EDB: Significant Growth of Foreign Direct Investments in Russia and Other EAEU Member States from Asian Countries Expected in 2018
Saint Petersburg, December 21, 2017. The significant growth of direct investments in Russia and other EAEU member states is expected in 2018 against the backdrop of execution of several agreements between Russian oil and gas companies and their Chinese partners, and keen interest displayed by Asian investors in Eurasian economies. This will reinforce the "turn-to-the-East" trend which manifests itself in a heightened inflow of Asian investments registered by EDB analysts in 2016-2017. New deals closed under hydrocarbon extraction and processing projects have enabled Chinese investors to boost their FDI in Russia by $3 billion to $8.2 billion.
This is noted in the report by the Centre for Integration Studies of the Eurasian Development Bank (EDB Centre for Integration Studies) "EAEU and Eurasia: Monitoring and Analysis of Direct Investments – 2017." The report is based on a unique database of investment projects which is generated following the “bottom up" approach, i.e. relies on corporate reports and other primary information. This makes it possible to more precisely identify the ultimate beneficiaries of investments, and keep accurate records of reinvested profits.
According to EDB Centre for Integration Studies analysts, Chinese investors will be acquiring assets not only in Oil and Gas and Chemicals, but also in the manufacturing industry of EAEU countries. However, the main upsurge of investment expansion is anticipated in Mining.
"In terms of investments, the "turn to the East" – object of numerous discussions we have witnessed over the last several years – has been materializing since 2016. Asian investors needed time to examine high-potential projects, make final decisions, and close the relevant deals," says Evgeny Vinokurov, Director, EDB Centre for Integration Studies. "The Chinese investments have finally begun to gain momentum in Russia, as well. We observe rapid growth of Chinese direct investments in Russian Oil and Gas and Mining. On the other hand, so far there have been few, if any, noteworthy investment projects in the manufacturing industry, and no FDI at all in Transport." Meanwhile, China is actively investing in in other countries, in particular, in Kazakhstan’s oil and gas.
In terms of Chinese FDI stock, Russia is lagging behind Kazakhstan, where this indicator is almost 3 times higher at $21.5 billion (see Figure below). In addition to that, since 2014 Chinese TNCs** have been increasingly interested in Belarus, where 2016 investments in Mechanical Engineering and Transport have boosted Chinese FDI stock by 53% to $0.6 billion.
Generally, Asian investors have continued to increase direct investments in the EAEU. During the monitoring period (2008-2016), FDI stock originating from 12 Asian countries (China, Japan, Turkey, India, Israel, Mongolia, Republic of Korea, Saudi Arabia, the UAE, Iran, Singapore, and Vietnam) has increased from $32 billion in 2008 to $75.6 billion in the beginning of 2017.
For the time being, Japan maintains the largest FDI stock in Russia among Asian countries. In 2016, the Russian economy received $15.1 billion of Japanese FDI compared to $14.8 billion in 2015. As for the other EAEU countries, Japanese companies have assumed a wait-and-see stance, and are now busy sizing up the most promising projects. Russian Oil and Gas accounts for about 65% of total investment stock accumulated by Japanese TNCs in EAEU member states, closely followed by Agriculture and Food Products and Mechanical Engineering.
Successful acquisition of Russian oil and gas assets in 2016 helped Indian TNCs to increase their FDI stock in Russia by $3.3 billion. There was no significant inflow of Indian FDI in the other EAEU countries. EDB Centre for Integration Studies experts believe that India will continue to invest in Russia and Kazakhstan, but Indian TNCs will be losing in their competition with Chinese companies.
Against the background of creation of an EAEU-Vietnam free trade area and a possible start of negotiations on a free trade agreement between the EAEU and Singapore, these Southeast Asian states have been showing more and more interest in EAEU economies. However, 99% of total Vietnamese and Singaporean outward FDI stock is currently concentrated in Russia: at the end of 2016, total direct investments by those countries in the Russian economy amounted to $667 million and $786 million, respectively. Vietnam and Singapore are rapidly increasing their direct investments in Russia. EDB Centre for Integration Studies experts also forecast intensification of investment activity with other countries which are expanding their trade and economic relations with the EAEU, in particular, with Iran and Egypt.
Kazakhstan has been quite successful in attracting investors from the Middle East. At the beginning of 2017, total UAE direct investment stock in that country stood at almost $1.5 billion out of a total of $2 billion registered in all EAEU countries. There are about 200 businesses with UAE equity participation already operating in Kazakhstan. Besides, by the end of 2016, Kazakhstan became a center of gravity for Turkish FDI: over the course of the year, direct investments by Turkish TNCs in Kazakhstani economy had increased by 34% to $1.3 billion. Capital of Turkish origin is represented in almost all recipient sectors, with the exception of Oil and Gas.
Middle East investors are also building up their presence in other EAEU countries. In 2016, Russia received its first FDI from the UAE ($0.6 billion). There is a possibility of a breakthrough in economic interaction between Saudi Arabia and Russia. According to the conclusions drawn in the EDB Centre for Integration Studies report, inflow of Saudi FDI over the mid-term horizon is estimated at $8-10 billion.
All EAEU countries without exception continue to boost their outward investments in Eurasia beyond the CIS. In 2016, that indicator went up by 4% ($3.6 billion) to $93 billion. In 2008-2016, total FDI stock owned by EAEU countries in Eurasia has grown by a factor of 2.5. European countries remain the main destination for outward FDI originating from the EAEU. Russia is currently not particularly interested in investing in East Asia and South Asia. Over the last year, there has been a slight reduction of Russian FDI stock in those regions. In 2016, Russian FDI in Mongolia and India has demonstrated a sharp decline (by a factor of 3), while in Egypt it has posted a sizeable increase (by 45% to $3.3 billion).
Changes in Chinese Outward FDI in EAEU Countries,
Azerbaijan, Tajikistan, and Ukraine, $ billion
Source: EDB Centre for Integration Studies
The full version of the report "EAEU and Eurasia: Monitoring and Analysis of Direct Investments – 2017" is available here.
Notes:
* FDI – Foreign Direct Investments
** TNC – Transnational Corporation (Company)
Additional Information:
Eurasian Development Bank (EDB) is an international financial institution founded by Russia and Kazakhstan in January 2006 to promote development of market economies of its member states, and secure their sustainable economic growth and expansion of their mutual trade and economic ties. The charter capital of the EDB is US$ 7 billion. The member states of the Bank are the Republic of Armenia, the Republic of Belarus, the Republic of Kazakhstan, the Kyrgyz Republic, the Russian Federation, and the Republic of Tajikistan.
Centre for Integration Studies is the specialized analytical center of the Eurasian Development Bank. The key tasks of the Center are to organize research work, and prepare reports and recommendations on regional economic integration matters. Over the 6 years since its establishment, the Center has issued 47 public reports. More detailed information on EDB Centre for Integration Studies projects and publications is available at https://eabr.org/en/analytics/integration-research/cii-reports/.
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