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© 2006 Go-Essays® All Rights Reserved Salvaging Russia’s Foreign Investment Problems As the world’s financial institutions pushed for globalization, and as the free market mantra in the early 1990s prevailed, countries following policies pursued by the International Monetary Fund and the World Bank were left with nothing to show for their efforts except a complete financial collapse. The case in Russia epitomizes this failure. As the country broke away from its communist regime and pursued liberalization policies, capital flight escalated to insidious levels; indeed, economists report that the losses totaled $15 million dollars a year (Stiglitz 2002). This occurrence in and of itself was enough to strip the economy of its power, but coupled with other issues, such as prevalent bureaucratic corruption and comprehensive investment ambivalence toward Russia, foreign capital was certainly not an integral aspect of Russia’s economy (Bonell 2001). Since this horrendous financial blunder, Russia has been trying to recuperate from the disastrous effects. Thus, with the realization that the country is still suffering from low investment levels which are necessary to stimulate the economy, it is crucial to devise a pragmatic strategy that addresses Russia’s investment dilemma. Some options, such as working with China or Japan in the energy sector are attractive, although recent reports have noted that Russia is in the process of drafting new laws that would “limit foreign investments in ‘strategic sectors’” (Agence France-Presse 2006) of the economy. This move is both arbitrary and monopolistic, and such a law will not help Russia stimulate its level of investment. Provided that it is crucial for Russia to maintain its relations with Japan (Ivanov & Smith 1999), a more practical approach for the respective nations is to devise a bilateral investment treaty (BIT) on the energy sector. Countries that enter into these agreements accept foreign participation in their economies (Lopez-Perez & Diaz 2001) and, since the 1950s, BITs have been vigorously pursued by developing and non-developing nations. While it is not within the scope of this report to provide an overview of BITs, it is necessary to give a brief look at what these treaties cover. Peterson (2004) noted that while BIT’s encompass a number of different elements to stimulate a country’s economy, there are some general features which have emerged. In particular, the treaty will include provisions on treatment (for example, “fair and equitable treatment), standards of treatment (National treatment or Most-Favoured Nation); protections against expropriation or nationalization, and recourse to dispute-settlement (state-to-state and investor-to-state)” (p. 2). In addition, the treaties stipulations may include protection clauses for civil wars and social/political unrest. The economic sectors that the BIT will cover are not limited in scope; indeed, any sector, unless otherwise stipulated in the terms of the agreement, can be included within the BIT (Peterson 2004). Fundamentally, bilateral investment treaties are designed to increase and protect foreign direct investment (FDI). Peterson (2004) reports that the underlying principle that sets these treaties in motion is due to the fact there “there is a straightforward expectation that the treaties will encourage new investment, which will, in turn, contribute to the economic development of the host state” by increasing investment flows (Peterson 2004). The plethora of research on FDI attests to its importance (ADO 2004; Fischer 2000; Peterson 2004), especially as the world moves to a global, interdependent economy. In the case of Russia and Japan, FDI levels have not had a significant macroeconomic impact because of market restrictions, but if these were broken down, higher FDI flows would significantly impact the respective economies (Fischer 2000). However, the factor determining the applicability of a bilateral investment treaty between Japan and Russia is the level of attraction in foreign investment between these respective countries. Put simply, it must first be discerned why Japan would want to invest in Russia and Russia in Japan. To this end, research has provided evidence that both countries would benefit greatly by such a relationship. Japan’s technology sector, in particular, could greatly expand by expanding on the entrance into European markets whereas Russia could increase imports on products such as timber, non-ferrous metals, marine products, and coal (Ivanov & Smith 1999), but the energy sector is especially attractive since Japan is dependent on Russia for oil resources. Moreover, the availability for joint projects within this sector is abundant. Gas can be tapped and transported to the Irutsk fields in Siberia and brought to the Asian markets, drilling for gas and oil can occur on Sakhalin, and Fischer (2000) notes that “there can be mining and petroleum refining projects in Siberia, and the joint exploitation of wind and solar energy on the disputed Kuril Islands” (p. 421). The author goes on to note that the region of Eastern Siberia could be developed into an energy and raw materials base for the Southeast Asian economies (Fischer 2000), but this can only happen under the direction of an agreement. While there remains some ambiguity over Russia’s current move to limit economic cooperation within the energy sector, economists emphasize that the energy sector is a central area of bilateral cooperation (Ivanov & Smith 1999). The Sakhalin gas and oil projects have attested to this fact, as this effort has already brought in a number of different investors such as Sodeco and Rosneft' and Rosneft', and, naturally, these projects will lead to an increase in trade. There have been some discussions regarding the possibility of energy exploration in other areas of East Asian proveniences, which serves to bolster the possibility of the establishment of a mutual relationship (Ivanov & Smith 1999), and the advantages for both countries are extensive. “Russia-Japan cooperation will be enhanced by the revival of volumes of transit transportation from Japan to Europe and Central Asia over the Trans-Siberian Railway, which will be modernized along with ports, roads, and other infrastructure. This will contribute to Russia's internal integration as well” (p. 224). Some policy instruments that would assist in regulating this process could include the establishment of an investor information system, the creation of an FDI agency and special incentives for SDI in designated constituencies and/or industries (Fischer 2000). In regards to the “special incentives” mentioned, there are diverse options that the governments could create. For example, Fischer (2000) explains that China and India offer “generous tax holidays for joint ventures and wholly-owned subsidiaries in high-tech industries with high export, employment, technology and local sourcing content” (p. 482). On the other hand, sectors that are focused on domestic products (or on serving local industries) are excluded from the incentives mentioned above because the government wants to have an edge in brining in foreign capital. Financial incentives are not the only option though. Russia and Japan could also establish non-financial incentives that could be measures to improve the overall infrastructure of the country. More than 50 years ago, Japan and Russia negotiated on a BIT agreement in the fishery sector, as each country came to the realization that they had to share the same resources—particularly the Sea of Okhotsk and the Sea of Japan—and this treaty has proved to bring economic cooperation between the respective nations (Ivanov & Smith 1999). Given that this economic tool has been useful in the past, a new BIT in the energy sector of the nation’s economies will ultimately prove to be a pragmatic strategy. Moreover, the opportunity for a stronger and centralized economy offers numerous benefits that both nations need to stimulate financial capital. References Agence France-Presse. (2006). Russia plans limits on foreign investment in 'strategic' sectors. Industry Week. Retrieved March 6, 2006, from http://www.industryweek.com/ReadArticle.aspx?ArticleID=11555
Bonnell, V. E. (2001). Russia in the new century: Stability or disorder? Boulder: Westview Press.
Lopez-Perez, J. & Diaz, M.F. (2001). Contribution of BITs to Cuba’s foreign investment program. Law and Policy in International Business. 32(3), 529 Fischer, P. (2000). Foreign direct investment in Russia: A strategy for industrial recovery. New York: St. Martin's Press.
Foreign direct investment in developing Asia. (2004). Asia Development Outlook. Retrieved March 7, 2006, from http://www.adb.org/Documents/Books/ADO/2004/ADO2004_PART3.pdf
Ivanov, V. & Smith, K.S. (1999). Japan and Russia in northeast Asia: Partners in the 21st century. Praeger Publishers: Westport Peterson, L. E. (2004). Bilateral investment treaties and development policy-making. International Institute for Sustainable Development. Retrieved March 6, 2006, from http://www.iisd.org/pdf/2004/trade_bits.pdf
Stiglitz, J.E. (2002). Globalization and its discontents. New York: W.W. Norton Company
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