Presentation on theme: "Global foreign direct investment: the case of Russia Laza Kekic - Regional Director, Central and Eastern Europe Economist Intelligence Unit Moscow, July."— Presentation transcript:
Global foreign direct investment: the case of Russia Laza Kekic - Regional Director, Central and Eastern Europe Economist Intelligence Unit Moscow, July 1st 2003
The Economist Intelligence Unit Who is the Economist Intelligence Unit: The business information arm of the Economist Group (includes the Economist magazine). Provider of economic, political and business analysis and forecasts; macroeconomic and industry data; daily briefings; custom publishing. Users: Thousands of executives engaged in cross- border business. Location: headquarters in London; offices in 31 other locations.
The Economist Intelligence Unit Mission: To provide executives with timely and reliable analysis for making successful global decisions. Resources: More than one hundred in-house analysts (London, New York, Hong Kong) and over 500 external contributors across the globe. For Eastern Europe and Russia: based in London, staff of 15--EIU’s largest regional team. Extensive coverage and forecasts of economic, political and business developments for all 27 East European countries.
Global FDI and Russia The global and regional context FDI in Russia: the record so far The potential role of FDI in spurring long-term Russian growth The EIU’s business environment model and FDI forecasts
The global and regional context Global FDI quintuples between 1990 and 2000. Reaches peak of US$1.4trn in 2000, but plummets in 2001-02, driven by slump in M&As. Bursting of the stock market bubble, geopolitical uncertainty and the weak global economy accompanied by drop in global FDI to estimated US$580bn in 2002. Inflows in the developed world fell by an estimated 27% in 2002 to US$375bn, their lowest total since 1997. This followed a 53% decline in 2001. Decline concentrated in US and UK (US$140bn total drop on 2001).
Expected recovery FDI flows into developing world hold up Further shrinkage in global FDI early 2003 But, stabilisation in second half of 2003; slow recovery from 2004 Recovery in global FDI: trend towards better business environments; progress in regional integration; industrial consolidation; sharper global competition; opportunities in emerging markets. FDI flows to China in 2002 a record total of US$53bn. High FDI flows to China will be sustained in the coming years.
FDI in eastern Europe FDI into the transition region bucked worldwide trend of stagnant or declining inflows in 2002 Record total of over US$32bn, despite weak OECD growth and difficult financing conditions. Increased relative attractiveness of the region compared with most other emerging markets; Further sales of state assets; Cost-cutting pressures on Western companies FDI key driver of investment growth, rapid structural change and competitiveness in central and east European economies
A “wildly optimistic” forecast for FDI into the transition economies 1996-2000, beg. 1996
The medium-term future: more of the same Continued steady increase in inflows Share of Poland, Hungary and Czech Republic in regional total to decline (to 40% of total) FDI/GDP averages just over 3% of GDP Some CIS energy producers major attraction Catch-up in reforms, performance and FDI by some previous laggards
FDI inflows into the transition economies (US $m)
Foreign direct investment in Russia Extremely low FDI inflows so far, far below potential The missing ingredient from Russia’s recent economic successes Inflows average a mere US$2.7bn per year in 1998-2002 Estimated “foregone FDI” in this period: US$10bn per year (if Russia had had same business environment and willingness to sell state assets as in east central Europe)
Russia and the transition region Russia, % shares in regional totals, 2002 GDP (at market exchange rates): 35.4% GDP (at PPP exchange rates): 37.6% Population: 35.2% Exports: 32.8% Inward FDI stock: 11.7%
Features of FDI in Russia Regional concentration--two thirds of stock in Moscow(44%), Sakhalin (14%) and Saint Petersburg (8%) Transport and communications dominate (25% of 2002 stock), then fuels and petrochemicals (19%) and food industry (15%) US and “Cyprus” main investors--about 20% each of end-2002 stock of US$20.4bn (Goskomstat) ...but overtaken by UK in 2003 (BP-TNK and Shell Sakhalin); over US$10bn in total
The role of FDI in Russia Recent big FDI deals--a harbinger of things to come? How much does it matter? Does Russia need large- scale FDI? Economic growth since 1999 averages 6.4% pa; acceleration of growth in first half of 2003, to above 7% Putin wants 7%-plus growth; doubles incomes in a decade ….but, is high growth sustainable?
A mixed picture I The good news Increased monetisation of the economy; reduced barter; decline in government arrears Decline in capital flight Recent evidence of some improvements in business environment Effectiveness of institutions improves slowly Despite ups and downs, relations with the West remain essentially cooperative Eventual WTO membership
A mixed picture II The bad news Few signs of industrial restructuring Very weak banking sector Still overall unfriendly business environment (tax regime, regulatory framework, crime and corruption,property rights protection) Demographic trends Political-business links in the regions Capacity constraints Overdependence on energy sector
The natural resource curse High oil prices help state finances and boost short- term growth, but also: lead to real appreciation crowd out the non-oil sector weaken the urgency to reform No natural-resource dependent market economy has grown fast in the last half- century
Dependence on energy sector In 2002, energy accounted for: almost 20% of GDP 55% of export revenue up to 40% of fiscal revenue 50% of industrial investment For every US$1 change in the international oil price: US$1bn change in federal budget revenue US$300m change in regional budget revenue US$2bn change in export revenue
Reform--an uphill task Reform may also be stymied by the enormity of outstanding tasks increase competition sustain macroeconomic stability reform monopolies and banking system cut tax burden, simplify the tax regime and reduce general government spending reform of housing sector and utilities upgrade regulatory framework; fight crime/corruption reform the military
Continued reform is likely but will face familiar obstacles: public hostility vested industrial interests regional obstruction inefficient bureaucracy difficulty of building and sustaining reformist coalitions Overdependence on presidency--weak political development
The baseline outlook--getting by Political stability Putin persists with reforms, although implementation remains difficult Medium-term external environment is relatively favourable Macrostability preserved No 2007-08 “succession crisis” Authoritarian trends held in check External debt managed successfully Oil prices remain near US$20 pb
Catch-up prospects Russia GDP per head (at PPP), 2002: US$7,590 Index, EU-15=100: 29.2 Index, US=100: 20.8 Best-case scenario: Russia’s catch-up time with long-term growth of GDP per head of 3.5% per year (assumes EU and US growth at 2% per year): with EU average: 85 years with US: 108 years
The baseline outlook and growth Not enough for sustained, very fast growth Long-term growth determinants--Russia has too many minuses Domestic underpinnings for sustained fast growth are weak Hypothesis: Russia needs massive infusion of foreign capital, technology and management practices to try to break long-term growth bind
Main determinants of FDI Market size GDP Expected market growth Natural resources endowment Labour costs Distances/proximity to markets Agglomeration effects (FDI clusters) Overall business environment Policy towards FDI Exchange rate variability Regional integration
EIU Findings Traditional determinants still very important (market access, wage costs, natural resources) Relative immunity of FDI to financial crises Importance of geographic distances Strong regional integration effects High degree of sensitivity to policy and business environment
EIU business environment rankings model Model measures the quality or attractiveness of the business environment and its key components Opportunities for and hindrances to business in 60 countries (over 95% of global FDI and GDP) Ranking of a country’s overall position and ten categories The model uses quantitative data and forecasts, business surveys and expert assessment Main criteria used by companies to formulate their global business strategies and investment location decisions The overall scores (on a 1-10 scale) and rankings are based on the scores for 70 indicators
Main features Estimates for historic and forecast periods Based on EIU forecasting models and assessment by a network of hundreds of in- house country experts and external contributors High correlation with recorded FDI inflows across countries Good forecasting record
Business environment model Political environment political stability political effectiveness Macroeconomic environment Policy towards private enterprise & competition Market opportunities Policy towards foreign investment Foreign trade & exchange controls Taxes Financing The labour market Infrastructure
Comparative strengths Labour market Market opportunities Comparative weaknesses Institutional ineffectiveness (bureaucracy, corruption, rule of law) Infrastructure Overall policy towards private enterprise Financial sector
Factors underpinning FDI forecast Macroeconomic stability Low corporate tax rate; further tax reforms Further trade and exchange rate stabilisation Reduction in regulation, bureaucracy; some decline in incidence of crime and corruption Preservation of political stability Steady institutional improvement Infrastructure upgrades But overall attitudes (especially at grassroots) to FDI remain ambivalent--main barrier
Medium-term FDI projection Expected improvement in overall business environment with: Improvement in most areas of the business environment Maintenance of competitive labour costs Consistent with average FDI inflow of up to US$10bn per year in 2003-07; about 2% of GDP--but still well below potential and requirements
Some issues for discussion Could future FDI into Russia be even stronger? How sensitive to Russo-Western political relations? FDI and EU membership - how high are the costs of exclusion? How much does eastern Europe feature in MNE global strategies? Choosing a regional destination - safe versus risky strategies