Russia needs to do more to attract foreign direct investment, in the wake of its move in early July to make the rouble fully convertible. This would strengthen its economy and reduce its reliance on oil and gas revenues, OECD experts say.
A new OECD report, Investment Policy Review of Russia 2006: Enhancing Policy Transparency, analyses developments in Russia’s regulatory investment environment in recent years. It finds that while FDI has risen over the past two years, Russia still attracts relatively little compared to OECD countries and other emerging economies relative to the size of its economy and level of development. FDI in Russia reached US$14.6 billion in 2005, but was less than 3% of GDP. This is below Poland’s level of 4.9%, for instance.
On 1 July 2006, Russia removed all exchange controls on the rouble, making it fully convertible. While a positive step, and in line with the recommendation made by the OECD Investment Policy Review of 2004, the move will have to be accompanied by other measures if it is to have a sustained impact, OECD experts believe.
Much of the investment inflows recorded so far probably stem from Russian-owned assets held offshore and reinvested in Russia, rather than from foreign investors bringing fresh capital into the Russian economy, according to the OECD. In 2005, for example, 28% of FDI came from Cyprus.
To fully realise its investment potential, given its natural resources, large domestic market and relatively low wages, Russia needs to cut the restrictions facing foreign investors looking to invest in Russian firms. Despite good progress, barriers remain high in some sectors, notably energy, insurance and transport sectors, and should be reduced, the report said.
Corruption remains a major problem in Russia and greater policy transparency is needed. Obtaining work permits takes time, as does registering land or property. These procedures should be shortened. New regulations are also often introduced without prior consultation with firms and this aggravates a lack of predictability.
The new laws on Special Economic Zones and “Concessions”, adopted by the Russian parliament in 2005, is a positive step, the report notes, but the rules, in particular for concessions, need to be implemented in a transparent and non-discriminatory way if they are to attract new foreign investors.
A draft law on strategic sectors, expected to be discussed in the Russian parliament in December 2006, will be a test of the government’s commitment to transparency, in particular in the energy sector. The OECD recommends that the future law narrowly defines the sectors concerned and limits the scope of restrictions on foreign investors.
Investment Policy Review of Russia 2006: Enhancing Policy Transparency, available via SourceOECD or from www.oecdbookshop.org
For more information, contact Blanka.Kalinova@oecd.org, in the OECD’s Investment Division.
©OECD Observer No 256, July 2006