Russia faces foreign investment drought amidst isolation
The Kremlin's expectations that "friendly" countries would step in to replace Western investors have been in vain, reports "The Moscow Times." Since the onset of the conflict, billions of pounds have disappeared from the Russian economy, with no one willing to bridge this gap.
According to statistics from the Central Bank of the Russian Federation, cited by The Moscow Times, the volume of foreign investments in Russia last October fell to its lowest level in 15 years and continues to decline sharply. Specifically, during the first three quarters of 2024, foreign investors withdrew an additional £35 billion in capital, reducing direct foreign investments in the Russian economy to approximately £187 billion.
Foreign direct investments (FDI) involve businesses, multinational corporations, or individuals from one country investing capital in the assets of another country to a degree that allows them to participate directly in their management. As The Moscow Times notes, in 2023, Russia lost £65 billion in FDI, while in the first year of the war, the figure was £112 billion. Consequently, within three years, the FDI pool in the Russian economy, which was nearly £404 billion before the invasion of Ukraine, has halved, decreasing by £212 billion.
Allies are not listening to Putin
Despite Russian President Vladimir Putin advocating for maximum openness to investors from BRICS countries (an informal group of developing nations initiated by Brazil, Russia, India, and China) and encouraging them to invest in Russia, the central bank's statistics recorded no influx of funds. According to Janis Kluge, a researcher at the Institute for International and Security Studies, quoted by The Moscow Times, this points to the increasing isolation of the Russian economy.
For instance, authorities in China, Russia's largest trading partner with whom Putin maintains strategic relations, have prohibited local companies from investing in the Russian oil and gas sector, rejected investments in the Power of Siberia 2 pipeline, and instructed car manufacturers not to build factories in Russia.
Prior to the conflict, three-quarters of foreign direct investments in Russia came from countries now on the "unfriendly" list, whose investments ceased due to sanctions and counter-sanctions. They had invested an amount equalling 20 per cent of all fixed assets in mineral extraction and manufacturing, which comprise 50 per cent of Russia's GDP and 40 per cent of employment. Their share is even more significant in trade (constituting 80 per cent of fixed assets), finance (nearly 70 per cent), and the scientific and technical sector (40 per cent), according to analysts from Loko-Invest.
Meanwhile, China accounted for only £2.7 billion in direct investments in Russia, or 0.66 per cent of the total. India's investments stood at just £505 million, or 0.012 per cent, and investments from Brazil and South Africa were so insignificant they weren't included in the central bank's statistics.
The Moscow Times reports that the assets of remaining Western investors in Russia are at risk of confiscation. The government is preparing to submit a draft law to the Duma that will create a mechanism for seizing private property in response to the freezing of the central bank's reserves in the West. According to sources familiar with the document, the practice of confiscation is set to be extended to all countries that have imposed sanctions on Russia.
