Putin’s Russia: „Sorry, we have withdrawn our investment intentions“…

In context with the Crimea crisis the EU and US consider various sanctions. However, one kind of sanction will come – for sure – by the markets themselves, i. e. by thousands of big and small investors who until now have considered an investment to Russia.

First, investment is a huge global market. Every state, every region, every municipality dreams of big factories, hotels, company headquarters, or of small and medium sized companies‘ investment into their territories. So investors, who want to conquer another market or want to place a factory closer to their existing markets, also for service reasons, are pampered wherever they might be. It is no accident that very many states, regions or local governments run own offices or agencies in order to attract Investment, and some of them really do a good work. States or regions often have special laws with implicit positive discrimination of foreign investors.

Second, foreign direct investment makes a lot of sense: it brings new technologies, new ways of management, new jobs, new clients, and whoever is the investor also opens a bilateral trade runway between his own country and the investment destination. The WTO takes this into account with the TRIMs Agreement from 15.4.1994 (TRIMs = Trade-related investment measures), the WTO to which Russia acceded only recently. Of course, foreign direct investment may be restricted or excluded in sensitive fields (and Russia has a lot of them), but in principle Russia has less FDI than a „normal“ country, which should have – passively – around a third of the capital in foreign hands (and should also – actively – participate accordingly).

Third, investment decisions are not only a matter of figures, facts and data. Investment decisions are today for around 50% based on emotional Facts. A little town in French Vosges mountains got the Japanese factory because it is a nice region, a beautiful location, near rivers and lakes, near bigger cities, but otherwise like in a fairytale movie, with wild storks etc.. And the wife of a West German owner of a manufacture forced him not to go to Apolda/Thüringen but to Weimar, as this is culturally more interesting and the kids could go there in better schools, etc. After all, the investment destination must be sympathetic to the investor.

Russia has now a problem. In the discussion about sanctions and counter-measures and counter-counter measures, they said among others that it would not be excluded that in retaliating any sanctions Russia may confiscate foreign Investment. Russians who said this may not have worked at any time in any privately held shop or company, otherwise they would have known what immense damage this not too wise formulation brings. It brings … nothing, in the sense that then really nobody will invest anymore. I was advising a German medium-sized enterprise who was convinced to invest in tourism in Siberia. They wanted to acquire or build a lodge. Now came a phone call: „Sorry, we have withdrawn our investment intentions…“. Not because of Crimea, but because of the above mentioned phrase. This phrase has not been used by any of the EU institutions or member states – it would also hit the wrong. But by using this or having it used in an open way, Putin shows either that he does not care at all about the Russian economy, or does not know anything about economy, or both. He has just imposed the biggest sanction against himself, but also against his own people. Another „collateral“ damage in addition to the political and diplomatical damage because of his Crimea action.

Hans-Jürgen Zahorka
Chief Editor, European Union Foreign Affairs Journal