Sunday, 14 March 2010

Russian wild card

Russia is in a strong but vulnerable financial position due to its dependency on exports of oil and natural gas. Nevertheless, it doesn’t explain why other economies like Kazakhstan and other Central Asian countries did relatively well in both performance and foreign direct investment inflows. Interestingly Ukraine, as well as Georgia, attracted 85 percent of their foreign investment in the last 5-7 years.

Ownership of Russian enterprises is concentrated in the hands of a narrow group of actors dominated by the state and so-called oligarchs. Russia has thus far been unable to diversify its economy and attract sizable foreign investments in key sectors. Russia’s lack of competition, poor infrastructure, high reliance on imports of finished goods and an unreformed banking system remain issues. Sizeable budget expenditures to GDP ratio (above 30 percent since 2005) and a sharp fall in revenues in 2009 triggered a budget reversal equivalent to 14 percent of GDP.

Russia’s status outside the World Trade Organization is symptomatic. If any of these elements were to change positively, this economy would be able to attract hundreds of billions. Russia, as the biggest country in the region, remains a wild card for foreign investors.

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