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2008

Kari Liuhto;
Genesis of Economic Nationalism in Russia
Electronic Publications of Pan-European Institute 3/2008

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Conclusions - What next?

It is important to notice that the law on strategic sectors is only the tip of the iceberg and the genesis of economic nationalism rather than its final destination. In other words, the major part of the economic nationalism in Russia is below the legislative surface, and therefore, the main dangers to any foreign investors are in the operations of state corporations and the Kremlin-supported oligarchs.

On the one hand, I would not be surprised to see more state involvement, for instance, in forestry and logistics. State involvement can also be indirect by nature, i.e. the use of the Kremlin-loyal oligarchs is very probable in the aforementioned sectors. In addition, several precious stones and metals will obviously fall under the control strategic government policies.

As long as state-owned companies are heavily involved in the electricity generation, it will remain sensitive, and therefore, the rules of international politics apply more than the rules of international business in its development. Uncertainties concerning the role of foreigners in Russian telecommunications have not disappeared with the law, quite on the contrary.

On the other hand, I anticipate that FDI inflow to Russia will remain at a high level despite the strategic government policies due to the fact that foreign companies are tempted by Russia’s fast growing private consumption. I assume that the majority of future FDI deals will be conducted in the non-sensitive sector of the Russia economy, i.e. in the private consumptionrelated sectors, including retail banking. Also big deals are to be expected in sensitive sectors, when foreign firms acquire minority stakes.

The aforementioned also applies to Finnish firms, i.e. the overwhelming majority of Finnish firms operate outside these strategic sectors, though the major investments – the current and future ones – belong to the sensitive sectors of the political economy.

It would be an important task for President Medvedev to stop the implicit widening of economic nationalism in Russia. The consequences of this hidden economic nationalism may dramatically worsen relations between Russia and the EU / the USA, and one day, we might find ourselves in an investment and trade war, or even worse. Medvedev’s presidency puts his expressed economic liberalism to a real litmus test. Hopefully, the test results will not be to acidic for foreign firms.

It has been aptly concluded: “Mr. Medvedev may perhaps push through some moderate
liberal changes but he seems unlikely to alter what, for the moment at least, has proved to be successful. The main impetus for change in Russia’s strong-state economic model will not be the personality of its next president, but the performance of the economy. If GDP growth dips sharply, the pragmatists in Russia’s leadership will seek change. The fact that there is a relatively liberal president might then tip the balance in favour of change towards more market-based solutions, rather than more statism” (EIU 2008c, 4).

Do we need to wish for stagnation in the Russian economy in order to see improvement in the position of foreign firms in Russia? Following the same line of thought, do foreign firms have any sustainable position in Russia or are they used as long as they do not have any Russian replacement available?

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