Companies Prefer Russia to China?
An article today in Bloomberg covering the St. Petersburg International Economic Forum begins with the following lede:
Russia is the most promising market for foreign investment, surpassing China and India, even though corruption remains a “major concern,” according to a survey of international companies for the Russian government.
Count me among the unconvinced. Even if we assume the agency commissioned by the Russian government to carry out the survey was evenhanded, the methodology was clearly flawed. About 50 companies were polled, but they don’t look much like a random selection. The surveyed companies account for about 40 percent of FDI in Russia. Bias in the selection of companies makes it difficult to take anything meaningful from the data – other than that the companies that are already in Russia believe they should be there, despite the risk that corruption poses.
All of this is not to say that Russia is not an attractive target for foreign direct investment. According to the Economist Intelligence Unit, Russia has received FDI inflows of 2.55 percent of GDP on average between 2004-07. China edged Russia out by less than half a percentage point, at 2.9 percent, although some part of this must be discounted because of the round-tripping of FDI to Hong Kong. The future is more questionable, though. The Economist Intelligence Unit predicts that Russia will slip in its business environment rankings from 59th place to 63rd place over the next few years.
Dmitri Medvedev, Russia’s new head of state, is trying to convince current and potential investors that he means business when it comes to corruption. Medvedev has promised to fix what he calls a culture of legal nihilism. According to an aide to Medvedev, a new law governing investments in strategic industries is due to come into force. It promises to improve clarity for foreign investors. Yet the St. Petersburg International Economic Forum is taking place against the backdrop of the TNK-BP dispute. I wait to see what the investors in St. Petersburg make of it all.
Update: Apparently, some are claiming that China is the most attractive destination for FDI...
Update II: A June 9 article in the Financial Times suggests that the TNK-BP dispute has damaged investor sentiment at the weekend meeting in St. Petersburg. The dispute shows no signs of being resolved.
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I share your skepticism. Any company already in Russia wouldn't dare go on record with any other view. My gut feeling is that this will be the Asian century, not the Russian one. I had better get my children a Chinese nanny and get them started on Mandarin!
Posted by: Dave Lawrence | Jun 7, 2008 11:38:30 AM
Well, we'll see. No one can say for sure.
With all due respect for the Economist Intelligence Unit, their prognosis is based on assumptions of an uncertain nature.
Corruption is quite bad, it’s true, but corruption is a serious problem for China, as well. Also, China has many endemic concerns that often tend to be neglected by optimistic predictors.
Russia has better infrastructure (the Soviet legacy) and its population enjoys higher levels of education than China (the Soviet legacy, as well). Therefore, the potential for industrial development in Russia is significant. Of course, China does produce millions of tons of consumer goods every year as a result of cheap labor availability. However, this is not something an economy can be based on in the long run.
Also, China is fundamentally limited by its political system. Russia has many transitional problems but it is a democracy. Chinese socialism will set a limit on Chinese growth at some point, I think.
And finally, political and geopolitical circumstances are not to be neglected. We all know what is happening around Tibet and Hong Kong, and what's happening is not contributing to economic stability and attractiveness of the country for foreign investors.
Posted by: A Russian | Jun 13, 2008 11:37:52 AM