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January, 2006

Peeter Vahtra
Electronic Publications of
PanEuropean Institute, 1/2006

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Outlook and policy implications of Russian outward investments

Future prospects for foreign investments from Russia remain highly promising despite the somewhat discouraging domestic policies. The large natural resourcebased conglomerates will most likely expand their global market shares and continue foreign asset purchases as recently witnessed on several fronts. Increasing international asset diversification provides Russian companies with capabilities to match the moves of their global competitors.

The internationalisation of nonnatural resourcebased companies is a more recent phenomenon in the Russian economy. Led by the mobile operators, the Russian nonnatural resourcebased companies are rapidly catching up in acquiring foreign assets. Domestic economic growth, large human potential and closing ties with global economy are likely to continue to drive Russian business expansion abroad.

From the Russian perspective, the outward expansion of the Russian firms is essential for both the individual companies and the Russian economy as a whole. The companies must become more international in order to survive in the global competition, which will become fiercer even on the domestic market when Russia gains a membership in the WTO. Correspondingly, the Russian economy requires a structural reform and improvement in competitiveness to transform the country from the natural resourcebased economy towards a modern serviceand innovationoriented society. The outward expansion is perhaps the most efficient way to force companies to change their old patterns.

The attitudes in recipient countries towards Russian FDI continue to post challenges towards international expansion of Russian companies especially in the neighboring areas where the Russian companies have traditionally strong foothold. One can even claim that during the recent years, Russia has come close of regaining her superpower status in the nearby region, only this time leveraged by her economic resources. The Russian leading enterprises bear strong economic and political influence in the neighbouring CIS countries.

At current, few countries in the world hold the leverage comparable to that of Russia in their neighbouring areas. In several occasions, Russia’s leading companies have acquired control over entire industrial sectors of the CIS countries. In Ukraine, for instance, Russian oil companies’ estimated share of petroleum market stands between 80 and 90 per cent.

Similarly, the country’s mobile telecommunication sector is dominated by the Russian mobile companies; currently four out of five leading mobile operators in Ukraine are majorityowned by Russian entities, accountable for lion’s share of Ukraine’s subscriber base. One can add to the list the major acquisitions of Gazprom in the CIS countries, in many of which the Russian gas giant is the sole supplier of natural gas and the majority owner of national gas companies. Whereas for many of the CIS countries, the presentday Russia is the most viable economic and political partner while others are fighting to shrug off the past dependencies on Russia.

The outward investment potential of Russian SME sector can not be neglected, but considerable policy improvements are necessary for the companies to develop more sophisticated internationalisation practices. Russian SMEs are in need for support in their outward expansion processes due to the lack of financial resources and knowledge of markets and business practices. OFDI supporting measures for the Russian companies would serve the overall development of the country’s enterprise sector by encouraging the companies to develop their business practices and managerial skills.

The international experience through outward investments would provide effective means to promote management and technology transfers to Russia. Through operational experience in foreign markets the domestic enterprises have to develop their business practices more actively than when operating merely from homebased locations. In future development of investment environment, further emphasis could be laid on facilitative and investment capacity building measures. In cooperation with the private sector, it would be possible to develop for instance marketing and management techniques and put in place the structures necessary to facilitate outward investments. Providing information by bringing together the potential investors, government and financial service providers would serve as an important facilitative measure for foreign investments.

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