The Russian Federation was portion of the Union of Soviet Socialist Republics for the most portion of the twentieth century. In 1991 the USSR broke up into Russia and 14 other independent provinces, catalyzed by the glasnost and perestroika reforms instigated by President Mikhael Gorbachev ( CIA, 2011 ) . This period besides marked the passage from a centrally planned economic system to one that was more market oriented. Initially, the abruptness with which this took topographic point caused the economic system to worsen during 1990 – 1995 due to a deficiency of fight on the portion of Russian companies ( Wikipedia, 2010 ) . However, the Russian economic system grew continuously after that on the dorsums of turning domestic demand and rising oil and trade good monetary values in the universe market. Russia averaged a GDP growing rate of 3.64 % between 2006 and mid-2010 merely offset by the negative growing rate of 7.9 % in 2009 ( extension tabular array 1 & A ; 2 ) , due to the planetary fiscal crisis ( World Bank, 2010 ) . Russia has a entire population of about 139 million and a per capita income of 15,900 US dollars in PPP footings ( CIA, 2011 ) .
2. Overview of the Country and Its Locational Advantages and Disadvantages
Russia is the largest state in the universe with an country of 17,075,400 square kilometres. It borders 14 states which include EU states, CIS states, and Asiatic states such as China and Mongolia ( Wikipedia, 2010 ) . As a portion of the BRIC group of states consisting of Brazil, India, and China, Russia ‘s function as one of the major economic participants can non be ignored. Russia has much of what foreign investors are seeking in an investing environment ( A-gutcu 2002 ; Kuznetsov, 2010 ) .
The chief advantage of Russia as a beginning of Foreign Direct Investment ( FDI ) is foremost its non-skilled labour which is cheaper in comparing to that of other Western European states. Second, Russia has a high growing potency and contains a ample in-between category. It was averaging a growing rate was 6.7 % between 1999 and 2006. Although, there was a bead in this figure after the planetary recession of 2009, it is once more expected to pick up. Third, Russia is extremely accessible from Europe and Asia, by land, sea, and air due to its huge size ; a strong factor in consideration for cross-border joint ventures. Fourthly, its huge natural resources, which are suited for resource-seeking FDI such as oil and excavation sectors, are a large fillip. And eventually, Russia has a big population of skilled and educated work force doing it suited for service seeking FDI ‘s, such as information engineering and research and development companies ( Rogacheva & A ; Mikerova, 2003 ) .
On the flip-side, nevertheless, corruptness and unfavourable concern environment has efficaciously curtailed efficiency-seeking FDI in Russia and most of the FDI is resource-seeking or market-seeking. ( Rogacheva & A ; Mikerova, 2003 ; Kuznetsov, 2010 ) . This relates to the chief disadvantages of making concern in Russia which are mostly political and administrative in nature. First, corruptness and high degree of political intervention is a large concern to foreign investors, particularly houses that are from more developed economic systems. Second, it has a weak and opaque legislative system and bench that is non really independent. This is a really large concern to investors who feel that legal protection extended to companies is weak in instance of differences. Third, the revenue enhancement system is one of the most complicated in the universe, which is the beginning of significant administrative holds. Finally, the deficiency of equal physical substructure is the major concern cited by concerns that depend on motion of merchandises from one topographic point to another ( FIAC, 2008 ) . In World Bank ‘s latest “ Making Business 2011 ” study Russia ‘s rank dropped 7 musca volitanss from 116 to 123 in comparing to the old twelvemonth ( 2011 ) .
3. Current Government Regulations that Affect MNEs and FDI
In 1991, growing in Russia and the staying states of former USSR was seen as a primary end to guarantee development. Most of these passage economic systems at the point of formation lacked capital, proficient cognition and concern patterns to vie with the West. The solution to this job was to increase the degree of FDI in the state. However, addition in inward FDI without checks/balances would hold led to phasing out of noncompetitive domestic houses. A all right balance had to be maintained between the reaching of cognition through FDI and keeping fight of the domestic houses. This scenario led to the creative activity of authorities Torahs to modulate FDI in the state ( Kuznetsov, 2010 ) .
Since 1991, the Russian authorities has passed many Torahs to assistance and protect the economic system. The Modern Russian FDI jurisprudence passed in 1999 was to supply equal chances to both foreign and domestic investors in making economic growing through joint ventures. Even though foreign houses received aid to put up in the state, they were besides subjected to extra cheques than the domestic houses. A 2005 federal jurisprudence introduced inducements to pull inward foreign FDI through the formation of particular economic zones. These zones were designed non by the authorities but by the companies to guarantee proper competitory use of resources. The zones varied from industrial to advanced zones. In add-on, addition in the figure of dual revenue enhancement pacts ( DTTs ) signed by the Russian authorities besides provides grounds in favour of increasing inward FDI ( Kuznetsov, 2010 ) . Despite all these positive moves, the 2008 jurisprudence limited FDI in strategic sectors which include atomic power, arms, aircraft production and mass media. This jurisprudence has caused a batch of concern among foreign investors about the legitimacy of these restrictions and the possibility of protectionism on the authorities ‘s portion. In add-on, to these Torahs, the political and bureaucratism constituent have acted as a hindrance to inward FDI. Concerns about unneeded bureaucratism, barriers in imposts and migration offices, and weak belongings rights have been an obstruction to foreign investors ( Kuznetsov, 2010 ) .
4. Inward Foreign Direct Investment
Russia has seen singular growing in the country of inward FDI from the early 2000s. In 2008, the state has seen its GDP grow 1.94 times its 1998 degree ( Kuznetsov, 2010 ) . Despite this strong growing the state ‘s inward FDI is lower compared to its opposite numbers from Europe. Russia in the 1990s had adopted a system of oligarchy whereby major Soviet endeavors were broken down and sold to few powerful investors. This methodological analysis of denationalization acted as a hindrance to inward FDI. Violation of belongings rights, favorability of domestic endeavors and inability to get market portion were seen as possible obstructions by foreign companies to investing. Presently the foreign investing is still less than 10 % of gross capital formation.
Most of Russian IFDI can be linked to states in the European Union ( EU ) and the Commonwealth of Independent States ( CIS ) . These strong relationships are chiefly due to the propinquity, common linguistic communications and concern contacts from the Soviet epoch. Recent information shows that Cypress provides 23 % of inward FDI while Germany and Netherlands came in 2nd and 3rd with 16 % and 12 % severally ( BOFIT Weekly, 2010 ) . The part from Cypress could be chiefly due to the big figure of Russian companies registered in that state. Similarly, a important part of the inward FDI can besides be traced to states in Latin America, Caribbean and the British Virgin Islands ( Kuznetsov, 2010 ) . These investings are chiefly round-tripping investings from states where Russian capital has been stored.
Inward FDI increased enormously from the 1st one-fourth of 2003 and continued on the upward tendency until 2008. The inward FDI took a crisp dip in 2009 chiefly due to the impact of the universe economic system on the Russian economic system and less due to the impact of progress fiscal instruments in the Russian bank sector ( annex tabular array 3 ) .
Foreign companies play a cardinal function in merely a few Russian industries like drinks and baccy. Inability to do big raids in the strategic sectors like oil & A ; gas, sub-soil and other strategic sectors makes TNK BP the lone important joint venture with a foreign ownership greater than 50 % . Table 4 provides a list of the chief foreign non-financial affiliates based on turnover.
In the period of 2003-2007, the services sector was the biggest sector accounting for 50-60 % of the influxs into Russia. The chief economic sectors of the entire foreign investings include trade, fabrication, excavation and quarrying, and existent estate ( Curtis, Griffin & A ; Kornecki, 2010 ) . Some of the cardinal foreign MNEs runing in Russia are British Petroleum, Ford Motor and Auchan.
5. Outward Foreign Direct Investment
The growing in Russian outward FDI has been every bit singular as in the instance of its inward FDI ( annex table 5 ) . Among emerging economic systems, the entire Russian outward Foreign Direct Investment ( OFDI ) was more than that of Brazil India and China ( excepting Hong Kong ) ( annex tabular array 6 ) in 2008 ( Panibratov & A ; Kalotay, 2009 ) . Its entire outward stock was $ 203 billion, second merely to Hong Kong, which had an outward stock of $ 776 billion. The Russian investing tendency abroad was averaging about $ 43 billion per twelvemonth from 2006-2009 ( UNCTAD, 2009 ) . Although, the planetary fiscal crisis has impacted this bullish tendency, the Russian OFDI shows no mark of withdrawing ( Panibratov & A ; Kalotay 2009 ) . Russia ‘s OFDI stock in 2009 was $ 249 billion, 25 % higher than the old twelvemonth ( UNCTAD, 2009 ) .
The Russian transnational endeavors ( MNEs ) puting abroad are diverse. Both in private owned and authorities owned companies fall in this group. Among the private endeavors there are really efficient establishments every bit good as establishments with rent-seeking inclinations who are puting outside Russian boundary lines. Similarly the province owned endeavors besides contain a mix of efficient companies and unproductive 1s ( IMEMO-VCC, 2009 ) . As of 2008, the top finish for Russian MNEs was Europe with 49 % of its assets at that place. The Commonwealth of Independent States ( CIS ) and the United States accounted for 23 % and17 % of the entire portion, severally ( annex tabular array 7 ) ( Panibratov & A ; Kalotay 2009 ) . The chief factors that histories for the foreign markets ‘ choice are geographical propinquity as in the instance of Europe and cultural propinquity as in the instance of CIS states ( IMEMO-VCC, 2009 ) .
Harmonizing to Andrei Panibratov and Kalman Kalotay, amalgamations and acquisitions ( M & A ; As ) by Russian companies are the best manner to larn about Russian OFDI due to a deficiency of quality informations on the topic ( 2009 ) . M & A ; As seem to be more concentrated in the primary sector, accounting for 59 % . Fabrication and services accounted for 23 % and 18 % severally ( Panibratov & A ; Kalotay 2009 ) . A superior conducted by SKOLKOVO-CPII ( annex tabular array 8 ) shows that the top 25 Russian MNEs histories for 38 % of the entire OFDI of the more than 1000 houses puting abroad ( 2007 ) . Most are comparatively new since 18 of the 25 MNEs established themselves abroad merely after 1999. From this list 12 or 50 % of the companies are involved in resource-seeking FDI. This reflects in the fact that the top M & A ; A minutess between 2005 and 2008 were for the big portion resource-seeking trades and involved companies such as Norilsk Nickel, Evraz Group, Gazprom, and Lukoil ( Panibratov & A ; Kalotay ) . While four of the resource-seekers in the list are involved in the oil and gas sectors, the staying 1s are involved in the metal and excavation sectors.
The key participants in the oil and gas sectors are companies like Lukoil and Gazprom. Lukoil is the 2nd largest privately-owned oil company in the universe. It has geographic expedition and operations in the CIS states, Middle East, Latin America, and Africa. In add-on it besides owns downstream installations such as refineries in the United States and the European Union. Gazprom on the other manus is a state-owned company and Russia ‘s 2nd largest. In contrast to Lukoil, Gazprom determination spell planetary has come merely late ( Kalotay & A ; Sulstarova, 2010 ) . Companies such as Severstal, Rusal, and Norilsk Nickel, are the cardinal participants in metal and excavation. Severstal is the 3rd largest Russian multinational corporation and is besides the largest steel manufacturer in Russia. When it acquired Rogue Industries, an US steel industry, it besides became a provider to American car makers. Rusal is a leader in aluminium, and Norilsk Nickel has a heavy presence in non-ferrous metals such as Co, Cu, Ni, Pd and Pt. Both maintain assets in several states ( Kalotay & A ; Sulstarova. 2010 ) .
Other cardinal companies in the list include Sovcomflot in the conveyance industry ; AFK Sistema and VimpelCom in the telecom industry ; RAO UES in electricity ; Eurochem in agro-chemicals, and ; GAZ and OMZ in fabrication. Sistema and VimpelCom are the 7th and 8th largest Russian MNEs in footings of foreign assets and their presence is chiefly concentrated in the CIS states ( SKOLKOVA-CPII, 2007 ) .
The Russian economic system has seen slow growing in the early 1990s to rapid growing in the early twenty-first century. Harmonizing to the International Commission founded by the Bleyzer foundation “ the attraction of FDI in Russia was chiefly due to noteworthy betterments in the liberalisation and deregulating of the concern environment, improved corporate and public administration, remotion of international capital and trade limitations, and investing inducements ” ( Curtis, Griffin & A ; Kornecki, 2010 ) . However, for Russia to keep productiveness and fight in the universe economic system it has to undertake corruptness, political intervention and a weak legislative system which are viewed as obstructions for foreign investing in Russia.