Asian Foreign Direct Investment in Russia

Yana Grigoryeva, Intern at the Russian National Committee on BRICS Research - special for InfoBRICS

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The imposition of anti-Russian sanctions in 2014 by economically developed countries definitely impacts on the configuration of Russia’s investment links. The percentage of the federal support for the far Eastern regions is increasing. The direction of Russian investment flows changes towards Asia and the role of the Eastern regions of Russia grows. However, according to experts, building economic relations with Asian countries, including China and India, faces certain difficulties. What is the role of Siberia and the Far East in the formation of the “Eastern way” of Russian investment relations and, in particular, in attracting foreign direct investment (FDI)? It is known that the geographical proximity of the territories contributes to the intensification of investment ties. If the Russian Eastern regions are really interested in neighboring countries, it certainly improves the prospects for investment cooperation.

Since the beginning of the anti-Russian sanctions, the share of FDI attracted to Russia from Asian countries has increased dramatically. In 2016, it exceeded 50%, whereas before in some years it did not reach 1%. Of course, this can be seen as evidence of the increasing importance of Asian investments for Russia.

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Foreign direct investment in Russia, 2016 (million dollars):

Europe – 5978

America – 9584

Asia – 17376

%

Europe – 18.1 (60.1 – in 2008)

America – 29.1 (23.6)

Asia – 52.7 (0.8)

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The increase in Asia’s share of the total FDI balance is mainly because of the decrease in the share of the investment from Europe. In terms of FDI from China, the maximum balance was in 2014 ($1.27 billion), in the next two years, it declined, amounting to only $ 350 million. The structure of accumulated FDI in Russia also indicates of the weakening role of Chinese investment. At the beginning of 2017, China ranked only 20th in accumulated FDI in Russia.

Since the beginning of 2014, it has more than halved (from 4547 million dollars to 2271 million dollars). The dynamics and structure of accumulated FDI, as we can see in official statistics, are also largely determined by single transactions (projects). Thus, the privatization of “Rosneft” led to a sharp increase in the share of investments from Singapore. A threefold increase in accumulated FDI from Italy and the reduction in the role of Austria was due to the restructuring of UniCredit Bank. So, the flow of FDI to Russia has not yet become sustainable, the scale of investments is relatively small, their dynamics and structure are determined by single transactions related to the implementation of certain major projects or restructuring of companies, mainly with state participation.

Traditionally, the so-called neighborhood effect has been considered one of the main factors influencing the dynamics, distribution and accumulation of FDI. Good knowledge of the neighboring country, geographical proximity, and in some cases also cultural and historical community, as a rule, increase the share of neighboring countries in the structure of FDI and increase the concentration of investments in border regions. China and the Republic of Korea are among the top twenty countries in terms of FDI accumulated in Russia.

“Komatsu”, a leading Japanese manufacturer of construction and forestry equipment, operates in the Yaroslavl region.

The commodity plays a significant role in attracting FDI from East Asian countries, especially from China. The most well-known projects of East Asian investors include factories for the production of household appliances (“LG” in the Moscow region and “Samsung” in Kaluga). Udmurtia reached the fifth place in the list of the main recipient regions because since 2006 the Chinese state company “Sinopec” has been involved in the management of “Udmurtneft” (in the same year “Rosneft” became the Russian shareholder of “Udmurtneft”). The neighborhood effect in attracting FDI from East Asian countries is manifested in the presence in the list of leaders a number of regions of Siberia and the Far East. Thus, in the trans-Baikal region, the largest project of Chinese investors was a mining and processing plant at the large Noion-Tologoi Deposit of polymetallic ores.

In Primorsky region, within the framework of the Federal program for the development of the automotive industry, car Assembly enterprises of Japanese “Toyota” and “Mazda”, Chinese “Great Wall”, as well as the production of automotive components of South Korean “Hyundai” were created. Attracting FDI from East Asian countries to the Russian Eastern regions is associated with the implementation of projects not only in industry but also in other sectors, including services. Outside the Eastern regions such projects are rare (in Moscow operates a subsidiary Bank “Bank of China”, in the Samara region, the Chinese company “Beijing China Sport Construction” is building an ice Palace). In the far East, such projects have become more widespread.

Thus, Bank of China branches were established in Primorsky and Khabarovsk territories. In the Khabarovsk territory, South Korean investors are involved in housing construction (“Kyeryong Construction Industrial Co”), and South Korean “Incheon International Airport Corporation” and Japanese “Sojitz Corporation” are implementing projects at Khabarovsk airport. The Pacific state University has a training center and laboratory of the Japanese “Komatsu”. In the Amur region, Chinese investor “Huafu Commercial Construction Company” built shopping centers, hotels and entertainment complexes. There is also a joint Russian-Japanese project on the cultivation of buckwheat, soybeans, corn and vegetables.

The intensification of economic ties with the Asia-Pacific countries in the energy sector is largely due to the changes in the production of oil and natural gas in Russia. If in 2005 the total share of Siberia and the Far East in oil production was only 4%, and natural gas-1.5%, in 2015 it reached 14.3 and 8% respectively. So, the increasing role of the Eastern regions of Russia in oil and gas production began long before the economic crisis of 2008 and the anti-Russian sanctions of 2014. The shift of oil and gas production to the East of the country is because of the depletion of reserves in the Western regions and the need to develop new hydrocarbon deposits. The geography of Russian oil and gas supplies has also changed, and large-scale projects have begun, in particular, the construction of the “Eastern Siberia- Pacific Ocean” oil pipeline (the first stage was launched at the end of 2009) and the “Power of Siberia” gas pipeline.

Such projects, especially those already implemented in the oil industry, affect not only the geography of Russian exports, but also investment ties. And this is a rare case when it comes to real mutual investment of companies. Investment projects in the oil industry are extremely costly. Investments in oil production and, especially, in oil pipelines in the territory of the country-exporter of oil make sense only when there is a guaranteed market. Accordingly, it is reasonable to invest in oil refineries and pipelines in the territory of an oil-importing country when oil supplies are guaranteed. These rules apply to both Russian companies when buying stakes in oil refineries abroad and foreign companies when entering into oil production projects on Russian territory. Rosneft is already the main supplier of domestic oil to China and seeks to carry out investment work along the entire technological chain together with foreign partners.

In conclusion, the “Eastern vector” in Russian investment relations is strengthened and becomes sustainable. So far, the neighborhood effect and the Federal support of the Far East in attracting East Asian investments are less significant than the capacity of the consumer market and the existing sectoral structure of the regional economy. The “Eastern way” of Russian investment ties is likely to continue to strengthen, as it is due not only to anti-Russian sanctions, but also to objective long-term factors, primarily the shift of oil and gas production in Russia to the East and the growth of energy supplies to growing Asian markets. The activation of the Federal policy to attract investors to the Eastern regions of the country can also bring positive results.

Source: InfoBRICS

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