Prospect of FDI in Russian alternate scenario analysis

Abstract

The economic history of Russia has been analysed along with the social and political scenario which are so intricately woven with the economy of the country. The uncontrolled inflation is traced back to a loose monetary policy and excessive government spending. It was found that Russian economy s over dependence on oil exports makes it extremely vulnerable to any global downturn and hence a need for urgent diversification is identified. The positive influence of Putin s regime despite high levels of corruption in the country is also emphasized. On comparison with different sectors, the retail and consumer goods sector and the construction sector were found to be most favourable. Although Russia scores well on political macroeconomic stability, still, other concerns such as weakness in disclosure norms, labour benefits guaranteed as well as lack of a vibrant capital market came out as the key issues to be taken before choosing a sector. Contribution of SEZs in encouraging business in Russia is another sign of reform. With processing and high tech plants getting the most out of SEZs they surely gain an advantage. Regression results suggest that the key determinants of FDI in a country are its GNI (with a two year lag), real rate of inflation (with a two year lag) and regime (with a 1 year lag).The GNI in itself if positively related to the crude oil price. On carrying out an alternative scenario analysis on the oil price, the FDI could move to as high as 81 billion USD or fall to as low as 46 billion USD from its current value of 52.3by 2015.Of the non traditional factors, corruption seems to have the highest influence on GNI/Capita. Therefore given the low corruption score of Russia, things stand to improve much more than predicted if it tightens controls. Finally, some interviews were conducted with senior managers in Pharmaceutical and Auto sectors which provided a holistic view of multinational and Indian companies towards investments in Russia. The consensus view is that the growing purchasing power and huge population makes Russia an attractive market and an export destination, however it is advisable only for big mettle companies who can deal with the corruption of mafia and have superior technology than Russians or are looking for labour cost reductions to open up shops in Russia.