Foreign direct investment (FDI) in Russia

FDI in Figures

On February 24th 2022, Russia initiated a military conflict on the Ukrainian territory, which profoundly upsets the current political and economic context in both countries and will have substantial ramifications on the investment climate. For the ongoing updates on the developments of Russia-Ukraine conflict please consult the dedicated pages on BBC News.

The latest specific information on economic sanctions against Russia in response to the conflict in Ukraine is available below:
•    What sanctions are being imposed on Russia

After plummeting by 70% in 2020 due to the COVID-19 pandemic, FDI flows to Russia rebounded by 267% in 2021, reaching USD 38.2 billion (compared to USD 10.4 billion in 2020) according to UNCTAD's World Investment Report 2022. Russia ranked 9th top host economy in the world. In 2021, the stock of FDI was about USD 521.9 billion (UNCTAD). However, following Russia’s invasion of Ukraine in February 2022, various Western companies have decided to stop or limit their activity in Russia. For example, major oil and gas groups such as BP, Shell and Exxon withdrew from the country, and following international pressure French TotalEnergies announced it would gradually withdraw from its Russian investments. Norway’s sovereign wealth fund, the world’s largest, also decided to divest itself of its Russian investments. With the aim of provoking the collapse of the economy, Western countries adopted an unprecedented range of sanctions against Russia, which triggered the flight of foreign capital. Russia’s central bank assets have been frozen, selected banks have been removed from the international communication tool SWIFT, the EU airspace has been closed to Russian aircraft, exports of high-tech components to Russia have been restricted, and the Nord Stream 2 certification was withhold, among other measures. In reaction, in August 2022, Russian President Vladimir Putin issued a decree imposing an overall ban on transactions with certain assets, preventing foreign investment exiting the country without specific permission. According to OECD data, in the first half of 2022 negative FDI flows to Russia reached USD 24.3 billion.

Major investors in 2021 included Cyprus, the Bermudas, the UK, the Netherlands, Ireland, Luxembourg, Germany, the Bahamas and France (Central Bank of Russia). The geographical proximity has also driven FDI within the territory of the Russian Federation, with ongoing Chinese cross-border investment in the Russian Far East and resilient investment from Finland. The main sectors receiving FDI are the extractive industry, manufacturing, financial and insurance activities, wholesale and retail trade, administrative and service activities, and real estate.
 
Before the war, the share of FDI in GDP remained relatively low given the country's growth and economic potential, and working capital investments represented a significant share of total FDI. Russia had undertaken economic reforms in recent years, but administrative problems, corruption and uncertainties regarding the stability of the region remained major challenges. Russia passed a law allowing it to seize the assets of foreign states on its own territory, in reaction to the confiscation of Russian property by European countries in the Yukos case. Russia ranks 58th (out of 82 countries) in the latest The Economist’s Business Environment ranking. The war in Ukraine and associated sanctions, as well as the government's increased control over the economy, weigh on the overall business environment. The main assets of Russia are its abundant natural resources (oil, gas and metals) and its large and skilled workforce.

What to consider if you invest in Russia

Strong Points

Many investors see Russia as still under-exploited. The key advantages for FDI in Russia include:

• A strong economic base, based in particular on abundant natural resources (oil, gas and metals)
• Large domestic market size
• Accessible labour cost attractive to foreign investors
• Skilled workforce trained in export functions and relatively open internationally (due to its geographical and cultural proximity to Western Europe and Asia)
• Low public debt
• Comfortable foreign exchange reserves
• Current account surplus

Weak Points

Russia has an investment climate that is complicated to control and generally unstable. The major disadvantages for FDI in Russia include:

• Deteriorated economic and investment climate due to severe economic sanctions imposed at an unprecedented scale by the EU, US and other Western countries following Russia's military invasion of Ukraine in February 2022
• The Russian economy remains extremely dependent on the prices of hydrocarbons (39% of GDP) and raw materials as well as on imports of capital goods and foreign technology
• Low business confidence in the country's legal system
• Institutional and governance weaknesses (insolvency treatment, property rights, corruption)
• Many sectors considered strategic are closed to foreign investments
• Declining demographics
• High level of social security contributions (30% of salaries)

Government Measures to Motivate or Restrict FDI

The Ministry of Economic Development (MED) is responsible for overseeing investment policy in Russia.  The Russian Direct Investment Fund (RDIF) was established to facilitate FDI in Russia.

The establishment of investment assistance in Russia is still in its infancy. The government prefers to improve the general investment climate by tax reductions and economic reforms. Majority foreign ownership is subject to authorisation in many sectors, particularly those linked to raw materials, heavy industry and aerospace.
Among the effective incentives are:

• Regional incentives which are granted at regional and local levels, and are concerned with the taxes paid to the respective budgets (exemption from property, land and transport taxes, exemption from customs duties and import VAT, corporate profits tax).
• Special economic zones which provide for special tax regimes (exemption from property and land tax, exemption from customs duties and VAT, reduced corporate profits tax)
• Incentives regarding certain activities, for example IT business, different types of research and technologies works, and so on.

For more information, please visit the website Invest in Russia.

Bilateral investment conventions signed by Russia

Russia has 63 bilateral investment treaties (BITs) in force. To see the complete list of the countries, go to the Investment Policy Hub (UNCTAD).