Policy of the Russian Federation in the field of FDI attraction

Executive Summary on FDI Policy in Russia: What is to be done? This report presents evidence on policies toward FDI in transition and developing economies and draws conclusions for the development of policies in the Russian Federation. The executive summary asks what should be done immediately, what can be done quickly, and what policies can be adopted to enable the transition to be rapid. We bring out the key features of the report and recommend the construction of an FDI Guarantee Fund that can act as a mediator and as an insurer for foreign firms in Russia whilst the process of institution building strengthens. What should be done immediately? It is not possible to immediately change all the conditions that limit FDI inflows. In particular it takes time to increase confidence in the stability of the economy and the polity, change perceptions of risk and uncertainty, and to adapt the legal framework and the implementation of law to enable technology and knowledge transfer A level playing field. There is a widespread, and justified, perception that foreign firms are treated differently from domestic firms in Russia. It is not enough to pass laws to build a level playing field where contracts are reliable. Action must be taken to ensure that foreign firms are guaranteed a level playing field. Penalties and compensation arrangements that are binding on both parties are needed. Tax incentives for foreign firms have little impact, and special subsidies to particular firms are not a useful part of an overall strategy. Abandoning them makes it clear to domestic firms that they will face equal treatment. Giving guarantees. There is a widespread, and justified, perception that contracts cannot be enforced in Russia, and that there is no guarantee that returns will be realisable, even where seemingly binding arrangements on tax and on purchase prices have been established. • Giving arbitration rights to an independent external third party would remove some contractual problems. • Giving binding security on contracts to an independent third party would remove some risks on realisability of returns. These guarantees would give incentives to both sides to ensure contracts were adhered to and that returns would have only normal commercial risks associated with them. This arrangement would mirror the common Chinese practice of having cross holding in a pair of firms, one in China as the destination for FDI, with a matching holding by the host company …