Introduction
This paper aims to offer insight into Russian business expansion to the neighbouring countries of Commonwealth of Independent States (CIS, using the company-level approach to the subject. Although the extent of Russian investments in the CIS is commonly recognized, fewer contributions can be found discussing the economic and political leverage of Russians firms “near abroad.
This paper will describe examples from a number of industrial sectors and will discuss the extent of Russian investments in the CIS countries and the related economic political leverage driven by these investments in the target economies.
Literature review
According to Peeter Vahtra, Russia has emerged as one of the major countries that export capital to CIS countries (2005, 4). The outward foreign direct investments (OFDI) of Russia have grown drastically since the end of Cold War. Although Russian OFDI to CIS pales in comparison to that of United States or European Union countries such as Germany, UK and France, in 2004, Russia exported over $ 99 billion in OFDI stock (Vahtra, 2005, p.4).
The CIS countries have been used as launching pads for majority of Russian firms to gain entrance to the international markets (Moore, 2001, p.1). In many instances, the infrastructure and energy assets held by Russian firms in the CIS region tend to be contentious in nature.
Moreover, Russian firms tend to be central players in a number of CIS markets while in high income economies, they frequently hold lesser market shares and control in respective sectors. However, attention should be given to the fact that there has been significant rise in investments by Russian Firms in the CIS region (Vahtra, 2005, p.9).
According to the Russian Federal State Service, the OFDI investment to CIS countries in 2004 was over $ 710 million. On the other hand, the recent years the Russian telecommunications and energy companies have invested in CIS countries with the value of individual transactions surpassing the aggregate investment from Russia.
This inconsistency is attributed to the fact that key Russian firms invest overseas via offshore investment units which are omitted from the balance of payment records of the Russian Federation. Belarus and Ukraine, some of the CIS countries, have received the largest capital investment from Russia in the past years (Kononczuk, 2009, p.2). Russia was the seventh biggest investor in Belarus with aggregate FDI stock of over $540 million (Vahtra, 2005, p.10).
The revival of Russia’s economy after the economic crisis in 1998 was due to rising energy prices. Russia has turned out to be a viable business partner for a number of CIS countries. Given its solid economic growth and ensuing growth in consumption, Russia has re-surfaced as the main viable export market for most CIS countries as a result of the low level of competitiveness of their goods in the western markets.
Moreover, consumer goods from Russia are more popular in CIS countries since they are cheaper than those imported from western markets (Vahtra, 2005, p.15). In addition, the supply of Russian energy to CIS countries is done Russian energy firms in the region.
For example, Gazprom, the world’s biggest natural gas producer, and United Energy System (UES), Russia’s largest electrical energy company, are the most dominant bearers of Russia’s control in the CIS. Other than being the main supplier of natural gas to CIS region, Gazprom is the major proprietor of national gas distribution firms (Heinrich, 2003, p.46).
The motivations behind Russian Investments
The decision of Russia to expand its Capital investments in CIS was gain influence in these countries. For instance, during the 2008 economic crisis, Moscow offered a number of CIS countries loans and grants to stabilize their fragile economies in return for precise economic and political compromises.
For instance, Russia granted Belarus $ 2 billion as stabilization loan. In return, Belarus agreed to form a military air defence system pact with Russia (Kononczuk, 2009, p.4). The motivations behind Russian firm’s foreign investments in CIS are thus diverse. Russian energy resources is substantial used by Moscow as a foreign policy tool to control her political and economical in the CIS region.
For example, Gazprom and UES have attained major grip in the CIS countries as a result of intergovernmental accords. However, it is worth to note that Russian OFDI investment to CIS is also driven by the lucrative market in these countries that have notably lower entry obstacles than the Western and US market (Heinrich, 2003, p.48).
Russian energy firms seek to manage their entire operations globally via their foreign expansion. The acquisition of upstream assets, sales outlets and processing plant overseas has enabled Russian firms to increase their influence in CIS markets and other strategic assets such as oil pipelines and seaports that deliver crude oil to US and Europe.
The telecommunication sector is an apt example that can be used to illustrate strategies used by Russian firms to acquire foreign markets in CIS. The Russian telecom firms have significantly boosted their position in CIS region via active expansion strategies.
The Russian firms lead the chase for market share in CIS region, through its expansion of foreign firms in this region (Hill, 2004, p. 17). Thus, the rising Russian OFDI investments to CIS are the chief bearers of Russian political and economic sway in these countries, representing a considerable shift from the military resources during the Cold War era.
References
Heinrich, A. (2003). Internationalization of Russia’s Gazprom. Journal of East European Management Studies, 8 (1), 46-66.
Hill, F. (2004). Energy Empire: Oil, Gas and Russia’s Revival. London: The Foreign Policy Centre.
Kononczuk, W. (2009). Russia uses the crisis to build influence in CIS countries. Web.
Moore, K. (2001). USSR Breakup: Ten Years After, Russia Fights for Influence over CIS States. Web.
Vahtra, P. (2005). Russian Investments in the CIS: Scope, Motivations and Leverages. Web.