EAEU and Eurasia: Monitoring and Analysis of Direct Investments 2016

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The report presents new results of the permanent research project dedicated to monitoring of direct investments in Eurasia. It focuses on investments made by Russia, Belarus, Kazakhstan, Armenia, Kyrgyzstan, Azerbaijan, Tajikistan, and Ukraine in all countries of Eurasia outside the CIS and Georgia as well as reciprocal direct investments made by Austria, the Netherlands, Turkey, the United Arab Emirates, Iran, India, Singapore, Vietnam, China, the Republic of Korea, and Japan in the eight CIS countries listed above.

According to the new findings, Asian investors continue to increase direct investments in the EAEU. Over the observation period, FDI stock from nine Asian countries (China, Japan, Turkey, India, the Republic of Korea, the United Arab Emirates, Iran, Singapore, and Vietnam) has increased from $30.4 billion in 2008 to $61.9 billion in early 2016.

China continues to expand its economic presence in EAEU countries and Central Asia, retaining its leadership among Asian countries in terms of FDI stock in the region. Since 2008, the overall amount of Chinese companies’ FDI stock in five EAEU countries has increased by 138%, to $25.7 billion. In terms of investment growth rates, the top recipients of Chinese investments are Belarus and Kyrgyzstan where FDI has grown by 48% and 19% respectively over the recent period. In absolute terms, Kazakhstan traditionally remains the main recipient of Chinese FDI in the EAEU ($21 billion). The most attractive sectors for Chinese investors in this country are Oil and Gas and Trunk Pipelines.

In the Russian market, the level of activity displayed by Chinese investors is still not very high. At the beginning of 2016, Chinese FDI stock in Russia amounted to $3.4 billion, a 1.4% decrease year-on-year. According to the EDB Centre for Integration Studies, a considerable number of major transactions announced in and prior to 2014 are still awaiting their final implementation. In some cases Chinese companies have assumed a wait-and-see stance to avoid EU and US sanctions. In addition, in the current weak economic environment Chinese investors often wait for more profitable offers from Russian businesses.

Japan is a solid leader in terms of FDI in Russia, being way ahead of other Asian countries. Despite the devaluation of the Russian ruble, Japanese FDI stock in Russia has remained virtually static at $14.5 billion, with 70% directed into the Russian Oil and Gas sector. As for the other EAEU countries and Central Asia, Japanese companies have assumed a wait-and-see stance and are now busy sizing up the most promising economic projects.

The recent crisis in the relations between Russia and Turkey has not had a significant effect on Turkish FDI. Turkey remains one of largest investors in the EAEU. According to the most recent data, Turkish FDI stock in the EAEU has reached $7.4 billion, up 1.4% over the year. The stability of investment flows from Turkey is largely due to the high country diversification of Turkish FDI. Projects with Turkish capital were recorded in all EAEU countries, except Armenia. Russia accounts for approximately a half of all transactions and 66% of Turkish FDI in the EAEU. An important feature of Turkish FDI is the significant sectoral coverage: Turkish capital is represented in a range of sectors. This is the key distinction of Turkish capital from Chinese or Japanese investments. As a result, Turkey became the Asian top investor in the sectors not related to hydrocarbon production and transportation.

The Republic of Korea invests in both Russia and Kazakhstan, with Russia being the top recipient of South Korean FDI. According to the most recent data, it accounts for over $2.1 billion, or 88% of total South Korean FDI stock in the EAEU. The sectors attracting the most significant amounts of Korean capital are Mechanical Engineering, Construction, Tourism, Agriculture and Food Products.

As for the amount of outgoing FDI from the EAEU, in 2015 it continued to grow and went up by 16%, or by $13.5 billion. The main growth driver was Russian companies which implemented some large-scale transactions in the EU. In 2008–2015, the aggregate FDI stock owned by EAEU countries under review has grown by a factor of 2.4.

Russian TNCs continue to enhance their presence in EU countries. According to monitoring data, by the end of 2015 the share of Russian FDI stock in EU countries amounted to 62% of the total direct capital investments in Eurasia. The aggregate share of Russian corporate investments in Asia has decreased from 31% in 2011 to 26.7% at the end of 2015. The Oil and Gas sector traditionally accounts for the largest share in the sectoral structure of Russian FDI exported to Eurasian countries. The share of Oil and Gas in Russian FDI stock increased from 25.8% at the end of 2008 to 33.7% at the end of 2015. FDI is also significant in Finance, Communication and IT.

Of the EAEU countries, Kazakhstan comes second after Russia in terms of capital export to Eurasian countries. At the beginning of 2016, Kazakh FDI stock in Eurasian countries outside the CIS reached almost $6 billion. EU countries stay the main recipients of Kazakh direct capital investments, with 90.5% of total Kazakh FDI going to Eurasian countries. Oil and Gas remains Kazakhstan’s key international specialization sector, with consistently more than a 50% share of total FDI. Wholesale and Retail Trade has the second position.

Armenian, Belarusian and Kyrgyz companies have few investment projects in Eurasian countries, all being insignificant in terms of their FDI value. The reason for this is the fact that in above mentioned countries there are virtually no large companies with competitive advantages which would enable to expand into foreign markets.

EDB researchers believe that in 2017 direct investors from Eurasian countries will be more active in the EAEU. The development of China’s “One Belt, One Road” initiative is expected to become one of the stimuli for FDI inflows. Chinese investors have already begun to show interest not only in hydrocarbon production, but also in transport, infrastructure, and the power sector, among others. Most investments are expected to be made by Chinese companies and financed with the proceeds of loans by national development institutions. Japan and the Republic of Korea will be China’s competitors in that respect.

Data, analysis and conclusions presented in EAEU and Eurasia: Monitoring and Analysis of Direct Investments 2016 will help companies to better orientate themselves in the region’s business environment and the governments to promote mutually beneficial sector cooperation.