Nothing ventured, nothing gained: Foreign direct investment and political risk in Russia

Despite the threatening image it presents to foreign investors, Russia is surprisingly well-suited for foreign direct investment. According to a recent survey, the country ranks eleventh in FDI attractiveness among European countries.

A brief history of FDI in Russia

According to World Bank data (Figure 1), Russian FDI was highly volatile between 1992 and 2019. A short spell of increased FDI inflows began in 1995, when investors sensed an opportunity to exploit modern Russia’s slow recovery from the shocks arising from capitalist transformation. This culminated in figures for 1997, during which the Russian Federation received $4.865 billion of foreign investments. By mid-1998, however, a growing financial crisis spooked investors, and FDI declined.

Figure 1: Foreign direct investment (net inflows in current US dollars) into the Russian Federation from 1992 to 2019. Source: World Bank.

From 2002 onwards, when Russia and the West began to make concerted efforts to normalise relations, FDI net inflows consistently increased, reaching an all-time high of $74.783 billion in 2008. Despite the Russian government’s mixed signals to foreign investors, including the state’s destruction of the oil and gas company Yukos from 2004 onwards, FDI continued to grow; this established the country as an investment opportunity that combined lucrative prospects with significant political and operational risk.

FDI into Russia has consistently correlated with OPEC crude oil prices; when plotted on a graph, the FDI curve is relatively similar to the oil price curve from 2005 to 2019 (Figures 1 and 2). 

Figure 2: Average annual OPEC crude oil price from 1960 to 2021 (in US dollars per barrel) Source: Statista.

However, in 2008 the Kremlin gave a telling indication of its geopolitical ambitions. The 12-day Russo-Georgian War in August 2008 worsened relations between Russia and the West for more than a year and alarmed parts of the foreign investment community. This conflict, combined with the world’s slow recovery from the Global Financial Crisis, meant FDI net inflows into Russia only reached 2008 levels ($69.219 billion) by 2013.

Political risk for investors in Russian businesses peaked in 2014, when the Russia-Ukraine conflict, the Crimean crisis and the war in the Ukrainian Donbas region took place. This time, despite oil prices being $96.29 per barrel, FDI into Russia collapsed to $22.031 billion in 2014, and even further in 2015, to $6.853 billion (hovering close to 1997 levels). Exacerbating this decline, Russia decided to conduct a military intervention into Syria, rendering itself even more problematic for foreign investors.

FDI in present-day Russia

Investors have short memories and can quickly forget political factors that once roiled the financial markets. While the political situation in Russia remains unstable, and Russian actions on the global stage are still unpredictable, investors are gradually making adjustments. Even in November 2021, as the Russian military has massed troops at the border with Ukraine, and the Covid-19 pandemic remains a major problem, there are signs of a revival in FDI inflows to the Russian Federation, according to recent research by EY. Among the reasons for foreign direct investments returning to Russia, were the attractiveness and profitability of Russian manufacturing and agrifood.

There is a famous Russian proverb “Volkov boyatsa – v les ne hodit” (Волков бояться — в лес не ходить) which translates roughly to “nothing ventured, nothing gained”. The history of FDI in Russia teaches us that there may be real rewards for investors willing to tolerate significant political risk.

Nikita Gryazin is an Audere International research analyst with a focus on British, European, Russian and Central Asian jurisdictions. Fluent in Russian and proficient in complex data collection and analysis, Nikita is responsible for carrying out political risk assignments using open-source and human source networks. If your company requires political risk analysis on Russia, Central and Eastern Europe, or the Commonwealth of Independent States, please contact us at enquiries@audereinternational.com.