Limits to Foreign Direct Investment in Russia The Russian Economy emerged from the upheaval of the sass as a market where power was inadequately dispersed among the oligarchs, formal regulating institutions were scarcely in force and the state assumed too much of a role in an economy that was to run on free market principles. A decade later, there have been minimal reforms despite the widespread political rhetoric about Russia being integrated into the world economy. How has the absence of a fully developed free market and dominance of Oligarchs proven to be an impediment to the Economic growth?
How has the relationship between them and the Russian government changed over time? What are some of the malpractices of the domestic economy? These are some questions that help us determine how the world views the economy in Russia and how it limits foreign investment. Informal practices exploited by the Oligarchs confound the world Since the prevarication of Russian firms, the domestic market in Russia was run by a ‘grabbing hand model’ – “government at all levels were likely to prey on more successful firms to redistribute rents to less successful firms and to political allies”(Frye,Yugoslav,and Yak’s,p. ). The oligarchs captured immense power during the mayhem of economic liberalizing and created enormous wealth, thereby they “managed to capture the state, enrich themselves, and undermine economic development” (Frye,Yugoslav,and Yak’s,p. 33). This hardly fostered efficiency in the market since the motive was “wealth Extraction not wealth generation” (Rise and Fall of Oligarchs,p. 3). They viewed the state as an ‘irrelevant player’ and resorted to “fraudulent accounting to hiring a private army to wrest control of an asset away from its rightful owner” (Rise and Fall Of Oligarchs, p. ). With a lack of hindsight, immediate economic gains were the main concern of the oligarchs. In 1996, a group of American economists tried persuaded the state to adopt “property rights, a viable currency, a legal system with enforcement , regulations to deal with monopoly and the theft of newly privatized enterprises , and a simplified and enforced tax code”(Shellfire and Trainman,p. 18). Such establishments are viewed by the world market as the benchmark for the functioning of free market.
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The persistent lack of them creates skepticism in the minds of foreign investors, turning investment in Russia an undesired venture. No investor wants to tap a resource that has encapsulated risks despite the calculated rewards. The business strategies and fraudulent techniques in Russia are dismal and continue to scare away investors. The private security industry is associated with “debt recovery and other routine business tasks, all of which need to be accomplished in an environment of pervasive corruption and high risks”(Laden,p. 178).
In the absence of formal regulations, informal means such as “arranging for an opponent’s shares or assets to be frozen, effusing to renew the terms of a loan and demanding immediate repayment, threatening a firm with insolvency proceedings, and increasing the level of bribes”(Laden, p. 174) emerge to seal transactions. How has the scene changed? The reckless resource extraction and short term profiting had been the way Oligarchs functioned. However, in the current economic downturn, the oligarchs have been that their personal coffers can no longer be supplemented by malpractice.
Desperate to break even, they have now turned towards the government only to meet the rising ambition of Putting. The vertical integration of the political and economic sphere under Putting poses as much of a challenge to the free market as the presence of earlier practices. From an investor’s perspective, whether it is battling the informal practices or Putting ambitions, there are limited incentives to be a stake holder in an economy with corrupt corporate governance.
The state might emerge as the bigger oligarch of them all and how that impacts the next round of economic development is going to be new story. With the economic crisis of 1998, the oligarchs were forced to rethink heir strategies and “standard reinvestment and asset-maintenance practices were introduced”(Rise and fall Of Oligarchs, p. 4 ). In 2000, Putting addressed the oligarchs in a round table conference and established the new relation between the businesses and the state. To limit the power of the oligarchs, Putting established the dichotomy and asked them to pay their taxes and stay out of politics.
The extradition of Mikhail Storybooks ,who owned Yukon, was deemed to be strategic by some in order for the state to control ” Russian’s most important political economic and social lever”(Rise ND Fall Of Oligarchs, p. 5). This weakens the rule of law in the absence of an independent Judicial system. The handover of Yukon to state owned Rosiest decreased the oil output from 9% to about 1% by 2007. 1 In this corporate climate , “the legal murkiness and sordid corporate histories of most Russian firms -state and private-frightened away investors and Russian Ipso were at best tepid affairs” (Rise and Fall Of Oligarchs, p. ). Now, the shift in balance of power is apparent in Putting final consolidation of power. The financial crisis of 2008 has left the Oligarchs in a reedit crunch and turning to the Kremlin for support which may imply a change in ownership of these firms. The world view of the market Research on the Foreign Direct Investment (FDA) in Russia has shown that the present market distortions and dominance of oligarchs have kept it at bay, thereby obstructing the path to “improve productivity, develop international trade, and experience economic growth” (Michelle in Fairy and Genii, p. 290).