Russia and FDI

This semester my research will focus on Russia’s need for foreign direct investment (FDI) and what policy measures the nation has implemented and how they can be enhanced to increase investor confidence. Russia currently relies on its production of oil and gas to fuel its economy; those commodities constitute 25 percent of its GDP and 75 percent of its exports. The need to diversify the economy magnified during the financial crisis, which saw its GDP drop, by 7.9 percent in 2009. An article published in Forbes Magazine cited Russia’s overdependence on oil and gas as being the main factor in its inability to weather the crisis. The article went on to list other factors such as corruption, government interference in the private sector, the erosion of civil liberties as other factors as to why Russia preformed so poorly during the crisis. Those same factors will continue to hamper the growth of Russia’s economy in the future. Russia has been able to bounce back in the past few years, developing at a rate of 4.3% in both 2010 and 2011, but with the widely predicted drop in the price of oil and natural gas in the medium term diversification is necessary.

            Russia has the capabilities to become a world leader in a wide variety of industries but holding it back are problems in infrastructure and inefficiency. Moreover, Russia seems to be suffering from the “Dutch Disease”- this occurs when a country is overly reliant on natural resources for its exports, consequently resulting in a dramatic increase in the value of its currency, resulting in losses for the manufacturing sector as goods become more expensive for other nations to purchase. An increase in investment can allow for collaboration and greater quality of infrastructure as foreign firms build factories and provide training for Russian workers.

            My research will examine the current legal and regulatory barriers existing in Russia, namely the law entitled “Foreign Investment in the Russian Federation” first passed by the Duma in 1999 and since amended. I will also examine some of the informal barriers such as corruption, administrative barriers, bureaucracy and selective interpretations of the law. It is also essential to consider the political implications and the threat of a loss of economic sovereignty as foreign acquire and play a dominant role in Russian economy. When evaluating a former Soviet nation one should be mindful that privatization was not always a norm and many still look upon foreign investors with suspicion.

            Finally, I will consider some steps that Russia can take in order to strengthen consumer confidence and achieve Putin’s goal of breaking into the top 20 countries in regards to east of doing business- Russia is currently at 120. It is also worth examining how American equity and direct investors can protect themselves from the dangers of investing in Russia. While Russian corporate law is very similar to the international norm, enforcement of such laws can be problematic. One way to protect ones investment is to utilize a mandatory arbitration clause in a contract to ensure that Russian courts do not interfere. Russia is a member of the New York Convention, which governs international arbitration enforcement and practices. Russia is a nation with tremendous potential, yet to realize its goals it will have to attract foreign cash flows to diversify its economy.         

Andreas Woeller, Note,  Private Equity in the BRICS, 17 Fordham J. Corp. & Fin. L. 1307 (2012).

Jesse Heath, Notes, Strategic Protectionism? National Security And Foreign Investment in the Russian Federation”, 41 Geo. Wash.Int’s L. Rev. 465 (2010).

Elliot Glusker, Arbitration Hurdles Facing Foreign Inverstors In Russia: Analysis of Present Issues and Implications”, 10 Pepp. Disp. Resol. L.J. 595 (2010).

Lukas I. Alpert, Russia’s Business Climate Imporves, Foreign Investment Slows. The Wall Street Jounral, Feb. 2, 2012, 6:32 PM), http://blogs.wsj.com/emergingeurope/2012/10/24/russias-business-climate-improves-foreign-investment-slows/.

Anastasiya Savinykh, Investorov Puskayut Parami, Izvestiya, Oct. 13, 2008, http://www.izvestia.ru/economic/article3121497/index.html.

Jesse Heath, Strategic Protectionism? National Security and Foreign Investment in the Russian Federation, 41 Geo. Wash. Int'l L. Rev. 465, 501 (2009)

Rasporiazhenie Pravitel'stva Rossiiskoi Federatsii Sostav Pravitel'stvennoi Komissii po Kontroliu za Osushchestvleniem Innostrannykh Investitsii v Rossiiskoi Federatsii, Ros. gaz., July 6, 2008, available at http://www.rg.ru/2008/07/11/komissiya-dok.html [hereinafter Rasporiazhenie].