth rates in the poorest countries. IDA appears to have acquired a trend where traditional PPP approaches are transformed through the emergence of multilateral partnerships that unite representatives of the public sector, private firms and NGOs. In many cases, this effect is triggered by the complexity of the IDA process which involves multiple goals of economic development of the poorest countries, the possibility of the negative net present value of the project, and the need for strengthening national institutions to ensure continuity in IDA project outcomes in the long term.

Corporate social responsibility is another track for business participation in the IDA. Usually, firms regard CSR programs as an instrument to lower social risks and maintain the loyalty of current and potential clients in developing countries. The public sector regards CSR programs through the prism of lowering ecological and social risks, with multilateral and bilateral donors accentuating this point as well. As a result, CSR often becomes a realm where the activities of the businesses and donors in recipient countries play in tune.

Internationally, CSR projects in developing countries are primarily related to the companies' implementation of certain international principles regulating socially responsible financing, first of all those recommended by international development banks like the IFC and IBRD, Asian Development Bank, and the African Development Bank, which vigorously support the processes of socio-economic development in the poorest countries.

Russian business is quite inattentive to socially responsible financing due to lack of culture for the implementation of such practices, imperfect national legislation for regulating CSR programs and socially responsible investment, and the weak presence of Russian business in developing markets.

Russian business is quite inattentive to socially responsible financing due to lack of culture for the implementation of such practices, imperfect national legislation for regulating CSR programs and socially responsible investment, and the weak presence of Russian business in developing markets.

To overcome these barriers, Russian companies need to expand cooperation with the NGOs that are better informed about the needs of the poorest states. Russian and foreign NGOs do possess the potential for bolstering the CSR programs of private firms. Investment institutions should diversify their portfolios through more microcrediting in developing countries, since it often alleviates the financial burden of international business in the implementation of CSR programs. Microcredits go to the small businesses directly engaged in handling social and ecological problems at the local level.

Conclusions and Recommendations

Supporting national business in developing countries both helps to strengthen the positions of Russian companies in foreign markets and improves the local investment environment that shapes productivity, employment and wages, which, which in turn, ensure stable economic growth.

One of the key factors affecting the competitiveness of Russian companies in developing markets is the absence of the practice for joint projects and partnerships between Russian firms and state institutions in the IDA sphere. The efficiency of the business participation and interaction with the government within the IDA process could be increased through work along the following tracks:

  • Informing government agencies about planned projects intertwined with Russian state IDA programs in foreign countries.
  • Participation in the development of IDA programs and initiation of IDA-related programs in foreign countries.

For its part, the state should create conditions for engaging companies in IDA programs including measures aimed at expanding the firms' participation in the IDA processes, among other things through their involvement in multilateral arrangements initiated by international development banks.

Currently it appears quite critical to establish a system for insuring the political risk of companies realizing IDA programs, which could be launched by the state through joint financing schemes. It also appears sensible to employ the existing mechanisms of the Russian Export Insurance Agency to insure export credits from political risk.

The above forms of cooperation in the areas of PPP and CSR could expand the range of incentives for companies to participate in IDA-related projects, as well as help create a Russian system for development assistance with business acting as a key partner.

1. World Investment Report 2012. Towards a New Generation of Investment Policies. UNCTAD. N.Y.; Geneva, 2012. P. 169–171.

2. Investment From Russia Stabilizes After the Global Crisis. M.: RAS Institute of World Economy and International Relations. 2011. P. 24.

3. The New Geography of Capital Flows. A SIEMS Report. Skolkovo Institute for Emerging Market Studies. Moscow. 2011. P. 8.

4. Russian Transnational Corporations Keep Expanding Despite Global Crisis. A Research Paper. Moscow. RAS Institute of World Economy and International Relations. 2009, P. 30.

5. Hornberger K., Battat J., Kusek P. Attracting FDI: How Much Does Investment Climate Matter? // Finance and Private Sector Development View Point. World Bank Group. 2011. № 327.

6. Harding T., Javorcik B.S. Roll Out the Red Carpet and They Will Come: Investment Promotion and FDI Inflows // The Economic Journal. 2011. Vol. 121. № 557.

7. A. Pakhomov. FDI Export from Russia: Essays on Theory and Practice // Research Papers № 163Р. Moscow: Gaidar Institute Publishers, 2012.

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