FDI into Russia has been hit hard by the Covid-19 pandemic. Will the country now move away from extractive industries such as oil and gas to attract investors back? (Photo by Dimitar Dilkoff/AFP via Getty Images)

FDI in Russia plummeted during 2020 as a result of the Covid-19 pandemic. Inflows fell from $32bn in 2019 to just $1.1bn in 2020, according to the UN Conference on Trade and Development’s (UNCTAD) Investment Trends Monitor.

Greenfield project announcements in Russia decreased 61% in 2020, and UNCTAD has predicted this decline in investment is likely to continue in 2021.

UNCTAD highlighted in 2020 how overproduction and a decline in global demand for raw materials have contributed to a “strong downward pressure on commodity prices”. This has had an outsized impact on FDI in Russia, with its economy mostly focused on extractive industries.

The pandemic hit at a time of improving investment levels in Russia. After two years of declining FDI, inflows rose by 140% in 2019. The country’s ranking in the World Bank’s Doing Business 2020 report has also improved in recent years, climbing three places to 28th out of 190 countries in 2020.

Russia has been ruled over by Vladimir Putin since he was appointed prime minister by then-President Boris Yeltsin in August 1999. Putin’s strongman politics have had negative impacts on investment levels, as seen between 2013 and 2015 following Russia’s invasion of Ukraine.

With Putin extending his stay in power until 2036 through a controversial amendment to the constitution, foreign perceptions of Putin’s authoritarian leadership are likely to continue to play a role in Russia’s attempts to attract FDI.

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The need to diversify Russia’s economy

A paper by economic think tank Bruegel shows that the bulk of FDI into Russia comes from the EU, with European investors owning between 55% and 75% of Russian FDI stock between 2009 and 2017.

The EU’s pledge to be climate-neutral by 2050 threatens that investment flow, however, with Russia’s economy still largely based on oil and gas. The Bruegel paper highlights how European countries could provide the investment Russia needs in higher-value-added activities to diversify its economy and benefit more from knowledge transfer.

With global FDI flows set to continue to decline across transition economies in 2021, an investment recovery in Russia may depend on whether its main recipient sectors remain extractive industries or become more diverse.