Download Russia: The Impact -- and Lack Thereof -

Russia: The Impact -- and Lack Thereof -- of Foreign Direct Investment
Foreign direct investment (FDI) has certainly played a constructive role in helping Russia
modernize. Foreign money brings with it technology, managerial skills and other sorts of
expertise that the Russians simply have not developed at home. Many feel that so long as
Russian needs this investment -- or more specifically, the benefits that are often attached to it -Moscow will be loath to break from the West in its foreign policy in any substantial way. By this
argument, the current Georgian crisis should be resolved relatively quickly.
But the reality is that while FDI reached an estimated $28 billion in 2007, most interested parties
have overstated its effects.
Most "foreign" direct investment into Russia is not actually foreign at all. Less than a quarter of
that $28 billion -- roughly $6 billion -- is what can be considered true investment originating at
foreign firms. Nearly all of this is European money.
More than a third -- nearly $10 billion -- is flat out from haven states such as the British Virgin
Islands, Luxembourg or Cyprus and represents Russian money that has fled the country to evade
taxes and is now being funneled back into Russia by the same people and firms (often via shell
companies) that smuggled it out in the first place.
The remaining investment is from states -- mostly the United Kingdom and the Netherlands -which, while sources of true foreign investment themselves, also often serve as financial
intermediaries that serve a similar role to that of the haven states. All in all probably only about
one-third of the total FDI is truly foreign.
Which means that instead of $28 billion of foreign money and assorted goodies binding the
Russians to the West's way of doing things, there is probably only about $9 billion. For the
roughly $1 trillion Russian economy -- flush with somewhere around $750 billion in surplus
petroleum income stashed away in its currency reserves and rainy day funds -- $9 billion is
literally a drop in the bucket.
Russia is not nearly as fettered in its actions as its business partners in the West might like to
believe. If anything, Moscow feels even more freedom to act than the FDI suggests. Russia
supplies Europe with roughly a quarter of its natural gas, oil and uranium -- to say nothing of the
other raw materials of which it is a major exporter. If there is any economic leverage to be had
between the Russians and the West, it is the Russians holding the long end of the stick.