The previous story about the Russian Chess Federation’s battle with the state may shed some light on the fact that foreign direct investment in Russia fell 17.6 percent in the first quarter of 2010. And it is not that 2009 was such a great year: FDI in 2009 was down 41 percent over 2008. So despite the alleged recovery in the Russian economy, FDI is not coming back. This is problematic for Russia because foreign investment was an important driver of GDP growth in the mid-00s.
Not that I’m surprised. Given the tenuousness of property rights from the predations of the state, or the whims of those who can wield the coercive powers of the state, it is dangerous to invest directly in Russia; fear, uncertainty, and doubt should be foremost in the mind of any potential foreign investor.. If the Chess Foundation is worth siccing the police on, just think of the incentives to call in the muscle when there’s real money to be made.
Kudrin seems to be whistling past the graveyard:
Finance Minister Alexei Kudrin said in February that FDI might climb to a “pre-crisis level of $60 billion to $70 billion in the next two to three years.”
Given that the 2010 pace is for about $10 billion/year, $60-$70 billion seems way, way out of sight for the medium term.
Although FDI was down, total foreign investment in Russia is up. This is a mixed blessing, at most, for Russia. It is not a strong vote of confidence in the Russian economy. Instead, a good chunk of it is likely hot money playing the carry trade, borrowing abroad at low rates (thanks, Ben and Claude!) and investing in Russia at higher rates. It’s also a play on energy prices. But this money can flee as quickly–more quickly, in fact–as it arrives. Flights to safety, concerns about the effects of the European crisis on energy prices, uncertainty about whether China will try to reduce credit growth and its effect on oil prices, or a million other things, can reverse those flows in a hurry.
Not that Russian officials (some Russian officials) are unaware of this:
Improving the investment climate is a priority to boost the share of long-term direct investment in the total capital flow into Russia, Economic Development Minister Elvira Nabiullina said Thursday.
While speculative capital inflows are “a problem,” Russia will not ban short-term investments and needs instead to “create conditions for attracting direct investment,” she said.
True enough. But how? That’s the Russian dilemma. The substantive changes needed to attract FDI–notably, the creation of at least a simulacrum of a rule of law that would protect investors from expropriation–is a threat to the political equilibrium in the Russian natural state. Meaning that Russia will not escape Putin’s purgatory any time soon.