Russia

Foreign Investment

Foreign investment is the second major element of Russia's reform strategy to strengthen international economic links. From the late 1920s to the late 1980s, the Soviet government prohibited foreign investment because it would have undermined the state's decision-making prerogatives on investment, production, and consumption.

The perestroika economic reforms of the late 1980s permitted limited foreign investment in the Soviet Union in the form of joint ventures. The first joint-venture law, which went into effect in June 1987, restricted foreign ownership to 49 percent of the venture and required that Soviet administrators fill the positions of chairman and general manager. By 1991, however, the Soviet government allowed foreign entities 100 percent ownership of subsidiaries in Russia.

Although limited in scope, the joint-venture law did open the door to direct foreign investment in the Soviet Union, which provided Russia's economy wider access to Western capital, technology, and management know-how. But the overall limitations of perestroika hampered the joint-venture program. The nonconvertibility of the Russian ruble was an impediment to repatriation of profits by foreign investors, private property was not recognized, government price controls remained in effect, and most of the Soviet economy remained under state control.

The Yeltsin government's commitment to foreign investment has been hampered in some cases by Russia's ongoing debates about the appropriate relationship with the West and about the amount of assistance that Russia should accept from the capitalist countries. Substantial political factions view the infusion of foreign capital as a device for Western governments to intrude on Russia's sovereignty and manipulate its economic condition, and they advocate a more independent course.

The Foreign Investment Law of 1991 provides the statutory foundation for the treatment of foreign investment. The law provides for "national treatment" of foreign investments; that is, foreign investors and investments are to be treated no less favorably than domestically based investments. The law also permits foreign investment in most sectors of the Russian economy and in all the forms available in the Russian economy: portfolios of government securities, stocks, and bonds, and direct investment in new businesses, in the acquisition of existing Russian-owned enterprises, in joint ventures, in property acquisition, and in leasing the rights to natural resources. Foreign investors are protected against nationalization or expropriation unless the government declares that such a procedure is necessary in the public interest. In such cases, foreign investors are to receive just compensation.

In response to demands by foreign oil investors for stronger legal guarantees before making large capital commitments, in July 1995 the State Duma passed the Law on Oil and Gas. It provides a basic framework for other laws and regulations pertaining to exploration, production, transportation, and security of oil and gas. In late 1995, the Duma passed the Production-Sharing Agreement bill, which provides for foreign investors to share output with domestic partners. Among other things, the bill lifts many of the financial impediments by removing excise and customs duties on the exportation of oil by joint ventures, and it requires contract sanctity for the life of the project. But in a clause that drew criticism from the United States business community, the bill requires State Duma approval of new joint-venture agreements on a case-by-case basis. As of mid-1996, the United States Department of Commerce considered the Duma's veto power over such agreements a key obstacle to expanded United States investment in Russia.

By the end of 1995, foreign investment in Russia since 1991 had totaled an estimated US$6 billion, a small amount considering the size of the Russian economy. Of that amount, US$3.2 billion had been invested between 1991 and 1993 and US$1 billion in 1994. Of the approximately US$2 billion invested in 1995, about 28 percent came from the United States, 13 percent from Germany, 9 percent from Switzerland, and 6 percent from Belgium. By sector, 15 percent of 1995 investments went to trade and catering; 13 percent to finance, insurance, and pensions; 10 percent to the fuel industries; and 8 percent to chemical industries. Telecommunications, food processing and agriculture, pharmaceuticals and medical equipment, and housing are in particular need of additional foreign investment.

Russia's overall investment climate has not been robust because of high inflation, a plunging GDP, an unstable exchange rate, an uncertain legal and political environment, and the capricious enactment and implementation of tax and regulatory regimes. Nevertheless, experts predict that improvement in those conditions will bring a strong increase in foreign activity.