South-Western College Publishing - Economics  
To Russia with Dollars
Subject Foreign Investment
Topic International Finance
Key Words Exchange rates, Investment, Economic Growth
News Story

Two years ago, Russia experienced an economic crisis that sent its currency into collapse. The decline in the ruble, Russia's national currency, in conjunction with a declining Gross Domestic Product (GDP), a number of scandals and political turmoil resulted in U.S. companies withdrawing investment funds. Since this spring stability and economic reform are taking hold in Russia and there is some evidence that U.S. companies are renewing their interest and investments.

American companies appear to be happy with Vladimir Putin, Russia's new president. They support Putin's efforts at economic reform, to establish a rule of law in Russia and restrain Russia's maverick regions. Putin has attempted to simplify Russia's tax code, adopt international accounting standards, establish safeguards for intellectual property and set up guidelines for electronic commerce. He has also cut business and personal taxes. Support of American firms is crucial, since American firms are the largest source of foreign investment. American firms have invested $4.5 billion in Russia from 1939-99. Cyprus is second, with $2.7 billion in investment, followed by Germany, Britain and the Netherlands.

American investment in Russia has started again. Ford Motor Company has announced that it will provide $170 million toward the construction of a plant that will produce the Ford Focus. Gillette opened a $40 million razor-production plant, and Intel has established a software development center that will employ up to 500 engineers.

The collapse of the ruble in August 1998 forced Russians to replace expensive imported goods with substitute goods manufactured in Russia. Foreign companies doing business in Russia manufacture many of these import substitutes. A weakened ruble means that foreign companies doing business in Russia will have the advantage of low-cost labor. Labor productivity in Russia still lags behind the rest of Europe and the United States.

(Updated August 1, 2000)

1. Why do firms establish foreign plants, that is, why don't they simply produce in their home country and export these goods to other countries?
2. Why are foreign countries eager to attract foreign funds? What are the gains from doing so? The potential losses?
3. What is the impact on a country's exchange rate of increased foreign investment?
Source James Cox, "Russia's economic 'paralysis is over'," USA Today, July 21, 2000.

Return to the International Finance Index

©1998-2001  South-Western College Publishing.  All Rights Reserved   webmaster  |   DISCLAIMER