Study: A Future Role of Foreign Firms in Russia’s Strategic Industries

I came across this interesting 43-page paper prepared by the Finnish academic Kari Liuhto for the Pan-European Institute of the Turku School of Economics which examines the development of Russia’s policy for strategic resources and outlines the changing role for foreign participation.

Here is the introduction:

A Future Role of Foreign Firms in Russia’s Strategic Industries – Introduction by Kari Liuhto The Russian economy has expanded with exceptional speed during the past eight years. The average annual GDP growth during these years has been around six per cent. Private consumption has increased even faster, reaching double digit figures annually. The long economic growth in a populous market with more than 140 million consumers has started a genuine foreign investment boom. The annual foreign investment inflow to Russia has multiplied compared with the situation in the first half of the 1990s. During the period 19901995, the average foreign direct investment (FDI) inflow was slightly over one billion US dollars per annum (UN, 2002), whereas in 2005 the FDI inflow was nearly 15 times higher. Despite such a sharp increase, one should not forget that Russia’s inward FDI stock is still less than USD 150 billion, i.e. it is less than 10 per cent of the US stock (UN, 2006). Experiences of foreign firms operating in the Russian market differ to a great extent depending on the industry in question. The majority of the foreign firms, for instance, in retail trade, have been very satisfied with the skyrocketing revenues generated by the domestic consumption boom. On the other hand, several foreign corporations operating in a natural resource sector, particularly in the oil and natural gas business, have expressed their growing concern over the strengthening grip of the state. The following quotation aptly describes the aforementioned situation in the oil and natural gas business.

“The Russian authorities’ attack on Royal Dutch/Shell and its Japanese partners at the Sakhalin2 project has been broadened, embracing three other major projects that are wholly or majority foreign owned. The moves seem intended to advance Russian interests on two fronts: to increase national participation in these four major projects3 and to revise the revenue sharing arrangements in Russia’s favour. … Legislation now in preparation insists that all ‘strategic’ oil and gas deposits be under majority Russian control” (BEE, 2006d, 12).

The growing direct involvement of the state in the so called strategic sectors of the economy has raised several questions, such as which industries are to be classified as strategic, what is the future role of foreign firms operating in these industries, which authority in Russia will be responsible for implementing the legislation on these strategic sectors, and how changeable are the laws dealing with the strategic industries in the future? These questions puzzle many foreign companies operating or investing in Russia, and hence, the main objective of this article is to position Russia’s key industries in the strategic governance matrix, i.e. to analyze the growing risks created by the expanding political economy in Russia for a foreign investor.