Will Foreign Direct Investment Take Off in the Russian Federation?

Abstract

With its size and natural resources, the Russian Federation has the potential to attract all types of foreign direct investment (FDI) but, up until recently, has attracted FDI flows below that potential. This has been largely due to the influence of local capitalists (the oligarchs) blocking the sales of assets to foreign investors. Realizing the Russian Federation's potential for attracting FDI and sustaining investor interest will depend largely on whether or not foreign investors will be allowed to acquire equity shares in or even ownership of local firms. From this point of view, the recent weakening of the oligarchs has a double-edged impact: while it potentially removes one obstacle to inflows of FDI, it raises questions about ownership rights and respect of the principle of pacta sunt servanda. This article therefore analyses how and to what degree bilateral investment agreements signed by the Russian Federation and the country's entry into the World Trade Organization may provide the necessary guarantees for foreign investors.

Keywords: Russia, foreign direct investment, FDI potential, natural resources, oligarchs

JEL Classification: F21, F23, F26, O52