Foreign investment is the second major element of Russia's reform strategy to strengthen international economic links. From the late 1920s to the late 1980s, the Soviet government prohibited foreign investment because it would have undermined the state's decision-making prerogatives on investment, production, and consumption.

The perestroika economic reforms of the late 1980s permitted limited foreign investment in the Soviet Union in the form of joint ventures. The first joint-venture law, which went into effect in June 1987, restricted foreign ownership to 49 percent of the venture and required that Soviet administrators fill the positions of chairman and general manager. By 1991, however, the Soviet government allowed foreign entities 100 percent ownership of subsidiaries in Russia.

Although limited in scope, the joint-venture law did open the door to direct foreign investment in the Soviet Union, which provided Russia's economy wider access to Western capital, technology, and management know-how. But the overall limitations of perestroika hampered the joint-venture program. The nonconvertibility of the Russian ruble was an impediment to repatriation of profits by foreign investors, private property was not recognized, government price controls remained in effect, and most of the Soviet economy remained under state control.

The Yeltsin government's commitment to foreign investment has been hampered in some cases by Russia's ongoing debates about the appropriate relationship with the West and about the amount of assistance that Russia should accept from the capitalist countries. Substantial political factions view the infusion of foreign capital as a device for Western governments to intrude on Russia's sovereignty and manipulate its economic condition, and they advocate a more independent course.

The Foreign Investment Law of 1991 provides the statutory foundation for the treatment of foreign investment. The law provides for "national treatment" of foreign investments; that is, foreign investors and investments are to be treated no less favorably than domestically based investments. The law also permits foreign investment in most sectors of the Russian economy and in all the forms available in the Russian economy: portfolios of government securities, stocks, and bonds, and direct investment in new businesses, in the acquisition of existing Russian-owned enterprises, in joint ventures, in property acquisition, and in leasing the rights to natural resources. Foreign investors are protected against nationalization or expropriation unless the government declares that such a procedure is necessary in the public interest. In such cases, foreign investors are to receive just compensation.

In response to demands by foreign oil investors for stronger legal guarantees before making large capital commitments, in July 1995 the State Duma passed the Law on Oil and Gas. It provides a basic framework for other laws and regulations pertaining to exploration, production, transportation, and security of oil and gas. In late 1995, the Duma passed the Production-Sharing Agreement bill, which provides for foreign investors to share output with domestic partners. Among other things, the bill lifts many of the financial impediments by removing excise and customs duties on the exportation of oil by joint ventures, and it requires contract sanctity for the life of the project. But in a clause that drew criticism from the United States business community, the bill requires State Duma approval of new joint-venture agreements on a case-by-case basis. As of mid-1996, the United States Department of Commerce considered the Duma's veto power over such agreements a key obstacle to expanded United States investment in Russia.

By the end of 1995, foreign investment in Russia since 1991 had totaled an estimated US$6 billion, a small amount considering the size of the Russian economy. Of that amount, US$3.2 billion had been invested between 1991 and 1993 and US$1 billion in 1994. Of the approximately US$2 billion invested in 1995, about 28 percent came from the United States, 13 percent from Germany, 9 percent from Switzerland, and 6 percent from Belgium. By sector, 15 percent of 1995 investments went to trade and catering; 13 percent to finance, insurance, and pensions; 10 percent to the fuel industries; and 8 percent to chemical industries. Telecommunications, food processing and agriculture, pharmaceuticals and medical equipment, and housing are in particular need of additional foreign investment.

Russia's overall investment climate has not been robust because of high inflation, a plunging GDP, an unstable exchange rate, an uncertain legal and political environment, and the capricious enactment and implementation of tax and regulatory regimes. Nevertheless, experts predict that improvement in those conditions will bring a strong increase in foreign activity.

Foreign Debt

Russia inherited a large foreign debt burden from the Soviet Union that clouds its economic situation. Throughout its history, the Soviet Union was a conservative borrower of foreign credits. Its ability to manage international accounts allowed the Soviet Union to obtain both government-guaranteed and commercial credits on favorable terms. But, by the end of the 1980s, the Soviet hard-currency debt had increased appreciably. At the end of 1991, the debt was estimated at US$65 billion, an increase of over 100 percent since the end of 1986.

By arrangement with the other former Soviet states and its creditors, Russia accepted responsibility for repayment of the Soviet Union's entire debt, in exchange for control of some of the overseas assets of the other republics. In January 1996, Russia's total foreign debt was US$120.4 billion, including US$103 billion of the Soviet Union's debt that Russia assumed. Russia has been hard pressed to service that amount.

In March 1996, the IMF approved a three-year loan of US$10.1 billion to Russia. At that point, Russia already had US$10.8 billion in outstanding IMF debts. The first loan payment of US$340 million was paid almost immediately, and it helped Russia to overcome a large budget deficit that it had been trying to cover by issuing securities. The IMF made the early monthly payments of the loan during Russia's 1996 presidential election campaign, despite Russia's failure to comply with several loan requirements. However, once Yeltsin had been reelected, the IMF withheld the July payment because Russia's hard-currency reserves had been severely depleted during the campaign and the tax collection system remained unsatisfactory.

In April 1996, the Paris Club of seventeen lending nations agreed to the largest debt rescheduling procedure in the history of the organization by postponing US$40 billion of Russian debt in order to assist Russia in meeting its international debt payments. The agreement followed the November 1995 provisional accord with the London Club of international commercial bank lenders (which spread repayment of US$32.5 billion over a twenty-five-year period) and the IMF loan of US$10.1 billion in March 1996. The new schedule gave Russia a six-year grace period for repayment on the principal it owes.

Data as of July 1996

NOTE: The information regarding Russia on this page is re-published from The Library of Congress Country Studies and the CIA World Factbook. No claims are made regarding the accuracy of Russia Foreign Debt information contained here. All suggestions for corrections of any errors about Russia Foreign Debt should be addressed to the Library of Congress and the CIA.