Potential and Opportunity of FDI in Russian Textile Industry Analysis

This report provides a comprehensive country analysis of Russia, focusing on the potential and opportunities for Foreign Direct Investment (FDI) in the textile and apparel industry. It begins with an overview of Russia's political, economic, social, technological, and legal (PESTL) factors influencing business operations and market growth. The report then examines factors creating competitive advantages, such as natural resources and a skilled workforce. It analyzes the influence of foreign currency and exchange rates on investment, reviews existing trade policies, systems, barriers, and incentives, and assesses the current level of FDI in Russia. The analysis highlights the emerging market status of the textile industry and suggests that increased FDI could contribute to the development of this sector and the broader Russian economy. The report emphasizes the importance of government policies and improvements in the investment climate to attract foreign investment and foster industry growth, offering valuable insights for potential investors in the Russian textile market.

Running head: FDI IN RUSSIAN TEXTILE INDUSTRY
Country Analysis: Potential and Opportunity of Foreign Direct Investment in Russia
Name of the Student:
Name of the University:
Author note:

1FDI IN RUSSIAN TEXTILE INDUSTRY
1. Introduction
Country analysis refers to the detailed evaluation and interpretation of a country’s social,
political and economic environment. This is helpful for the investors in the financial market. The
following report addresses the country analysis of Russia in respect of the emerging market of
textile and apparel industry. It focuses on the general overview of the country and detailed
analysis of various social, economic and political factors, which influence the growth of the
economy, scope of emerging markets, and level of FDI. The factors for competitive advantage,
potential and opportunities of FDI, trade policies, foreign currency and exchange market, and
recommendations for the scope of investment in the textile industry will be discussed in this
report.
Russia, officially the Russian Federation, is the biggest country in the world by the
surface area, spanning over 11 time zones, and it is the 9th most populous country, with more
than 144 million of people by March 2016 (Neumann 2016). The European western region of the
country is more populous and more developed compared to the eastern region. The history of
Russia is quite old and over the millennium, the country has gone through major political, social
and economic changes. After the Russian Revolution, the Soviet Union was the biggest socialist
state in the world. It played a major role in the allied powers in World War II and became the
rival of United States in the cold war. The Soviet era witnessed major technological
accomplishments of the last century. However, the Union or USSR collapsed in 1991 due to
many radical reforms by then president, Mikhail Gorbachev, and the new Russia was born
(Kaiser 2017).

2FDI IN RUSSIAN TEXTILE INDUSTRY
The economy of Russia holds the 12th position among the largest economies by nominal
GDP and 6th by PPP in 2015 (Neumann 2016). The country is one of the market leaders in the
production of natural gas and oil. It is part of many economic and social councils of the world.
2. PESTL analysis of Russia
PESTL is a market analysis tool, which helps to evaluate the external forces influencing
the business and operation of a nation or any organization. PESTL stands for political,
Economic, Social, Technological and Legal factors, affecting the external forces of a nation or an
organization (Shabanova et al. 2015). The PESTL analysis for Russia is explained below.
Political: Russia maintains an open foreign relationship strategy. The country witnessed
economic and political turmoil when it got defeated in Afghanistan and the economy was badly
affected. The government worked hard to regain stability and currently the system has become
economically and politically stable. It has relationships with 191 countries and embassies in 144
countries. However, there is no political freedom in Russia, even though it is a federation and the
corruption rate is very high (Vovchenko, Kochka and Pogorelenko 2015).
Economic: The economy is growing and expected to reach $3.18 billion GDP by 2018 (Liuhto,
Sutyrin and Blanchard 2016). The strong resource sector is the backbone of the economy.
However, the corruption and high crime rate in the country discourages the investors for
investing in the country, making the financial market vulnerable. Russia has the largest
agricultural area and produces more crops than many nations, and maximum of crops gets
exported to Asia and Europe. The economy is largely dependent on the price of oil. However, the
textile industry in Russia is not developed. The country imports apparels from South East Asia
(Shabanova et al. 2015).

3FDI IN RUSSIAN TEXTILE INDUSTRY
Social: Russia has a capitalist social structure. There were many social problems, such as,
income inequality, high crime rate, high corruption, high death rate, and low living standards.
However, the situation is improving with the government intervention (Wirtschafter 2015).
Technological: Technology is one of the strengths of the country. When the technological
revolution started, Russia became a pioneer in this, especially in space science. The first man in
space was a Russian. The technological advancements such as, Nanotechnology and Rosnano,
and in IT fields, manufacturing of weapons, and in the fields of mathematics, chemistry,
aerospace engineering have contributed significantly in the development of the country (Aslund
2013).
Legal: Russian jurisdiction is strong, although people have less political freedom. The
government has brought about new legislative reforms in the country to attract investors in the
country.
The textile and apparel industry is the new emerging market, which has a big scope in the
country. With a substantial amount of investments in this sector, it has a scope of huge growth.
The industry can focus on the PESTL analysis of the country and can take actions accordingly.
3. Factor endowments creating competitive advantage
Russia has been endowed with huge amount of natural resources, such as, oil and natural
gas. This leads to low energy prices. Relatively educated work force is another factor leading to
competitive advantage. Hence, the reserve of natural resources and raw materials, lower prices of
oil and educated work force are the factors for competitive advantage and in the next few years,
Russia needs to improve the level of competency through development of skills and competency.
These are favorable for the development of manufacturing industry (Series 2014).

4FDI IN RUSSIAN TEXTILE INDUSTRY
The textile and apparel industry is one type of manufacturing industry. The lower prices
of energy and raw materials, the huge amount of agricultural land and skilled labor can help in
the growth of this industry. Russia can easily grow cotton and develop the industry. The
conditions of the textile manufacturing plants can be improved and it can produce apparel within
the country, rather than importing from other countries (Hansen 2014).
However, the economic and international relations factors, such as, exchange rate with
other countries should be made favorable. The investors should feel confident about investing in
Russia. The government must impose some protection for the domestic producers and thereby
encouraging the improvement in the factors for competitive advantage (Kalotay 2015).
4. Foreign currency and foreign exchanges influence
The foreign currencies and exchange rate play a major role in the development and
shaping of the economy of a nation. The exchange rate is the price of a country’s currency in
terms of the currency of another country (Gabaix and Maggiori 2015). Hence, there are two
components in the exchange rate, one is the domestic currency and the other is the foreign
currency. For international trade, exchange rate is the most important part. It directly affects the
export and import of a country. When the Russian Ruble is stronger compared to other
currencies, the imports become cheaper and exports become costlier (Ghosh, Ostry and Chamon
2016).
The major trading partners of Russia are Italy, Germany, China, Poland, Turkey, UK,
USA, Switzerland and Finland. It also has trading partnerships with the countries in South East
Asia for the imports of textiles. The other importing products are machineries, vehicles, food,
chemical products, consumer goods etc. (Hameed and Rose 2016). The developed industries are

5FDI IN RUSSIAN TEXTILE INDUSTRY
machinery construction, energy and fuel, chemical and petrochemical, metallurgy, and
agriculture. Thus, the textile industry is not developed yet, rather it is an emerging market. The
foreign exchange is a major contributor in the development of the industries in Russia. When the
currency appreciated due to high exchange rate, the global investors become interested to invest
their money in the hope of higher return (Pawęta and Mikołajczyk 2016). Hence, the textile
industry would be benefitted if it receives foreign direct investment from global investors. The
amount of the investment is dependent on the exchange rate. If the exchange rate is high in favor
of Russia, the Ruble will appreciate and the investors will get higher return from their
investments in Russia. The textile industry of Russia can develop with the help of the foreign
direct investment. When the industry and domestic market will be developed, the country can
reduce the textile imports (Hansen 2014).
5. Existing trade policies, systems, barriers and incentives
During the existence of USSR, two main trade policies were state monopoly on the
foreign trade and tough protectionism (Makeeva and Chaplygina 2015). After 1991, Russia has
adopted extremely liberal principles for establishment of free market. It had started trade with the
developed western countries. Russia has trade agreements with European Union, and has
membership in World Trade Organization (WTO). It is the 3rd trading partner of EU and EU is
the 1st trading partner of Russia (Kuznetsov and Mezhevich 2016). The country has imposed
specific tools such as import quota and export quota, import and export licensing, technical
regulations in the international trade policies. It also has formulated policies for service trade,
although those are not rigid apart from the currency regulation. The new agreement between EU
and Russia focuses on building a comprehensive framework for the bilateral trade relations,

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along with stable and balanced rules for trade and investments. EU is the major FDI provider for
Russia, by providing almost 75% of the total FDI inflow (Ec.europa.eu 2017).
The trade barriers are mostly faced by United States companies while doing business in
Russia. They face many tariff and non tariff barriers during exports. Russia banned US
agricultural products and food items in 2014 after the annexure of Crimean peninsula. In the
financial sector, there is a serious limitation for the foreign companies to access all the financial
services in the country. The inefficient banking sector and underdeveloped financial sector are
major obstacles towards economic growth of Russia. The restrictions on foreign capital
investment and lack of competition in these sectors possess barriers to growth (European
Commission 2016).
The Russian government has started providing tax incentives and subsidies for
investment. It also provides incentives for exports. This is a step towards trade liberalization.
6. Existing level of FDI
The FDI inflow in Russia was highest in the year 2008 at 74.8 billion USD and then
declined. It again shot up to 69.2 billion USD in 2013 due to the transaction between BP and
Rosneft, and declined very sharply to 22 billion USD and 6.5 billion USD in 2014 and 2015
respectively. The rapid fall in FDI inflow in 2014 pushed down the country to the 16th position in
FDI inflows in the world from 5th position in 2013. The slump in FDI inflow occurred due to the
influence of the conflict in Ukraine, poor climate for investments, introduction of the sanction
plans, and downfall of the overall economy due to falling prices of oil (cbr.ru 2017). This was
the first year when outward FDI flow exceeded the inward FDI flow in Russia. In 2015, the fall

7FDI IN RUSSIAN TEXTILE INDUSTRY
in FDI was 92% from that in 2014. However, the inflow increased by 62% from 2015 and
reached 19 billion USD, due to privatization of the Rosneft company (santandertrade.com 2017).
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
2.0
3.8
4.3
4.5
3.0
2.8
2.7
2.3
3.1
1.1
0.5
2.6
FDI Russia, net inflows (% of GDP)
FDI Russia, net inflows (% of
GDP)
Linear (FDI Russia, net inflows
(% of GDP))
(Source: World Bank 2017)
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
15.5
37.6
55.9
74.8
36.6
43.2
55.1 50.6
69.2
22.0
6.9
33.0
FDI Russia, net inflows (BoP, current US$
billion)
FDI Russia, net inflows (BoP,
current US$ billion)
Linear (FDI Russia, net inflows
(BoP, current US$ billion))

8FDI IN RUSSIAN TEXTILE INDUSTRY
(Source: World Bank 2017)
The share of FDI is very low in the GDP of Russia, only 1.5%, in the view of the growth
potential of the economy (cbr.ru 2017). The FDI mostly comprises of working capital
investments. In the recent years, the country has adopted many reform schemes, but corruption,
administrative problems and uncertainties about regional stability have posed significant
challenges. The FDI inflow is not expected to improve as long as the conflict in Ukraine and
enduring problems of the governing system continue. To maintain a balance, the capital outflow
should be reduced. From the FDI data of the UNCTAD and Central Bank of Russia, it is found
that the major FDI inflow was in trade and repair of vehicles, 28.3%, followed by manufacturing
(23.9%), financial activities and insurance (13.9%), mining and quarrying (13%) and real estate
(4.3%) (unctad.org 2017). Thus, textile industry can establish its position to gain the foreign
support. If the government shifts its focus to develop the textile industry, the FDI inflow can
happen in that sector and can contribute in the development of this sector, as well as of the
economy.
(Source: unctad.org 2017)

9FDI IN RUSSIAN TEXTILE INDUSTRY
7. Recommendations and summary
To overcome the challenges, it can be recommended that, Russia should promote the
technological modernization of the textile industry and the economy through the facilitation of
advanced technologies and equipment from abroad. It should expand the usage of the customs
and the tariffs for exports, which includes the reduction of duties on the raw materials and
equipment for producing export goods and establishment of special zones for processing of
export products, and should take measures to eliminate export restrictions in the international
market. Russia should adopt measures to increase the level of FDI in the textile industry and
reduce the financial regulations to encourage the investors (Makeeva and Chaplygina 2015).
In the end, it can be concluded that, the Russian economy is still recovering from the
financial crisis of 2008-2009. Although the level of FDI has been improving after the sharp
downfall in 2014, the country needs to adopt more liberal policies for increasing the level of
foreign investment in the country. The PESTL analysis describes the economic, social, political,
technological and legal scenario of the country. The existing level of FDI is 19 billion USD
although, the textile sector does not receive any foreign capital. The textile industry is not yet
developed and the country imports from the South East Asia. It is an emerging market, where
there is a huge opportunity for potential FDI.

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