Prospects of cooperation of the Russian Federation with friendly countries in the framework of investment activities.

Korotin Kirill Vladimirovich Postgraduate Student, Department of Economics, Nizhny Novgorod Institute of Management – Branch of RANEPA 603950, Russia, Nizhny Novgorod region, Nizhny Novgorod, Prospekt Gagarina str., 46 korotinkirill28@gmail.com Other publications by this author

Introduction.

March 5 , 2022 The Government of the Russian Federation at the legislative level has fixed the list of foreign states and territories that commit unfriendly actions against the Russian Federation, Russian legal entities and individuals – unfriendly foreign states _^[2]. After the creation and approval of the list of unfriendly foreign states, regulatory legal acts, as well as programs of government departments and institutions, show a tendency to encourage interaction with friendly foreign states and complicate the process of interaction with unfriendly foreign states. Starting from March 2022, a special procedure has been established for carrying out economic activities related to unfriendly foreign states. In particular, transactions may require coordination with the Central Bank of the Russian Federation, the Ministry of Finance of the Russian Federation, the Government Commission for the Control of Foreign Investment in the Russian Federation _^[1].

At the moment, the course of encouraging interaction with friendly countries can be traced in all areas of state regulation of the economy, including in the field of regulation of credit institutions, the securities market and investment activities. In this paper, the prospects of cooperation between the Russian Federation and friendly countries in the framework of investment activities are analyzed. The paper provides an assessment of the course of the Central Bank of the Russian Federation in relation to the development of cooperation with friendly countries. The current position of the scientific community in relation to the development of economic relations with friendly countries is carried out in the work. Statistical information on various indicators characterizing the prospects of investing in friendly countries was also analyzed, and a list of measures to resolve the existing contradictions was determined.

The course of the Bank of Russia on the development of cooperation with friendly countries.

 The course of cooperation with friendly foreign states can be traced in the strategy of the financial market of the Russian Federation until 2030. In the paragraph "Principles of the development of the Russian Financial Market" of section I "General Provisions", the development of mutually beneficial partnerships with friendly countries is highlighted as one of the principles. A similar statement is contained in section II "The main trends in the development of the Russian Financial Market in previous years".  The item "Development of International cooperation" of section III "Conditions and long-term priorities for the development of the Russian financial market" contains the intention to create tax and other conditions for investors and issuers from friendly foreign states, admission of financial organizations from friendly foreign states to carry out activities on the territory of the Russian Federation _^[3].

As part of the analysis of the strategy for the development of the financial market in the short term – until 2025, the course for cooperation with foreign friendly states is also clearly traced. The improvement of interaction with friendly countries is highlighted at the level of prerequisites, mechanisms, tasks, such as the development of corporate relations, increasing the protection of consumers of financial services, the development of international payments and settlements, the configuration of currency regulation and others _^[4].

The combination of intentions to reduce administrative barriers, tax benefits and other methods of encouraging the development of relations with financial market entities of friendly foreign states with increased control and limited opportunities for interaction with financial market entities of unfriendly foreign states demonstrate the current course of development of the financial sector in the Russian Federation. It can be noted that due to the unprecedented pressure on the financial sector of the Russian Federation, external and internal economic factors, at the moment there is an objective need for state regulation of the financial sector. Before analyzing the prospects for cooperation with friendly countries, it is necessary to provide theoretical information on the regulation of the economy, and, in particular, the financial sector, as well as to analyze the position of the scientific community regarding the development of cooperation with friendly countries.

The position of the scientific community regarding the development of cooperation with friendly countries.

Today, representatives of the Russian scientific community suggest a decrease in the effectiveness of traditional methods of monetary regulation. In particular, the exhaustion of the potential of the traditional interest rate policy of central banks is noted. Kudrin A.L. notes that during the COVID-19 pandemic, central banks were forced to apply non-standard solutions to regulate the economy. For example, in developing countries, asset repurchase programs were launched for the first time, which were previously implemented only by the monetary authorities of developed countries ^[5]. The accumulated experience in regulating the financial sector during the COVID-19 pandemic was useful for state regulation of the financial sector in 2022, including for reorienting the economy and building a trend towards developing relations with friendly countries.

In accordance with the position of the state bodies of the Russian Federation described earlier, the intention to strengthen cooperation with the economies of friendly foreign states is primarily related to ensuring the security of economic activity and protecting the interests of investors.

Special attention should be paid to the position of the scientific community in relation to the development of cooperation with friendly countries. At the moment, there is a scientific gap in the analysis of cooperation with friendly countries. Many works are devoted to specific aspects of the current situation – strengthening strategic partnership with China, India, Belarus and other states, mainly within the real sector of the economy. There are no scientific papers devoted to the development of cooperation with friendly countries in the field of investment, analysis of the general problems of developing cooperation with friendly countries and the establishment of restrictions for cooperation with unfriendly countries.

As an example of the development of cooperation with friendly countries, it should be noted the position of Yampolskaya D. O. in relation to the development of cooperation between Russia and China and India in the field of electronic industry. Despite the common position of experts that China and India should become Russia's main partners in the supply of electronic industry products. At the same time, the author notes the existence of many sanctions against the Chinese electronics industry. Thus, cooperation between Russia and China in the field of electronic industry supplies may lead to an increase in the number of sanctions by the United States. In the case of Chinese manufacturers, when selling products to the Russian Federation, in addition to general market indicators, an analysis of sanctions risks will be carried out, which complicates the supply process.  On the other hand, the author puts forward a thesis according to which the largest equipment manufacturers have the opportunity to avoid sanctions, including by increasing production capacity outside the United States. In conclusion, the author notes that there are economic prerequisites for cooperation in terms of return on investment in joint projects, bypassing political aspects ^[6]. At the same time, "getting past the political aspects" is a very difficult task for the Russian government, the final result, which depends on many external factors, including those independent of the actions of the Russian Federation.

Analyzing the financial support of Russian exports in modern conditions, Sakharov D.M. notes the need to deepen financial cooperation with friendly countries and the development of public-private partnership. The author describes in detail the conditions for creating settlements in the national currencies of friendly countries, and mentions the importance of insurance instruments to promote the growth of Russian exports to friendly countries ^[7]. In this case, the benefit of this study is to evaluate the insurance tool to ensure economic interaction with friendly countries. On the other hand, at the moment there is an important problem of providing insurance opportunities not only to Russian market participants, but also to representatives of friendly countries. In the case of investment activities, the problem of insurance to representatives of friendly countries is particularly relevant, since the risk of sanctions is a complex risk for insurance companies from the point of view of risk assessment. For example, if sanctions are applied against a counterparty from a friendly country, the amount of risk for a Russian investor will be equal to the amount of investment. For a legal entity from a friendly country, sanctions can have a direct impact on all operational activities, and the amount of risk will be significantly greater. This fact puts investors from the Russian Federation and from friendly countries in an unequal position in the event of counter-sanctions.

When assessing external threats to the economic security of the Russian Federation, the authors define high integration with the economies of unfriendly countries as a problem in the field of economic security ^[8]. This thesis should be analyzed from the point of view of logic – if the economy of the Russian Federation depends on integration with the economies of unfriendly countries, then there is an inverse relationship. Further analysis will include an analysis of the assets of existing credit institutions, including with shareholders from unfriendly countries. In the case of the relations of the Russian Federation with unfriendly countries, each case is a separate event with its own introductory data. It should be noted that in some cases it is possible to apply the dependence of specific subjects of unfriendly countries on the economy of the Russian Federation to ensure their own economic development, instead of spending the state on building new economic relations. Economic integration can be not only a threat, but also an opportunity to minimize current risks.

When analyzing possible formats for the development of investment in the national economy, Chernenko V.A., Voronov A.A. and Reznik I.A., there is a position on the need for import substitution, including through the speedy replacement of non-residents as a result of refusal to work in Russia - for Russian investors and reliable foreign investors from friendly countries ^[9]. This position is correct in the context of ensuring economic security. Appropriate measures will significantly increase the state of security of the Russian economy, in particular investors. But at the same time, the concept of full import substitution is initially incorrect. In many areas, in particular in the production of low-margin products and investments in the relevant areas, the payback period of investments can be measured in tens of years, in the absence of prospects in terms of profit margins. On the other hand, the development of some high-tech and innovative industries is associated with making a profit and satisfactory payback periods for projects, but subject to the availability of a finished product on the market, even if the product belongs to residents of unfriendly countries, it is necessary to conduct an additional analysis of each specific project.

When analyzing the assessment and prospects for the development of the economy of the Russian Federation, E.K., Karpunina and other authors note a significant share of the foreign trade of the Russian Federation with unfriendly countries, both in terms of imports and exports. The authors propose to pursue a consistent policy of transferring exports from unfriendly countries to countries such as the UAE, Egypt, Mexico, Algeria, Saudi Arabia, Singapore and other countries ^[10]. The authors justify this thesis by reducing the risks of introducing restrictions with unfriendly countries. In the context of investment activity, an increase in exports to friendly countries can serve as a basis for creating investment conditions.

Thus, most studies at the moment are devoted to interacting with friendly countries in the real economy sector. The issues of investment prospects in friendly countries are not mentioned as a subject of research within the framework of scientific papers, which confirms the relevance of the research. With regard to current research, several problematic points should be highlighted. Firstly, the authors of the works often do not mention the risk of counter-sanctions, which significantly hinders partnership with friendly countries. Secondly, the proposal for the use of import substitution, which is often found in ongoing studies, does not imply specifying the sectors of the economy to which import substitution should be directed.

Analysis of statistical and economic indicators of friendly countries.

The first economic indicator by which it is customary to evaluate the country's economy is the GDP indicator. Among the 20 largest countries in terms of GDP in 2022, 12 states belong to unfriendly foreign states, 7 states belong to friendly foreign states. According to the statistical agency Statista, Russia ranks 8th in terms of GDP in 2022. On the other hand, China, which is not an unfriendly foreign state, is in second place, and has an accumulated GDP of 18,100.04 Billion US dollars, which exceeds the cumulative accumulated GDP of nine unfriendly states located in positions from 6 to 20 of the rating and is clearly shown in Figure 1. The GDP indicator allows noting, among other things and the need of the economy for new products. The higher the GDP, the higher the level of production and the higher the need for purchased products or services.

Figure 1. GDP in billions of US dollars for 2022 Source: _11^[11]

The assessment of potential trading partners based on the GDP indicator is more representative if trade cooperation is related to the export of raw materials. Since this work analyzes the financial sector, it is necessary to focus on other indicators as well. The United Nations Development Program calculates the Human Development Index (HDI), which estimates life expectancy, literacy rate and standard of living based on gross national income. People living in more favorable conditions will be willing to invest more, so it is also advisable to evaluate countries for the presence of potential investors through the HDI indicator. Among the 20 countries with the highest HDI index, only 1 country is friendly towards the Russian Federation – China _1^[12]. In this case, statistics show that a large number of potential investors – individuals and legal entities - are limited in their opportunities to invest in the economy of the Russian Federation.

In 2021, a rating of the 10 most attractive countries for investment was published. Similarly with HDI statistics, only China is a friendly foreign country that is included in this rating _{[These countries are the most attractive for investors after the COVID-19 pandemic // Forbes [13]}. These statistics show that Russian investors are also limited in investment opportunities with the opportunity to get the highest return.

Based on the data companiesmarketcap.com for this work, the statistics of companies in terms of capitalization, operating profit, revenue and assets were analyzed. These indicators have an impact on investment decisions. We selected the largest 50 companies within each indicator, and divided the companies by jurisdiction into companies from friendly (or neutral) countries and companies from unfriendly countries.

Fig. 2. The number of companies from friendly countries according to various indicators, % of the top 50 companies according to the corresponding indicator. Source: _1^[14]

The share of friendly or neutral companies in relation to the Russian Federation among the 50 largest companies in terms of indicators does not exceed 30% in all analyzed groups, which is clearly demonstrated in Fig. 2. By analogy with the indicators analyzed earlier, the low share of companies from the top 50 in terms of market capitalization, operating profit, revenue and the amount of assets indicates the existing restrictions for Russian investors.

It should be noted that in addition to the problems of investment prospects in companies of friendly countries, there is also the fact of the continuation of the activities of foreign companies from unfriendly foreign countries. As an example, we should consider the banking sector. In the rating of banks by the amount of assets as of February 2022, among the largest 50 banks, 4 banks have a total amount of assets of 3,705,360,512 thousand rubles. The shareholders are companies from unfriendly countries: Raiffeisen Bank, UniCredit Bank, Citibank, ING Bank _1^[15]. Despite the existence of precedents for the transfer of bank assets to Russian investors, as in the case of Rosbank _1^[16] or Home Credit Bank _1^[17], banks with owners from unfriendly countries continue to operate on the territory of the Russian Federation.

In the statements of representatives of state bodies, such as the Central Bank of the Russian Federation, as well as representatives of the State Duma, there is a tendency to maintain economic relations with unfriendly countries. According to the head of the Central Bank of the Russian Federation, the current task for the Russian economy is to attract foreign investment, including from unfriendly countries _1^[18]. A similar thesis is put forward by the head of the State Duma Committee on the financial market ^_[19].

Potential investors, in addition to restrictions on access to assets from unfriendly foreign states, also have uncertainty about the duration of the course of state policy for the development of economic relations with friendly foreign states. Investors can analyze a possible change in the course of state policy and reorientation towards the resumption of economic relations with unfriendly foreign states, including the abolition of currently existing restrictions, which will lead to an increase in the state of uncertainty in the market.

Ways to solve the existing problems

The current situation with the division of countries into friendly and unfriendly is explained, first of all, by the political situation that has developed in 2022. To resolve the existing contradictions described earlier in the work, a number of measures should be taken.

First, it is necessary to identify the most promising sectors of the economies of friendly countries in order to carry out tax incentives and reduce restrictive factors in specific areas. Directing efforts to reorient investments to specific sectors of the economy of friendly countries will reduce government spending on the development of the financial sector of the Russian Federation.

Secondly, it is necessary to continue working to minimize the risks of counter-sanctions. At the moment, for potential investors, both Russian and foreign, one of the key problems is the risk of counter-sanctions. In this situation, the risk of counter-sanctions significantly increases the state of uncertainty in the financial market. To solve this problem, it is possible to develop an insurance institution, define interstate cooperation within specific sectors of the economy. With the development of the insurance institute, it is necessary to resolve the previously identified contradiction, in which the risks of counter-sanctions for an investor from the Russian Federation and a legal entity from a friendly foreign state are disproportionate.

In 2023, special administrative districts (SAR) are becoming particularly relevant, in which by the end of 2023, according to the estimates of the Ministry of Economic Development, a total of 250 organizations are expected to be registered. In accordance with the statements of the Ministry of Economic Development, it is proposed to increase the period of exclusion of international companies from the foreign register to 5 years, expand the range of foreign legal entities to create an international company "from scratch" in the SAR, reduce the size of assets transferred to the international personal fund from 5 billion. 500 million rubles each . Such measures will give the business sufficient time to exclude the "double" registration of the company and will increase the attractiveness of creating an international personal fund in the SAR _^[20]. It should be noted that this measure is effective if the potential partner is not interested in further conducting activities with unfriendly countries, that is, the risk of counter-sanctions will not affect its operational activities.

Thirdly, it is necessary to regularly assess the possibility of resuming relations in the financial sector with unfriendly foreign states, since restrictions on the freedom of investment in the future may have a negative impact on the state of the financial sector of the Russian Federation. Assessment of the possibility of resuming relations with unfriendly countries should be made in connection with a number of circumstances:

· The dependence of the Russian economy on unfriendly countries is at a very high level, and the facts of the continuation of the activities of large credit institutions with shareholders from unfriendly countries, together with statements by representatives of government agencies, indicate the prospects for maintaining economic relations with unfriendly countries;

·        Full import substitution and the transfer of all investments to friendly countries is an economically unjustified decision. In the current conditions of uncertainty, any decision on the development of the economy, including in the field of investment, must be evaluated in terms of potential budget expenditures of the Russian Federation;

·        A reduction in economic and investment cooperation with friendly countries means a reduction in diplomatic ways to resolve the existing contradictions. Trade relations can be one of the reasons for maintaining and establishing relations between states.

Conclusion

The adoption of concrete measures to stimulate economic relations with companies from friendly countries, the gradual lifting of restrictions on access to assets from unfriendly countries in the foreseeable future will improve the investment climate in the Russian Federation.

Today, investment activity in the Russian Federation is in a state of uncertainty due to a number of problems. First of all, it cannot be unequivocally stated that the development of issued and received investments in unfriendly countries is a negative factor for the economy of the Russian Federation, which should be reduced to a zero level of activity. On the other hand, the development of investment relations with friendly countries is also associated with a number of difficulties – the risks of counter-sanctions, the difference in the estimated amount of risk, the presence of institutions and legal norms that provide advantages for investments in friendly countries.