Studies Eastern European Markets
Eastern European Markets
Kari Liuhto and Jari Jumpponen
Evidence concernig the foreign operations
of Russia´s 100 biggest exporters and banks

Research Report No. 141, 2003
. Lappeenranta University of Technology

    Summary (abridged version)

    How much Russian capital has been invested abroad?

    The Russian outward FDI stock totalled almost $ 15 billion at the beginning of 2002. Possessing this amount, Russia covers roughly 60% of the ex-socialist countries' total outward FDI stock. Although Russia dominates the FDI outflow from the transition economies, Russia is a dwarf in an international comparison. Russia covers only 0.2% of the world's outward FDI stock.

    Even Finland with a 5-million population has invested more abroad than Russia has. In fact, Finland's outward FDI stock is 4 times that of Russia. The USA, the biggest outward investor in the world, has invested overseas some 100 times more than Russia. Although Russia is still a small outward investor, two issues must be pointed out.

    Firstly, Russia's outward FDI is growing. Almost 90% of the Russian outward FDI
    outflows have taken place within the past five years. Should the world market price of oil, gas, metals, and other natural resources be high, the outward expansion of Russian firms will accelerate significantly, since the Russian natural resource exporters can improve their finances and hence, have more capital to invest both inside Russia and overseas.

    Secondly, Russian companies have shifted much more capital abroad than the outward FDI stock indicates. Russia's outward FDI stock does not represent all the Russian capital abroad. Here, one needs to remember that the capital flight from Russia was $ 150-300 billion during the 1990s. In other words, Russian firms and citizenry possess much more overseas buying power than the outward FDI stock indicates.

    Who are behind the Russian outward expansion?

    The largest Russian exporters are the most active in their operations abroad.
    The explanation for their broad international activities is simple; exporters possess an internationally-competitive commodity and the price level inside Russia is lower than in the world market. Therefore, those Russian firms, possessing an internationally competitive commodity, aim at selling it abroad. As natural resources dominate Russian exports, natural resources also dominate the

    Russian firms' outward investment activities.
    UNCTAD indicates that Lukoil and three Russian shipping companies are among the 25 most transnational companies based in the ex-CMEA. The authors consider that these shipping companies should be excluded from the list since the outward expansion of the shipping companies reminds one more of a technical exercise rather than genuine internationalisation, because the foreign-flagging ships does not mean that the firm would have become more committed to foreign operations or business practices would have changed. Maritime transportation is international business by definition and hence, those shipping companies dealing with international trade do not become global but are born global.

    If the shipping companies and banks are excluded, the authors strongly believe that the 10 conglomerates named below can be found among the 25 biggest Russian investors overseas (though not in the following order): Lukoil (oil) Yukos (oil) Rosneft (oil) TNK (oil) Tatneft (oil) Gazprom (natural gas) Itera (natural gas) RusAl (aluminium) Norilsk Nickel (non-ferrous metals) and Alrosa (diamonds).

    On the basis of the survey results, the most active Russian banks abroad are: Vneshtorgbank, Alfa-Bank, Promsvyazbank, Gazprombank, Evrotrast, the Russian Interregional Bank for Development, Lanta-bank and Kreditnyi agroprombank.

    Why Russian firms internationalise?

    Financial-efficiency seeking is the dominant reason for the Russian natural resource-based groups (NRGs) to export, as they obtain a higher price abroad and the solvency of their foreign clients is better.

    Russian firms do not only export abroad but have started founding their own units overseas. The foreign units can be used, for example, to reduce export duties by transfer pricing. Taxation planning is also a possible reason to go abroad. The foundation of the foreign unit may also aid in avoiding export quotas and thus, increase the firm's profitability by getting a larger amount of goods out of Russia.

    The goal to increase a firm's foreign sales and to strengthen their global market position is the main driving force behind establishing representative offices and sales units abroad (market-seeking).
    Even if financial efficiency-seeking and market-seeking are the dominant reasons for Russian NRGs to go abroad, resource-seeking (the acquisition of foreign resource sites) and strategic asset-seeking (the acquisition of production and logistics units overseas) can also be detected behind the outward expansion. The on-going privatisation in ex-socialist countries provides Russian firms with special opportunities for acquiring strategic assets.

    In this context, it needs to be stressed that the Russian NRGs are not a homogenous group in terms of their internationalisation. For instance, Russia's oil corporations can be divided into four main groups, regarding the extent of their international operations: (1) aggressive expanders, (2) followers, (3) exporters, and (4) domestic market-oriented companies.

    Aggressive expanders: Lukoil and Yukos can be considered as aggressive expanders, since they have acknowledged that their destiny lies in globalisation. They simultaneously use various internationalisation modes and hence, the authors argue that these firms do not follow the stage model's (the Uppsala model) gradual idea of internationalisation.

    Followers: for example TNK and Tatneft can be characterised as followers since, so far they have put less emphasis on outward expansion. If they will not accelerate their outward expansion, they will remain regional players. Should they remain regional players, they will most likely focus on the former CMEA.

    Exporters: though some Russian oil companies, such as Surgutneftegaz, possess
    significant oil reserves, they have remained passive in starting operations abroad. It is not easy to conclude whether this strategy has been made consciously or is just a result of lacking the necessary skills, experience, and vision.

    Domestically-oriented companies: in this context, one needs to remind oneself that over 100 companies produce oil in Russia but only a dozen have seriously focused on internationalisation. Therefore, the authors disagree with the idea that the oil business is international by definition i.e. oil production leads automatically to outward expansion.

    It should also be mentioned that some Russian oil companies do not expand abroad
    without political motives. For example, state-owned oil companies, such as Rosneft or a smaller actor, Zarubeshneft, seem to act not only to fulfil their commercial goals but also to serve the objectives of Russian foreign policy, when they go overseas. Moreover, some privately-owned Russian oil majors sometimes tend to act in line with Russia's foreign policy, perhaps to avoid unnecessary problems inside the country.

    The international operations of Gazprom are subject to so much political intervention that it can be argued that it first serves Russian foreign policy and only its own business interests thereafter. If the monopolistic position of Gazprom will not be broken, it is unrealistic to assume that it would become a purely business actor, either inside Russia or overseas.

    A special characteristic behind the outward expansion of some NRGs is the fact that sometimes their internationalisation is linked with the armaments trade. The researchers have discovered that some metals companies based in transition economies, have most likely been involved in unofficial armaments deals in Third World countries.

    The expansion of the non-natural resource-based firms abroad, such as Energomash and Wimm-Bill-Dann, is a very recent phenomenon. The first findings on their outward expansion suggest that the most successful Russian non-NRGs have managed to improve their financial position and to produce a competitive commodity and therefore, they head mainly towards the ex-Soviet republics, where competition is less fierce and where they still have a functioning business network.

    Russian banks seem to follow their customers when selecting their foreign environment. However, the main barrier towards internationalisation does not seem to be a lack of experience in international banking but the attractiveness of the home market i.e. Russian banks do not see the need to expand overseas since the domestic market is perceived as being more profitable.

    It is worth observing that the majority of banks surveyed mentioned having plans either to start operations abroad or further expand them in the nearest future. Therefore, it seems as if the internationalisation of Russian banks is just about to emerge in a large scale, even though some of the largest banks have already been present in international financial markets for several years.

    Where have the Russian companies landed?

    It is extremely difficult to point out exactly where the Russian capital has landed, since the statistics are impartial and inconsistent with each other. The UN data, which the authors believe to be the most accurate, indicates that a third of the Russian FDI has made its way to the EU, a quarter to ex-socialist states, another quarter to the USA, and the remainder to other countries.

    The three main countries receiving Russian capital outside the ex-USSR are the USA, Poland, and Germany.
    Together these three countries host over half of Russia's outward FDI stock. Finland's stake is relatively insignificant, only 1-2%, though the number of the Russian-owned companies in Finland is large, approximately 1500-2000. The EU is the main target for the Russian NRGs when they are implementing efficiency-seeking and market-seeking strategies. However, if they are searching for foreign resources, they focus on the Caspian Sea region, some developing countries, or some states which have a rather dubious reputation in the eyes of many Western nations, for instance Iraq, Libya, or Sudan. If the Russian NRGs are seeking out strategic assets, they usually land in the former socialist bloc, where they perceive themselves to have a competitive advantage vis-a-vis their Western competitors, due to their previous experience and connections in the ex-communist countries. The privatisation of the state companies in Eastern Europe and the ex-USSR has also attracted the Russian eagle out on the hunt.

    What does Russian outward expansion mean for other countries?

    Formerly socialist countries have been reluctant to allow Russian companies to enter their market. Such reluctance stems partially from the imperialistic policies of the USSR and partially from the shadow activities of some contemporary Russian corporations. The Russian companies can dispel fear and doubt only by acting as business units and not politically-motivated cover companies. Interestingly enough, political resistance in Central East European states has been stronger than in the CIS, where the economic impact of the Russian companies is stronger.

    The attitudes of developing countries towards the presence of some Russian companies have generally been positive.
    One can only guess whether the presence of some Russian firms is based more upon the irregular armaments trade rather than on conventional business activities. Moreover, a few developing countries are using the presence of Russian companies to counterbalance the USA's dominance. Therefore, one can conclude - though the Cold War is over, some practices of Eastern/Western firms have not changed in the Third World.

    The developed West has not reacted too much to penetration by Russian companies.
    This silence is partially due to the fact that the direct investments from Russia are still modest and they do not shake Western economies or their markets. Another reason for the silence is the fact that some business activities do not occur under the Russian flag but under some other country's name. To put it another way, some Russian companies are using a Western face to cover their Russian origin. Just lately, more attention has been paid to the entry of the Russian firms in the West, as the Russian energy companies have started to acquire stakes in internationally-recognised Western firms. The entry of Russian companies into the Western energy business may contribute

    positively to the predictability of the energy supply from Russia. On the other hand, one should not forget that Russia's growing role in the energy supply to the West may lead to serious consequences if Russia's relations with the West would deteriorate for some unexpected reason.

    Though no change is risk free and somebody always loses out in a changing situation, one can conclude that the continuation of the opening process in Russia is absolutely the best possible scenario for Russia herself and for the rest of the world.

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