Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Foreign Investment Tips

Businessmen and politicians understand full well these days the importance of foreign investment in Russia. However, in spite of the wealth of opinions and statements on this topic, the most major foreign investors are taking an extremely cautious, wait-and-see attitude. and potential recipients of foreign investment do not help the situation by their actions.


Directors of low-productivity monopolies are afraid that if they take large sums of money from foreign investors they will lose control over their enterprise. Foreign investments can bring demands for a radical change in organization, which in many enterprises is on quite a low level. and in the majority of cases it is obvious that some of the workers will have to be fired.


Also, many factory directors in Russia do not like the fact that foreign investors wish to supply enterprises with technology instead of money. In the vast majority of cases technological investments mean that the enterprise is tied to foreign suppliers, and the money received in hard currency must be spent on raw materials and spare parts for foreign equipment. Most directors naturally want to receive the most hard currency as possible with the fewest obligations to investors.


Foreign investors hesitate in the face of political instability in Russia, of the confusion surrounding currency regulations, and of the extreme contradictions in the government's policy toward foreign firms - ideologues greet foreign businessmen with open arms, while the bureaucrats, who really make the decisions, extort bribes from them with the threat of revoking permission for their business activities.


Another impediment to foreign investment is the technological backwardness of the firms, the absence of clear information about their financial condition. There are moral factors which complicate investment: the amount of ecologically harmful production, the absence of an ideology of conservation in Russian enterprises. The qualifications of managers is also in doubt.


As a result, the desire to increase foreign investment remains, on both sides, just a wish. What can be done, except to wait for a miracle?


In spite of all the complications involved in foreign investment, there are some solutions. These are tied first of all to a change in the approach to investment in Russia. It is becoming extremely inefficient to wait for worthy investments to present themselves. The foreign investor should try to create a demand for foreign investment.


How can this be accomplished? Investment should be preceded by a survey of various enterprises to ascertain what type of investment they need most - help with privatization, with forming a corporation, with stock shares, consultation on buying stocks and bonds, on international bookkeeping standards, on the best ways to attract foreign capital. Who, if not the foreign investors themselves, can and should explain in a clear and concise manner the principles and requirements of the international market?


The majority of enterprise directors are interested in raising the qualifications of their workers. In training Russian entrepreneurs, the foreign investor is creating a partner for himself.


The second step is choosing enterprises to become steady clients. Such a selection process could be built on written surveys, or on direct observation through visits to the firms. During this survey process the directors of enterprises must be apprised of the criteria for investment: a clearly defined production strategy, a plan that includes new types of production, analysis of the market and a marketing strategy, a plan for specialization in one or several products, which would be connected in the production and technological cycle, an export plan and a statement of financial requirements. Other criteria for selection should be the qualifications of those in charge, the mechanism for adopting management decisions, and whether or-not financial statements and other information are published for investors.


Surveys should be concentrated in the most promising fields: energy, refining of natural resources, building and real estate, transportation, consumer products, food processing, textiles, tourism.


Changing the approach to foreign investment in Russia demands appropriate forms of organization. It would be most efficient to create consulting and research departments in foreign firms, and especially financial institutions. Perhaps the best way to organize market analysis in Russia and to organize foreign investment in this market would be the creation of investment companies, capable of establishing both in Russia and beyond its borders a network of investment funds to accumulate resources for further investment.


In Russia the stock markets are just beginning to develop. Without these markets, which raise the liquidity of investment, and make it possible to involve large portions of the population in the investment process, foreign investment will not be able to survive. Privatization in Russia is also opening new possibilities. Joint-stock companies are being formed in place of state enterprises, the directors of which are in dire need of information and knowledge. Besides this, investment funds created in Russia could be used by foreign investors as partners. Why should a promising enterprise take all of its financing from a foreign investor when part of it can be obtained from a local financial institution?


Creating a market for oneself, instead of waiting for its spontaneous development would be in the interests both of Russia and of her foreign partners.


Vladimir Milovidov is managing director of the asset management department of the Moscow office of the Credit Commercial de France.