Viacheslav KOMAROV

Viacheslav Komarov, Ph.D. (Econ.), Head of the Department of Budget, Tax and Investment Policy, CIS Executive Committee

This analysis of investment activities in the ten years of existence of the Commonwealth of Independent States is the first work of this kind. Naturally, it may have some shortcomings connected, in particular, with a lack of the necessary statistical data and with some discrepancies between national and world statistics in this area. At the same time, the set of measures proposed within the CIS framework should make it possible to ensure optimal conditions for creating an attractive investment image of the Commonwealth states in the eyes of domestic and foreign investors and to intensify interstate investment and leasing activities aimed at real integration and effective development of the CIS economy.

* * *

Investment in fixed capital determines the prospects of expanded reproduction and innovative development of the economy of any country. That is why interstate investment activity is one of the key factors in going over to a new stage: a period of economic growth and fundamental restructuring of the CIS economies, effective interaction for the purpose of pulling out of the economic crisis, stabilization and recovery in the national economies. These matters are of strategic importance and are common to all the CIS countries, although each of them has its own specific features requiring individual tactical approaches and adjustment to real national conditions.

Investment activity in each country largely depends on the possibilities and behavior of national investors, but interstate cooperation in this field plays an important role as well. The substantial decline in production and investment activity calls for a special approach. That is why investment support for pilot sectors and projects in the real economy could become the main line in the efforts of the CIS states aimed at a general stabilization and revival of production.

Legal Framework for Investment Activities in the CIS

Key national legislative decisions serving to establish a legal framework for investors have been adopted in virtually all the Commonwealth countries. The emphasis has now been shifted to bringing the national legislations closer together by means of multilateral interstate and intergovernmental agreements aimed at creating a harmonized legal framework for investment in the CIS.

The first policy-making document in this area was the Agreement on Cooperation in the Field of Investment Activity, signed by the presidents of the CIS countries in Ashghabad on 24 December, 1993. In pursuance of that agreement, on 28 March, 1997, the CIS heads of state adopted a Convention on the Protection of Investor Rights, which has become the basic document in harmonizing the legal framework for investment activities in the CIS.

The purpose of the Convention is to create a common investment space so as to guarantee the possibility of a free inflow of capital and to ensure the rights and security of investors putting their money into the economy of the CIS countries. The document also includes a list of key terms.

In order to provide a legal framework for interstate leasing activities, the CIS countries drew up a Convention on Interstate Leasing, which was approved by the CIS Council of Heads of State in Moscow on 25 November, 1998. It sets forth the rules and conditions necessary for developing cooperation in this area, and is meant to assist commodity producers operating in the real sector of the economy, to provide a legal basis for various kinds of interstate leasing, and to guarantee the rights of all participants in this process. Its ratification will enable all economic agents to go over to mutually advantageous cooperation based on agreements and contracts, and will open the way to the establishment of joint structures in the form of interstate leasing companies and associations.

In pursuance of investment agreements and for the purpose of working out common approaches to the evaluation, selection and screening of interstate investment projects, the CIS Executive Committee developed a passport (certificate) for investment projects within the CIS. It was agreed with the CIS states and, under a decision of the Interstate Economic Committee (IEC) of 25 October, 1996, was recommended for use as a standardized working format. The passport has optimized the volume of information required by the investor, containing a questionnaire based on current international investment practice. The passport is being used to create data banks for investment projects and for informing potential investors in Armenia, Belarus, Kyrgyzstan, Russia and Ukraine. In Tajikistan, it has provided the basis for a two-volume publication entitled Investment Projects: An Invitation to Cooperate (in Russian and English), which is being circulated among potential investors and has already been twice updated.

A substantial place in investment processes belongs to construction activities, whose scale and specifics require more intensive interstate cooperation in the legal field and purposeful efforts to build an investment and a common construction market in the CIS. That is why the Commonwealth countries have adopted a number of agreements harmonizing the interstate legal framework in the field of construction. Thus, the Agreement on Cooperation in Construction Activity (Moscow, 9 September, 1994), concluded for the purpose of investment cooperation and mutually advantageous integration in the use of raw materials and industrial facilities, provides for measures aimed, first, to prepare and implement interstate investment programs and joint projects and to coordinate the development of the industrial base in construction, in the building materials industry, and in road-building and construction engineering; second, to promote the advance to a common market of investments, scientific and technical products and services, design and contract works, and to foster direct links between enterprises of all forms of ownership operating in this sector; and third, to help bring into alignment the CIS countries legislations and methods of government regulation of investment in construction.

In order to implement the agreement, frame a concerted policy, and pool their efforts in stabilizing, developing and coordinating the work of their construction sectors, the states parties to the agreement have set up an Intergovernmental Council for Cooperation in Construction Activity. It consists of the heads of national government agencies in charge of construction in the CIS countries. The Council took an active part in preparing an Agreement on Mutual Recognition of Licenses for Construction Activity, as issued by the licensing agencies of the CIS countries (Moscow, 27 March, 1997). Coordination and control of licensing is effected by the Commission on Matters of Licensing Construction Activity and Competence Certification, set up by the Council for Cooperation in Construction Activity in October 1998. Cooperation between licensors and licensees of Russia, Ukraine and Belarus has been particularly active: in 1998-2000, they issued 20,250 licenses.

This kind of work paves the way for real integration of national construction sectors and for the emergence of a single construction market. Thus, the Agreement on Interstate Expert Review of Projects of Mutual Interest to the CIS States (Saratov, 13 January, 1999) provides for interstate regulation of the investment process in the construction of facilities that are of interest to two or more parties to the agreementirrespective of funding sources, forms of ownership and actual owners of the facilitiesso as to ensure compliance of the future construction projects with the conditions and requirements specified by the parties legislative and regulatory acts. Any element of an investment project in construction may be subjected to interstate expert review.

General Trends in Investment Activities

In the ten years of the Commonwealth of Independent States, the most unfavorable trend among the basic macroeconomic indicators (GDP, industrial output, gross agricultural output) was in investment activities (see Fig. 1).

Figure 1. Indices of Basic Macroeconomic Indicators, CIS averages (1991 = 100%)

Investments in fixed capital from all sources of finance on average for the CIS countries sharply declined, and in 2001 were down to 37% of the 1991 level. It was only in 1999 that their index first registered a marginal rise (see Table 1).

Table 1

  1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Fixed capital investment index for CIS as a whole, (1991 = 100%) 61 55 42 36 30 29 28 29 34 37
Fixed capital investment for CIS as a whole, $bn       73.2 90.3 88.3 61.6 43.0 54.1 69.0

The investment dynamics were markedly influenced by an increase in the absolute amounts of fixed capital investment in Azerbaijan, Kazakhstan and Uzbekistan, where the investment upturn began somewhat prior to 1999, and also by the 1999 reversal of the downward investment trend in Russia, which has the largest absolute amount of such investment.

The maximum increase in fixed capital investment (from all sources of finance) compared with 1991 was recorded in Azerbaijan: from 57% in 1995 to 120% in 1996, 167% in 1997, 206% in 1998, 201% in 1999, 208% in 2000, and 243% in 2001. That is due to a substantial inflow of foreign direct investment into Azerbaijans oil and gas industry. The recovery pattern was more modest in Uzbekistan (from 50% in 1994 to 52% in 1995, 56% in 1996, 66% in 1997, 75% in 1998, and 77% in 1999) and in Kazakhstan (from 10% in 1996 to 11% in 1997, 15% in 1998, 20% in 1999, 30% in 2000, and 36% in 2001).

In Russia, fixed capital investment in 1999 fell to $27,230m (from $41,933 in 1998). The steepest drop was in Moldova (to 10% in 2001), Georgia (to 12% in 1994) and Kazakhstan (to 10% in 1996).

In most countries, investments kept falling until they reached a certain point, when the decline would give way to an equally steady upturn. The only exception is Kyrgyzstan, where investments have tended to fluctuate. Thus, in 1992 they stood at 75% of the 1991 level, falling to 32% in 1994. After a rise in 1996 (to 69%), they fell to 42% in 1998 and then began a gradual climb only to drop once again in 2001. These fluctuations in the overall investment pattern are explained by the large proportion of foreign investments, whose inflow into the country has been highly uneven.

The final results of changes in investment levels in the various Commonwealth countries as of the beginning of 2002 are presented in Table 2.

Table 2

Country Fixed Capital Investment Index in 2001 (1991 = 100%)
Azerbaijan 243
Belarus 47
Georgia 24 (in 2000)
Kazakhstan 36
Kyrgyzstan 59
Moldova 10
Russia 33
Tajikistan 33 (in 1994)
Turkmenistan 174 (in 1993)
Uzbekistan 77 (in 1999)
Ukraine 32

As we find, positive changes have occurred in Azerbaijan (to 243%), while the biggest drop was in Moldova (to 10%) and Georgia (to 24%).

Let us now turn to the absolute indicators of investment activity. Fixed capital investment in the Commonwealth countries (calculated at the weighted average exchange rate of the U.S. dollar) in 2001 totaled $69bn: $54.8bn in Russia (79.4% of the CIS total), $5.0bn in Ukraine (7.2%), $2.1bn in Belarus (3.0%), $5.3bn in Kazakhstan (7.7%), and $1.2bn in Azerbaijan (1.7%) (see Table 3).

Table 3

Country Fixed Capital Investment in 2001, $bn Countrys Share in Total Fixed Capital Investment, %
Azerbaijan 1.2 1.7
Armenia 0.2 0.3
Belarus 2.1 3.0
Kazakhstan 5.3 7.7
Kyrgyzstan 0.2 0.3
Moldova 0.1 0.14
Russia 54.8 79.4
Tajikistan 0.07 0.1
Ukraine 5.0 7.2
CIS total 69.0 100

In the view of experts, such a level of absolute investment is totally inadequate for the normal development of the CIS economies. The annual demand for investment is estimated at around $90bn, including $70bn in Russia.

One of the trends recorded in recent years has had a highly negative effect on the opportunities for expanded reproduction and economic recovery: a decline in gross fixed capital formation (i.e., investment by residents in fixed assets for the purpose of generating new income in the future through their use in production) as a share of the gross domestic product (GDP) in view of an increase in the share of spending on final consumption. The CIS average for gross fixed capital formation (GFCF) went down from 28% in 1990 to 16% in 2000 (see Table 4).

Table 4

  Gross Fixed Capital Formation as a Share of GDP in the CIS Countries (at current prices), %
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Azerbaijan 20.0 14.7 19.4 21.2 26.3 15.6 29.8 38.0 36.7 27.4 18.5
Armenia 43.1 29.5 18.3 12.9 21.2 16.5 18.1 16.9 16.8 16.8
Belarus 22.0 22.1 25.2 33.9 33.3 24.7 21.1 25.6 26.0 26.5 25.6
Georgia 22.6 18.9 17.7 0.8 10.7 19.2 9.3 10.9 12.5 19.1 16.9
Kazakhstan 37.7 30.0 31.1 29.1 24.4 22.3 18.0 16.9 16.5 15.5 16.3
Kyrgyzstan 22.0 15.9 14.3 13.1 12.1 20.4 22.4 12.4 12.9 15.7 18.0
Moldova1 23.0 17.1 15.7 15.5 19.3 16.0 19.7 19.9 22.1 18.4 15.4
Russia 28.9 23.8 24.7 21.0 22.0 21.3 21.0 19.1 17.7 14.8 15.6
Tajikistan 8.3 6.9 9.4 14.9 23.8 23.4 13.3 20.4 15.9 16.7
Uzbekistan 30.7 25.1 26.5 25.1 26.2 33.0 36.8 33.8
Ukraine 23.0 20.0 27.1 24.3 23.5 23.3 20.7 19.8 19.6 19.3
CIS average2 27.8 23.1 25.2 22.0 22.5 21.8 21.2 19.7 17.7 14.2 15.6
1 From 1993 onward, the figures are given without the territory of the left bank of the Dniester River and the town of Bendery.
2 As estimated by the CIS State Statistical Committee.

In terms of this indicator, the CIS countries fall into two groups. The lowest level of gross fixed capital formation has been recorded in Georgia, Kazakhstan, Moldova, Russia and Armenia (15.4-16.9%), and the highest, in Azerbaijan (18.5%), Belarus (25.6%) and Uzbekistan (33.8%).

The reduction in GFCF as a percentage of GDP is due to a number of factors. These include: a decline in savings, which are the main source of finance for investment in the economy; the long-drawn-out restructuring of the investment process, which has now come to a point where governments are no longer making any sizeable investments in the economy, while the market mechanism in this field is not yet working properly; disproportions in income distribution; and a financial policy conducive to investment in financial instruments instead of the real sector of the economy.

As we know, living standards, employment rates and social stability in a country are largely determined by such a relative indicator as investment per capita. In 2001, the figure was $379 in Russia, $356.5 in Kazakhstan, $208.3 in Belarus, $176.5 in Uzbekistan, $149.6 in Azerbaijan, $101.4 in Ukraine, $50.6 in Armenia, $41.3 in Kyrgyzstan, $38.4 in Georgia, $34.7 in Moldova, and $10.4 in Tajikistan.

Analysis shows that in 1996-2001 investment per capita in national monetary units rose in virtually all the CIS countries, e.g., from 13.8 thou to 28.1 thou drams in Armenia, from 31.6 to 76.0 lari in Georgia, from 7.6 thou to 52.3 thou tenge in Kazakhstan, and from 247 to 545 hryvnas in Ukraine. In real terms, however, there was virtually no increase in investment in view of a depreciation of financial resources.

Investment Structure

During the years of radical reform in the CIS, significant changes have occurred in the structure of financial resources. In most Commonwealth countries, the share of resources accumulated in the state budget has been reduced, while the share at the disposal of economic entities and households has increased.

Thus, the share of capital investment being made by state-owned enterprises and organizations has gone down: in 2000, the figure was 28.0% in Russia (against 32% in 1994), 46% in Ukraine (against 65%), 60% in Belarus (69%), 42% in Azerbaijan (91%), and 11% in Kazakhstan (51%). The proportion of such investment is largest in Armenia (82%) and Uzbekistan (63%).

The share of private-sector investment in fixed capital has increased: from 18% in 1994 to 31% in 2000 in Russia, from 5% to 14% in Belarus, from 49% to 60% in Kazakhstan, and from 56% to 64% in Kyrgyzstan. Moldova is the only country where this share fell from 45% to 22%.

The years of economic reform have been marked by a steady positive trend toward a decentralization of the investment process. The share of capital investment financed from budget sources in the total amount of fixed capital investment on average for the CIS countries fell from 20% in 1995 to 17% in 2000, while internal financing (own funds of enterprises and organizations) in 2000 was close to 65%.

The use of budget funds to finance capital investment fell in 1995-2000 from 13% to 3% in Azerbaijan, from 22% to 21% in Russia, and from 80% to 44% in Tajikistan. At the same time, fixed capital investment from budget sources rose in Uzbekistan (from 24% to 28%), Kazakhstan (from 5% to 6%) and Kyrgyzstan (from 5% to 9%).

The national vectors in the movement of fixed capital investment financed by enterprises and organizations out of internally generated funds from 1995 to 2000 pointed in different directions. Thus, in Armenia such investment rose from 6% to 41%, and in Belarus, from 50% to 51%, whereas in Russia and Ukraine it fell from 49% to 46% and from 76% to 69%, respectively.

In the conditions of budget deficits and money shortages experienced by economic entities and households, and also in line with current global trends the CIS countries have turned to foreign investors. From 1995 to 2000, the foreign contribution to fixed capital investment increased: from 2% to 25% in Kazakhstan, from 3% to 6% in Russia, from 14% to 23% in Uzbekistan, and from 2% to 6% in Ukraine. A decline was recorded in Armenia (from 41% to 24%), Belarus (from 7% to 4%) and Kyrgyzstan (from 68% to 60%). As we see, foreign investments play very different roles in the overall volume of investment activities, ranging from a few percentage points (Ukraine, Belarus, Russia) to significant figures (Azerbaijan, Kyrgyzstan, Kazakhstan, Armenia). The different opportunities for attracting foreign investment are rooted both in the size of the economy and in the investment image of the country.

The sectoral structure of capital investment has changed as well. In virtually all the Commonwealth countries, investment in the agrarian sector of the economy as a share of total investment in fixed capital has been drastically reduced (by almost an order of magnitude). This is largely due to low rates of return in agriculture, and also to transformations in the agrarian sector. In 2000, the share of investment in agriculture was down to 3.7% in Kyrgyzstan (from 20% in 1991), 3% in Russia (from 18%), 4% in Ukraine (from 22%), and 8.2% in Tajikistan (from 21%). At the same time, fixed capital investment in industry increased. Preference here in 2000 was given to the fuel and energy industries, the most profitable and vitally important industries supported at government level. In 2000 (compared with 1991), investments were up from 36% to 75% in Azerbaijan, from 25% to 30% in Belarus, from 24% to 30% in Georgia, from 30% to 61% in Kazakhstan, from 32% to 41% in Kyrgyzstan, from 35% to 38% in Russia, from 19% to 33% in Uzbekistan, and from 32% to 43.3% in Ukraine.

In view of the economic crisis and cutbacks in outlays on the development of construction, from 1991 to 2000 fixed capital investment in this sector fell in all the CIS countries: from 3% to 1% in Azerbaijan, from 5% to 0.1% in Armenia, from 3.9% to 1.4% in Belarus, from 3.7% to 0.7% in Kyrgyzstan, from 4.5% to 3.9% in Russia, from 2.3% to 0.3% in Uzbekistan, and from 3.4% to 2.4% in Ukraine. At the same time, the share of investments going into transport and communications markedly increased (primarily owing to the need to produce more light-duty trucks and to develop cellular communications). In 2000, their share in total fixed capital investment was 36.2% in Armenia (against 7.3% in 1991), 13.4% in Belarus (against 9.1%), 24.1% in Russia (9%), 27.4% in Tajikistan (6%), and 20% in Ukraine (7%). A point to note here is that the vector of foreign investments largely coincided with these trends.

Analysis has also shown that investment processes in the CIS countries have a number of common features. These include, in particular, a decline in financial accumulation and in the scale of renewal of production assets at enterprises coupled with a curtailment of national investment programs and projects. Virtually all the Commonwealth states have recorded a drop in investments in agriculture, while those in construction have fallen to a critical point. Capital investments in light industry have gone down in 11 of the 12 CIS states. Investment activities in machine building, electronics and high-technology industries are on the decline, while an increase in such activities has been registered in the oil and gas industry, electric power generation and some branches of metallurgy.

A study of the present state and structure of investment in the real sector of the economy leads to the conclusion that the focus of investment activity is shifting from life-supporting branches of the economy (agriculture, medical and light industry, building materials industry, science-intensive and innovative lines of production) to oil and gas production and the development of other export-oriented raw material resources. The Commonwealth of Independent States is gradually turning into a raw material sector of the world economy. Such a bias in investment policy gives rise to negative trends in the economic and especially in the food security of the CIS.

Interstate Investment

Mutual trade levels and traditionally strong economic ties are to some extent conducive to capital mobility. But for a number of reasons, both objective (crisis state of the economy, bad shortage of domestic and foreign investments) and subjective (inadequate legal protection of mutual investments, lack of stability in national economic legislation, etc.), the movement of capital between the Commonwealth countries tends to stall, remaining at a patently low level. There are even no joint statistics of these processes. Only in Russia such statistics have begun to take shape over the past three or four years in a sufficiently developed form, and some fragments are available in Belarus and Ukraine.

According to Russian statistical data, as of 1 January, 2002, the cumulative investments of the CIS states in RF enterprises and organizations totaled $33.2m (including redemptions). The largest investments have been made by Kazakhstan ($9.1m, or 27.4%), Belarus ($1.8m, or 5.6%), Ukraine ($10.6m, or 32%), Uzbekistan ($5.8m, or 17.5%) and Moldova ($3.6m, or 10.9%). In 2001 (according to preliminary data of Russias State Statistical Committee), investment flows from the CIS states into the Russian economy totaled $32.2m. Of these, Ukraine provided $7.3m (22.7%), Kazakhstan, $11.9m (36.9%), and Uzbekistan, $8.3m (25.7%). As regards Russian cumulative investments in the Commonwealth countries, as of 1 January, 2002, these reached $953.9m. The largest stocks were located in Belarus ($584.1m, or 61.2%), Moldova ($169.8m, or 17.8%) and Ukraine ($68.1m, or 7.2%). In 2001, Russian investment flows to the CIS countries totaled $310.2m. Of these, $61.4m (19.8%) went to Belarus, $93.5m (30.1%) to Moldova, and $6.9m (2.2%) to Ukraine.

So, in 2001 Russias investments in other CIS countries were more than nine times in excess of their sum-total investments in Russia.

In the estimate of Ukrainian agencies, as of 1 January, 2001, direct investments from Ukraine in other Commonwealth countries amounted to $18.4m, or 18.7% of their total volume. Of these, $15.9m (86.4%) were located in Russia. As of that date, investments in Ukraine from other CIS countries amounted to $370.7m, or 9.6% of the overall volume of foreign investments. The largest share had come from Russia: $314.3m, or 84.8% of the total volume of investments from the Commonwealth countries. This has made Russia one of the major home countries for Ukraine (ranking behind the Netherlands, Cyprus and the U.S.A.).

According to Belarus balance of payments data, investment flows to the republic from other CIS countries in 2000 amounted to $409.9m, which was much more than from all other countries of the world (a total of $64.5m). That year, Belarus itself invested $405.7m in other countries of the Commonwealth (while its investments in the rest of the world amounted to $4.8m, or 1.2%).

The largest amounts of mutual investments flow between Russia, Ukraine, Belarus and Kazakhstan.

In 2001, on the motion of Commonwealth governments, the CIS Executive Committee prepared a Joint Package (Catalogue) of Investment Projects of mutual interest to the CIS states. One should note, however, that projects of particular interest to several states at once are virtually absent. The Joint Package contains 60 projects from nine states worth around $9bn. It has been circulated to the CIS governments for examination and for the possible involvement of commercial, banking and other interested structures of the Commonwealth countries in the search for potential investors and in the implementation of the projects. The Joint Package has been posted on the CIS Executive Committees website (in Russian and English) for information purposes and as an invitation to potential investors. Since 2002, investment projects have been regularly published in the Vestnik Sodruzhestva of Russias Novosti News Agency.

Preparatory work is now underway to draw up a joint package of proposals for interstate investment projects, which is to be compiled on sectoral lines and based on projects developed by the interstate and intergovernmental councils of the CIS.

Foreign Direct Investment in the CIS Economy

The importance of foreign investment in the global movement of capital is evident from the fact that the cumulative amount of foreign direct investment outflows from the industrialized countries of the West to other states (outward FDI stock) has exceeded $3 trillion (as of 2001), while the cumulative amount of foreign direct investment inflows into these countries from abroad (inward FDI stock) is over $4 trillion.

The role of FDI in the global economic process has been growing steadily. Market-economy countries attach particular importance to such investment, regarding it as a separate priority category.

The present scale of foreign capital inflows into the CIS countries falls short of their requirements. The point is that the role of foreign direct investment in a transition economy is significantly higher than in a stable market economy, where it is an integral part of the reproduction process in view of the well-oiled mechanisms of capital turnover.

The difficulty of the economic position of the Commonwealth countries is that they have to address the tasks of systemic and structural reform together with those of anticrisis macroeconomic stabilization. As a rule, they are short of internal sources of investment for overcoming the recession and, even more so, for carrying out long-overdue structural changes. The new forms of economic activity springing up in the process of systemic reform are also in need of financial and investment support, for which domestic resources are insufficient.

The way to eliminate the acute investment shortage is closely connected, first and foremost, with the attraction and use of foreign direct investment. World practice shows that in the development of the Western countries such investment has in various periods been the key element of economic ties, promoting economic recovery, growth of the scientific and technical potential, and structural changes in the economy. Today there is no longer any need to argue the importance of FDI in the process of economic reform, since it is clearly evident from the experience of a number of East European countries and China. According to the experts of the German Economics Institute in Cologne up to the mid-1980s international trade and foreign direct investment kept growing at a roughly equal pace: about 7% a year. Since 1988, their growth rates have diverged, with FDI growing almost twice as fast as trade. Whereas world trade in this period has been rising at a rate of 10% a year, the FDI rate is 19% a year.

One should note that the potential capacity of CIS markets is quite considerable for foreign direct investment. Thus, the Belarus economys demand for FDI is roughly estimated at over $5bn a year, including $1.3bn for the fuel and energy sector, $670m for machine building, and $350m for the chemical and petrochemical industry. Azerbaijan is in need of up to $40bn solely for the development of its oil producing industry. Ukraine requires $7bn worth of investment in metallurgy, $5bn in machine building, and $3.3bn in the chemical and petrochemical industry. As Ukraines Ministry of Economics has estimated, economic restructuring in the country will require $40-50 billion.

Apart from providing financial resources, foreign investments in the CIS economy should help to introduce innovative technology and management methods. Their importance is evident from the fact that a Foreign Investment Advisory Council has been set up and is actively operating under the RF government.

The initial stage of reform did not justify the hopes for a rapid restructuring and modernization of the national economies through a massive influx of foreign investments and related foreign technologies or for gaining access, with their assistance, to world commodity and investment markets. Foreign aid was confined to the extension of tied government credits to individual states for the purpose of financing import purchases and humanitarian food supplies. An insignificant inflow of capital was ensured by foreign participants in joint ventures, mostly in the sphere of export-import operations.

The low level of domestic and mutual investments has induced many Commonwealth countries to start drawing capital from other states. The largest proportion of foreign investments in their overall amount has been recorded in Azerbaijan, Kyrgyzstan and Kazakhstan (65-80%), and a somewhat smaller proportion in Turkmenistan, Armenia and Uzbekistan (15-20%), whereas the figures for Moldova and Russia do not exceed 3%, and for Belarus and Ukraine, 2%.

The bulk of foreign investment goes into the raw material and mineral resource industries, the construction of oil and gas pipelines, and the development of telecommunications and the market infrastructure (banks, trade, etc.). Thanks to foreign investment in oil and gas production, Azerbaijan has achieved the CIS countries biggest increase in fixed capital investment compared with the early 1990s. In Georgia, FDI mostly goes into transport and into the production of manganese, copper, etc.; in Armenia, into gold and silver mining and into oil and gas exploration, and in Kazakhstan, into the key sectors of the economy (oil, gas, metallurgy). Uzbekistan has managed to draw investments not only to the mining industry (uranium, gold, ferrous and rare earth metals), but also to manufacturing.

Russias share in the overall amount of credits to the CIS countries is close to 20% (including debts for energy resources), and in investments, 1%. In Russia itself, almost one-third of all foreign investment comes from the U.S.A., 17.7% from Germany, and 30% from the EU countries. The European Bank for Reconstruction and Development (EBRD) jointly with a number of private banks has granted credits for the development of small business. Investments in the fuel and energy sector, metallurgy, chemicals and pharmaceuticals, in the pulp-and-paper, confectionery and other industries are on the rise. Around 70 projects are being implemented in Russia with EBRD participation (31% in the financial sector, 29% in oil, gas and gold, 19% in transport, and 5% in telecommunications).

The major investors in the CIS economy are the U.S.A., the EU countries, Japan, South Korea and Turkey. In 1991-2001, the Commonwealth countries received close to $95bn worth of foreign investment. Private foreign investors in the CIS countries expect to make an annual profit of at least 20-25%, whereas at home the rate of return does not exceed 7-8%. In 1998-2000 (according to the U.N. World Investment Report 2001), FDI flows to the CIS countries were on the whole quite steady and amounted to $6.2-6.6bn a year. One should note, however, that this is much less than in pre-crisis 1997, when FDI flows to the CIS came to $10.9 billion.

As a result of the 1998 crisis, FDI inflows into virtually all the Commonwealth countries in 1999 were reduced. In 2000 their growth was resumed. At the same time, FDI inflows have been steadily falling in Kyrgyzstan (since 1998) and Uzbekistan (since 1997).

Belarus is a host country for capital from 70 countries of the world. As of the beginning of 2001, the republics inward stock of foreign investment was over $3.4bn. In 2000, FDI inflows amounted to $92 million.

Foreign investment inflows into Armenia in 2000 amounted to $263.2m, including $133m worth of direct investment. As of 1 January, 2001, cumulative investment totaled $1.7bn, including $503m worth of direct investment. Investment inflows from the CIS countries in 2000 amounted to $43.4m, while the inward stock of such investment as of 1 January, 2001, stood at $252.6m, including direct investment in the amount of $43.1m (inflows) and $142.6m (stock).

The largest FDI flows in 2000 went to Azerbaijan ($883m), Kazakhstan ($1,249m), Russia ($2,704m) and Ukraine ($595m). Detailed information on the Commonwealth countries year by year is presented in Table 5.

Table 5

Foreign Direct Investment Inflows to the CIS (millions of U.S. dollars)

  1996 1997 1998 1999 2000
Azerbaijan 627 1,115 1,023 510 883
Armenia 18 52 232 130 133
Belarus 105 352 45 41 92
Georgia 45 243 265 82 197
Kazakhstan 1,137 1,321 1,152 1,587 1,249
Kyrgyzstan 47 83 109 35 19
Moldova 24 79 74 39 128
Russia 2,479 6,638 2,761 3,309 2,704
Tajikistan 16 4 30 21 24
Turkmenistan 108 108 64 80 100
Uzbekistan 55 285 140 121 100
Ukraine 521 624 743 496 595
CIS total 5,182 10,904 6,638 6,451 6,224

Source: U.N. World Investment Report 2001. (Statistical data on FDI as given by the United Nations, the World Bank and national statistical agencies contain a number of discrepancies.)

The overall amount of foreign investment does not, as a rule, give an objective picture of economic processes in countries moving toward a market economy. A more objective indicator in this respect is the level of foreign investment per head of the population in the recipient country.

For a subsequent comparative analysis let us consider the levels of investment in China and Hungary, two countries close to the opposite ends of the investment activity range in countries with a transition economy. Thus, foreign investments in China in the 1990s are estimated at $250bn. In a country with a population of roughly one billion, this comes to a per capita figure of around $250 for ten years, or $25 a year. In Hungary (with a population of 10 million) foreign investment inflows in that period amounted to $15bn, or $150 per capita a year. Considering that the two countries have roughly equal dynamics of economic growth, while Hungary has received six times more foreign investment per capita, the conclusion here is that the main source of growth of the Chinese economy is effective use of domestic investment, whereas GDP growth in Hungary over the past few years has largely been achieved through the optimal attraction and use of foreign capital.

FDI inflows into the Commonwealth countries in 2000 came to an average of $22.2 per person. This is commensurate with the figures for China, but is almost seven times less than in Hungary. The leaders here are Azerbaijan ($109.3), Kazakhstan ($84.2), Russia ($30.5), Georgia ($40.2), Armenia ($35) and Turkmenistan ($25.0). The lowest per capita figures have been recorded in Kyrgyzstan, Tajikistan and Uzbekistan. For the CIS as a whole, FDI per capita in 1998-2000 stabilized at $22.2-23.5.

One of the key indicators is the ratio of foreign direct investment to GDP, which shows the investment appeal of the recipient state. Based on World Bank data, according to which the ratio of FDI to GDP in the developing countries in the 1990s was around 2.7%, one may say that Ukraine, Uzbekistan, Belarus and Tajikistan are close to that level, while Turkmenistan, Kazakhstan, Moldova, Armenia and Azerbaijan have surpassed it.

Another indicative ratio is that between financial resources obtained from foreign direct investment and those accumulated through privatization revenues. On the results of 1989-2000, the Commonwealth states may be tentatively divided into three typical groups. The first group includes Belarus, Uzbekistan, Ukraine and Russia, where accumulated privatization revenues amount to 1-4% of GDP and are close to the FDI to GDP ratio, which comes to 3-9%. In the second group (Moldova and Georgia), the figures are 10-13% for privatization revenues and 25-27% for FDI. In the third group (Turkmenistan and Kyrgyzstan), the respective figures are 1-2.5% and 32-35%, which means that FDI inflows are much more substantial than revenues obtained from privatization.

A comparison of the CIS countries with emerging markets (based on average indicators for China, Brazil, Greece, Turkey and other countries) shows that their level of foreign direct investment as a percentage of GDP is much higher.

The above analysis shows, on the one hand, that the amount of FDI is critically insufficient for expanded innovative development of production in the CIS (compared with Hungary) and, on the other, that the attracted FDI is used less than efficiently (compared with China). Evidently, apart from attracting foreign direct investment, the Commonwealth states need to work out a strategy of its optimal use and to create conditions for channeling these resources into innovation spheres of the economy.

Conclusions and Proposals

Interstate investment in the CIS economy is at the initial stage and is most inadequate. It is necessary to develop and implement a set of evolutionary economic measures to intensify this process.

The development of investment activity in the Commonwealth countries is a complicated multifactor process of real economic integration. In summing up the results of the above analysis, one may draw the main conclusions for promoting the development of more effective investment and leasing processes in the real sector of the economy of the CIS countries and formulate the following proposals.

For the short term. More vigorous efforts must be made to harmonize normative legal documents, to align the legislations of the Commonwealth states, and also the institutional conditions for investment and leasing activities in order to create an optimal legal framework; to form, on a systematic basis, attractive joint packages of interstate investment projects and circulate them to the governments of the Commonwealth countries for all-round examination, a search for potential investors and implementation, particularly in such promising areas as fuel and energy, metallurgy, the agroindustrial and military-industrial complexes, and the light industry.

It is also necessary to prepare and launch sectoral projects for the development of interstate leasing in the CIS as a pilot investment mechanism; to draw up and put into effect a package of image-building measures for raising the investment appeal of the Commonwealth countries in order to draw foreign direct investment to the real economy; to step up the activities of the CIS Interstate Bank in implementing top-priority and particularly effective programs and projects.

For the medium term. In the banking sector, we need to develop a set of measures in order to change the vector of its activity. With this aim in view, it is necessary to create a mechanism that would encourage commercial banks and other financial institutions to provide medium-term and long-term credits for investment programs and projects; to build a system of government guarantees available to private investors in order to spur investment in priority lines of development and specific projects; to carry out a set of measures for normalizing payment discipline, for concentrating household funds in the banking system and channeling these into the real sector.

In addition, we need to develop a market for the insurance of investment and leasing projects and transactions so as to protect and safeguard national and foreign investments in each Commonwealth country and in the CIS as a whole; to initiate the establishment of new and provide support for existing transnational corporations as the most dynamic structures of interstate economic cooperation making efficient use of investment resources; to evolve a strategy for the rational use of foreign direct investment in the innovation sphere; and to find opportunities for drawing up a consolidated budget for priority interstate investment projects (such as the establishment of a fuel alliance or the construction of a transnational Eurasian highway).

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