31/07/2008 - Russia’s international investment flows reached record levels in 2007, with USD 52 billion of foreign direct investment (FDI) inflows and USD 46 billion invested by Russian firms abroad, according to a new OECD report. Investment in natural resources in 2007 tripled that of the previous year and represented nearly half of FDI.
But OECD’s Investment Policy Review of Russia 2008 says more needs to be done to improve the investment climate. A significant downturn in energy prices would hurt long-term growth. Domestic bottlenecks, including labour shortages and a lack of skills in some sectors, could also hurt the country’s investment programme.
The biggest obstacle to further domestic and foreign investment in Russia remains uncertainty over government policy, notably the risk of greater state interference in the economy and the impact of the postponement of necessary administrative and regulatory reforms.
The review analyses Russia’s investment regulations including the new law of May 2008 on strategic sectors. This law defines 42 sectors in which the control by foreign investors will be subject to prior authorisation from a special governmental commission. It represents an important step in enhancing legal transparency and predictability, the report notes.
However, the delay for notification of government decisions is longer and the sectoral coverage broader than OECD recommended best practice which provide for investment restrictions narrowly focused on essential security and public order and a limited timeframe for reviews and decisions. By including natural monopolies as “strategic sectors”, the government is extending its control over large parts of the Russian economy.
Stricter restrictions on foreign participation in oil and gas prospection and extraction risk further aggravating the difficulties faced in these sectors which are already struggling to cope with difficult exploitation conditions and growing domestic and international demand, the report warns.
The analysis of Russia’s energy investment policy shows that, in contrast to oil and gas upstream and energy transport where the state has strengthened its ownership and managerial control, the opening of the electricity sector to private, including foreign investors, has been actively pursued.
To encourage investment, by foreign and domestic firms, Russia should align domestic energy prices with production costs, secure property rights, improve the transparency of tax procedures and ensure effective competition policy.
The report finds progress in reporting corporate responsibility practices in Russia in recent years, driven by the expansion of Russian firms abroad, but more needs to be done, especially with respect to management practices supporting responsible business conduct. The government has an important role to play in this area that is essential to boost Russia’s creditworthiness and reliability as both an inward and outward investor.
Russia is one of five countries, including Chile, Estonia, Israel and Slovenia, which the OECD invited in May 2007 to open discussions for membership of the Organisation.
Investment Policy Review of Russia 2008: Strengthening the Policy Framework for Investment is available to journalists from the OECD’s Media Division (tel. + 33 1 45 24 97 00). The report is available through the OECD’s Online Bookshop. Subscribers and readers at subscribing institutions can access the online version via SourceOECD.
For further comment, journalists are invited to contact Blanka Kalinova, Senior Economist in OECD’s Investment Division, which serves as secretariat to the OECD Investment Committee (tel. + 33 1 45 24 89 23).