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Streetwise Professor

May 24, 2010

FUD Bedevils Russian FDI

Filed under: Economics,Energy,Politics,Russia — The Professor @ 4:19 pm

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.

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6 Comments »

  1. Meanwhile, from The Moscow Times (http://www.themoscowtimes.com/business/article/businessmen-ready-to-exit/406575.html):

    As many as 85 percent of Russian businessmen “have their bags packed” and are ready to leave the country because they do not trust the government, Mirax Group owner Sergei Polonsky said, Vedomosti reported Friday.
    President Dmitry Medvedev’s push to diversify the economy and promote innovation requires long-term investment over 10 to 15 years, whereas business plans only two to three years ahead because of its lack of trust in the government, Polonsky said at a meeting that included Vladislav Surkov, the president’s first deputy chief of staff.
    Surkov told the real estate developer that he would “like to pull the suitcase out from under you” and that Polonsky should “have a seat, make yourself at home.”

    Comment by NinaIvanovna — May 24, 2010 @ 7:23 pm

  2. Thanks for the link, Nina!

    Here comes the Russian bear market:

    http://larussophobe.wordpress.com/2010/05/25/editorial-the-horror-of-the-russian-bear-market/

    Comment by La Russophobe — May 25, 2010 @ 7:33 pm

  3. Can’t resist posting this, although it is barely related to your comment, Prof. Forgive me; the statistics are just too astonishing.

    Gazeta.ru
    May 26, 2010
    The lying employers
    By Igor Bakharev

    Eighty-four percent of Russia’s workers have been deceived by their employers during recruitment. For drivers and vendors, this indicator reaches 95%, learned HeadHunter.ru (a recruitment agency). In fact, during job interviews, job seekers often hear something different than what they were told by a recruiter, and perceive possibilities as promises.

    Deceit during the hiring process is a norm in Russia, HeadHunter analysts have learned, after surveying more than 4,000 Russians from all of the country’s regions. Two thirds of respondents said that they were misinformed about their pay rate. Most frequently, employers indicated that bonuses will be a part of the pay structure. In reality, however, they are virtually impossible to obtain. Others, after being presented a certain pay range, were compensated on the lowest level or even less than what was indicated. Often, employers conceal the fact that the promised salary is the sum before taxes are reduced.

    More than 60% of respondents were misinformed regarding their working conditions or the job-related tasks. Often, the amount of responsibility is much greater than what was initially suggested. Head of the “Rabota@Mail.Ru” project Alla Seregina says that many other “hidden agendas” exist. For example, paycheck deductions are given out for disciplinary violations, such as tardiness and fines for customer complaints. Some companies deduct wages for corporate events (to which attendance is mandatory) and insurance.

    People are often offered to work without filing any paperwork; while those who do manage to sign a contract find that it specifies a salary that is inconsistent with the actual pay rate.

    A total of 84% of respondents complained to researchers about deceit on the part of their employer. At the request of Gazeta.Ru, HeadHunter determined in which field this problem arises most frequently. Most complaints come from people working in the retail sector. Almost 95% of them say they have been lied to by their employer. Almost as many drivers and shipping agents (94%) complain about deceit on the part of their employer. Nine out of ten wholesale experts, waiters and waitresses, and business trainers have also come across dishonesty in the recruiting process at least once in their lifetime. Medical professionals (82%) and IT specialists (73%) were somewhat luckier. “Bonuses are often underpaid to sales people, drivers are not compensated for gas and car maintenance, and the salaries offered to waiters and waitresses include tips,” said Seregina. Moreover, low-skilled workers are not the only ones who are exposed to misleading information on behalf of their employer: translators, copywriters, and commercial specialists often find themselves in a similar situation. They are offered to complete large-scale test projects; and, in the hope of obtaining the job, people translate dozens of pages, write texts, and design ad campaigns, after which they are told that they did not pass. Meanwhile, the fruit of their labor remains with the “employer”. Moreover, a person could accept a lower pay rate for the duration of the probationary period, after which the employer terminates his employment, which he explains by saying that the trainee did not pass, added Seregina.

    For employees, such work experience results in serious psychological trauma. “People who are in a transitional phase in their life are especially vulnerable to deceit. And change of job is one such transitional step,” says president of HeadHunter Yury Virovets. But such an attitude toward employees also negatively affects the employer. When asked what they did after they learned the actual terms of employment, one of the most popular responses was “left for another job”, although there were other answers such as: “blacklisted the employer”; “began sabotaging ‘additional’ tasks”‘ and even “got pregnant and went on maternity leave.” However, there are those who said that they “accepted the situation.”

    According to the statistics of SuperJob, misleading information regarding pay scale or working conditions, has led to 20% of newly hired staff to quit their job.

    Often, HR managers deliberately exaggerate the conditions which the company guarantees to its employees in the hope of finding the best man for the job, say analysts. However, job seekers, who felt that they had been deceived, often perceive the possibilities outlined during their interviews as fact, says head of the research center SuperJob.ru Natalya Golovanova: “Therefore, we are always telling job seekers that these things need to be very carefully clarified during the interview.” Such a high percentage rate of deceived employees is mostly explained by the subjective perceptions of each party during the hiring process, agreed Timur Sokolov, managing partner of Club Consult Development. “One should also consider that each person has his own unique perception of the world. For example, for a job seeker, an irregular working schedule consists of nine hours, while for an HR manager ­ it is up to 14 working hours,” adds Sokolov.

    Comment by mossy — May 26, 2010 @ 11:27 am

  4. Thanks Mossy! Did you translate that? We’d publish it as a post on our blog.

    Comment by La Russophobe — May 26, 2010 @ 6:18 pm

  5. LR–you probably don’t want to hear this, but that appeared in Johnson’s Russia List :)

    The ProfessorComment by The Professor — May 26, 2010 @ 11:17 pm

  6. Thanks SWP. But it still doesn’t answer the question of who translated it. Certainly not DJ, doesn’t speak a word of Russian.

    Comment by La Russophobe — May 28, 2010 @ 5:21 am

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