Nearly 90 students and lecturers from four Russian Vi member universities (*) linked with UNCTAD’s Kalman Kalotay on October 5 for a videoconference presentation of the 2015 World Investment Report (WIR).
In 2014, global foreign direct investment (FDI) inflows dropped by 16 percent to USD 1.2 trillion amid slow economic growth in the global economy, reports this year’s WIR.
“The decline in FDI was particularly sizable in the Russian Federation, from USD 69 billion in 2013 (the second highest level since transition began) to USD 21billion in 2014. This significant drop occurred amid a decline in the economic performance of the Russian Federation,” Kalotay explained.
Although the Russian Federation remained among the top 20 recipients, the country is no longer a top-five destination. China, on the other hand, overtook the United States as the top destination for FDI in 2014.
“Between 2005 and 2008, FDI flows to the Russian Federation were growing faster than those oriented to China and there was even a catching up between the two economies,” he said. However, “since 2009 the difference between inflows to China and the Russian Federation has consistently increased.” By 2014, inward FDI in China was six times larger than in the Russian Federation.
In relation to outward FDI flows, the rapid expansion of Russian multinational enterprises (MNEs) marked a pause in 2014, whereas Chinese companies continued to increase their investments abroad.
The WIR attributes the decline in both FDI inflows and outflows to a number of vulnerabilities in the Russian economy.
“The economic structure of the Russian Federation has a major weakness,” Kalotay said. “The exports of the Russian Federation are concentrated in oil and gas, and other industries are uncompetitive, despite the high level of Russian human resources.
“Given the technological needs of Russian industries and the lack of diversification, more liberalization of FDI flows would be a better option than more regulation. The business environment also needs to improve” he added.
In the short term, UNCTAD’s FDI forecast model projects global FDI flows to rise in the coming years. This is supported by a survey of large multinationals top executives.
“Large MNEs are holding high levels of cash, which so far have not been invested. This shows there is room for expansion in capital expenditures and acquisitions,” he said.
However, Kalotay warned that the uncertainties surrounding the global economy may darken the outlook for FDI. For the Russian Federation, economic sanctions further compromise the future of FDI, both for inflows and outflows.
The presentation then turned to the WIR 2015 special themes: the reform of the international investment regime and the need for a coherent framework for international tax and investment policies.
“The international investment governance clearly needs a reform,” Kalotay said. “We have a time bomb now due to a large number of international investment agreements which do not have a clear hierarchy.
“The challenge is to safeguard the right to regulate of policymakers while providing for the protection and facilitation of investment. Governments, but also civil society representatives and the private sector should participate in the negotiations to achieve a coherent framework,” he added.
Regarding international tax and investment policy, the WIR 2015 suggests that FDI can play an important role in fulfilling the financing needs for the achievement of the Sustainable Development Goals.
According to the WIR, MNEs contribute an estimated USD 730 billion annually to government budgets in developing countries.
“This is a significant contribution,” Kalotay said. “However, tax payments are not fairly distributed among countries, and around 30 percent of FDI is routed through offshore hubs, 10 percent in tax havens and 20 percent transiting through special purpose entities and vehicles set up in financial centres. “
In Europe, for example, 35 percent of FDI is routed through offshore centres but only 3 percent transits through tax havens. “However, in the transition economies the offshore exposure is a real problem and 41 percent of corporate investments occur in tax havens,” Kalotay he said.
The WIR 2015 calls for action against tax avoidance while weighting the risks of negative effects on investment flows.
(*) Videoconference host, St. Petersburg State University, as well as the North-West Institute of Management, St. Petersburg State University of Economics and the Moscow State Institute of International Relations. Also attending were visiting students from the University of Macerata, Italy, and the Bowdoin College, United States.