Russian Federation Ministry of Education STATE UNIVERSITY OF MANAGEMENT Printed as Manuscript AHMAD .M.M. AL-SALEH The Problems Involved in Attracting Russian Investments in the Economy of Developing Countries (by Example of the Middle East Countries) Speciality 08.00.05 – Economics and Management of National Economy 8.00.14 - World Economy and International Economic Relations ABSTRACT Of PhD Dissertation (Economy) Moscow 2000 This work has been done at the Sub-faculty of Management of Foreign Economic Activities of the State University of Management. Supervisor of studies: Official opponents; Leading organization: N.A.Solovyov,PhD(Economy), Reader A.N.KuritsynD.Sc.(Economy), Full Professor P.V.Korolev,PhD(Economy) All-Russia Research Institute of MarketConditions(VNIKI) The defence is to take place on 20th June 2000 at 2.00 p.m. at the Dissertation Board R 053.21.06 meeting at the State University of Management at the address: 109542, Moscow, Ryazanskiy prospekt, 99, Academic Council Room. Copies of the Dissertation are available at the Library of the State University of Management. May 2000. The Abstract was circulated on Academic Secretary, Dissertation Board, D.Sc. (Economy), Full Professor (signature) L.V.Sokolova GENERAL Topicality of the research. Throughout the 90ies Russia has been actively participating in the international migration of capitals shaping the global structure of international invest¬ment collaboration. In fact, it has been acting not only as a recipient, but as a donor too, exporting abroad (mostly in hidden form) substantial financial funds. Official (open forms) of capital export has also been in progress. This is an evidence that even though Russian companies are in bad shortage of current capital and generally looking for foreign investments from abroad, they are still subject to the objec¬tive economic laws which demand that companies have to invest their own monies abroad as well. The Arab,countries of the Middle East: Syria, Jordan, Lebanon and the Palestinian Autonomy have traditionally been the zone of the Russian economic interests. Throughout many decades the USSR has been developing here the investment collabora¬tion, mostly in the form of construction of capital objects, accompanied with a diversified variety of supplies of goods and services, training of national specialists able to grasp the Soviet technical standards. In this way a base was crea¬ted for subsequent wider export of equipment, engineering ser-vices, knowhow, other forms of cooperation. Under the new market conditions this resource proved to be uncalled-for, whereas no new mechanism was worked out. No concept of the state politics exists in this field. Russian economists have done little in the studies of creation of such mechanisms and programs that would allow to draw capital investments to the region from abroad, nor have they looked into the efficiency of said mechanisms and programs, the specific character of free economic zones opened for foreign investments. Proceeding from what is said above, the Dissertation topica¬lity can be underpinned, in the authors opinion, by the fol¬lowing three key factors. First, the urgent necessity for Russia to look for the ways that would allow it to restore its lost positions at the markets of the Middle East region on the basis of the most effec¬tive investment mechanisms and within the framework of inter¬national migration of capitals. It is this migration that by inception of XXI century has become the commanding force in international economic relations and left far behind, by pace of growth, even the world trade. In the form of direct foreign investments (DFI) the international migration of capitals has become the primary mover in the process of globalization of world economy. Second, to prepare practical plans for Arab-Russian mutually beneficial economic collaboration it is necessary that inves¬tigations and estimates be made aimed at finding out what spe¬cific interests of Russian companies in these countries may be that would encourage Russian investments in this region and make them promising. Third, proceeding from the geography and role of the Middle East in the system of foreign economic and political interests of Russia, it is urgent to continuously study and think out in scientific terms the economic processes happening in the region, particularly those which involve the DFI mechanisms, their forms and the methods applied in their regulation. All that cannot but be of practical interest to Russian investors. The objective of the research - to appraise possible partici¬pation of Russian investors in the countries of the Middle East region under new, for Russia, historical conditions and with due account of specific character of economic develop¬ment and investment climate in the Middle East countries. To attain the objective one should assign and cope with the following tasks of research: - to examine the feasibility and need of foreign economic ac¬tivities abroad; - to prove the expedience of development of investment coope¬ration between Russia and the Middle East countries through the examination of accumulated potential in the field of trading and economic interrelations; - to analyze,as the objects of investment,the specific featu¬res of economic development of Syria, Lebanon, Jordan and the Palestinian Autonomy in the 90ies and appraise the in¬vestment climate in those countries; - to show up the competitive conditions with which potential Russian investors can encounter: forms, methods and aims of direct foreign investments in the region in the 90ies and in future; - to describe the particular features of state regulatory me¬chanisms in the Middle East countries acting in the sphere of foreign investments, the types of free economic zones in the region and regulations acting therein; - to work out long-range plans of Arab-Russian collaboration in the field of investments, outlining possible forms of Russian investments in the region. Object of research - the investment cooperation of Russia with the Middle East Arab countries: Syria, Jordan, Lebanon and the Palestinian Autonomy. The regional choice of the author was dictated by the following considerations: - politically, from the viewpoint of Russian interests, this region is notable for traditional orientation of the RF fo¬reign economic relations and favourably looking expecta¬tions for the Russian economic presence; - economically the aforesaid countries are pursuing the DFI policy that is not only close in content to that of Russia, but has common history and long-range vistas and hence, in the authors opinion, can make up a single economically integrated grouping; - up to the Second World War these countries constituted a single political and economic space with the population united by common cultural traditions and including a large Palestinian Diaspora. Subject of research - complex of relations proceeding from possible allotment of investments of Russian companies in the said states, including the legal grounds of their activities and possible economic behaviour: their industrial priorities,the scale and dynamics of capital investments, the structure and terms of investing and the specific character of the pro¬jects being implemented or in the pipeline. Theoretically and methodologically the Dissertation is based on the works of Russian scientists who have been dealing with the problems: E.F.Avdokushin, V.M.Akhmedov, I.N.Gerchikova, S.I.Dolgov, V.A.Isayev, I.I.Kretov, L.N.Rudenko, S.A.Solovyova, F.A.Trinich, N.Yu.Ulchenko, I.P.Faminskiy, A.O.Filonik. While working over the Dissertation the author has also used the official statistical materials of Russia and of the coun¬tries under study: Proceedings of the Institute of Oriental Studies and the Institute o f World Economics and Interna-tional Relations (both Institutes are of the Russian Academy of Sciences); the Institute for Israel and Middle East Stu¬dies; Institute of Scientific Information on Social Sciences (Russian Academy of Sciences); All-Russia Research Institute of Humid Subtropics (RF Ministry of Economics); All-Russia Research and Design Institute (Russian Federation Ministry of Trade). The Dissertation includes also the results of investigations made by the author in the works of foreign scientists: A.Bogsch, R.Folsom, M.Gordon, D.Ross, J.Spanogle, C.Schmitt-hoff, F.Scherer and some other. Particular attention was paid to the official publications of UNIDO, UNCTAD, other subdivisions of the UNO; also, publica¬tions in the special Russian periodic literature: Problems of Economics, Asia and Africa Today, World Economics and Inter¬national Relations, Russian Economic Magazine, Middle East Economic Digest, Engineering News Record. The author has also analyzed some materials of the Central Bank of Russia, World Trade Organization, materials of the information agencies Inter-Rate, Interfax, Prime-TASS, Rosbusinessconsulting, Publishing House Kommersant. Scientific novelty of the research consists in that a complex approach towards the appraisal and prognostication of new prospects in the sphere of investment collaboration between Russia and Middle East countries has been derived on the ba¬sis of modern market mechanisms, due account taken of the new phenomena that have come to life in the economic develop¬ment and specific character of the mechanism applied to at¬tract DPI to these countries. The most significant scientific results, the author received in the course of his work, are stated below: - the export of business capital from the Russian Federation is proved to be feasible and necessary since it helps pro¬mote the edge of Russian export competitiveness under highly intensified competition worldover; - reasonable trends in Russian investment policies as regards specific industries and projects are suggested proceeding from the national interests of the Russian Federation and Middle East countries; - building capital construction objects (CCO) by foreign com¬panies on contractual terms is shown as a form of capital export, ie, as a sort of investment activities rather than a kind of international trade (with CCO as a special type of commodity), which has so far been the case in the Russian literature; - new trends in the allotment of direct foreign investments are shown as applied to the Middle East countries in the 90ies: a successive growth of direct foreign investments and project-tied funds in the region; also, DFI markedly exceeding the portfolio investments; - a conclusion is drawn that the free economic zones (FEZ) are a means of step-by-step liberalization of economies of the Middle East countries as far as DFI attraction and re¬gulation are concerned; in this, the countries come forward as a proving ground of advanced legal standards, this being of particular importance for Russia too; - three DFI characteristics are shown as worthy of discrimina¬tion in the investment policy of a state: first, the DFI economic role (value characteristic); second, the DFI tech¬nological role, giving a qualitative characteristic of in- vestments as bearers of advanced technologies; third, the DFI as a tool for shaping the organization and management of production; - a fact has been ascertained that the share of foreign Arab investments from third countries has been growing in the structure of direct foreign investments in the region under study; this process has been specially promoted by the go-verments of the Middle East countries; - the investment climate in the Middle East countries has been appraised and a conclusion made that the most favourable conditions for foreign investments are offered in Jordan and Lebanon which should be attributed to the progress made in the social-economic development and to the legal liberali¬zation of the DFI aspects. Practical value of the work consists in that the materials, statements and conclusions the Dissertation contains can be made use of while developing the concept of further progress in foreign economic activities as applied to international in¬vestment collaboration in general and DFI in particular; they can also be helpful in preparing teaching aids and reading lectures on: World Economics11, International Economic Rela¬tions11 (particularly on the topics of international migra¬tion of capital and free economic zones), also while pre¬paring research papers and official documents for ministries and departments of interested countries. Approval of the work and results of research. The main re¬sults and conclusions of the work have been reported at sci¬entific conferences and cited in the authors publications. Some statements, conclusions and results of this research have been and are used in teaching the courses: Internatio¬nal Management and International Investment Collaboration at the Sub-faculty of Management of Foreign Economic Activi¬ties (the Institute of World and National Economics of the State University of Management). The results of the research have been used as a basis for two articles whose total volu¬me constituted 1.0 quire. Structurally the research has been shaped by its aim, jbjec-tives and logic; it consists of an indtroduction, three chap¬ters, conclusion, appendix and reference of literature used. Chapter 1. Key prerequisites and factors of investment coope¬ration between Russia and Middle East countries. Chapter 2. Characteristic features of the Middle East count¬ries economic development and the mechanisms applied to attract foreign investments. Chapter 3. Appraising the feasibility and prospects of investment activities of Russian companies in the countries of the region. MAIN CONTENTS OF THE WORK In Introduction the research topic is substantiated, its to¬picality is proved and the aim, objectives, methodological approaches and scientific novelty are described. The extent, to which the research topic has been developed, is evaluated and the theoretical and practical significance of the work and its approval are pointed out. First Chapter of the Dissertation examines the key cause and factors that make it necessary to extend the scale of Russian business investments abroad as a tool of export expansion under the intensified conditions of world competition. In his reasoning the author proceeded from an assumption that presently the Russian economists and politicians differ in their opinions as to whether Russian investments abroad should be considered as reasonable or unreasonable. Some authors, for instance, Russian research workers V.Isayev and A.Filonek argue that in its present standing Russia cannot run its earnings (if any) in the economy of another state because Russia urgently needs such funds for its own financing [13, P.74]. In our opinion such viewpoint fails to take account of the trends and prospects of Russian economy in the conditions of international competition. The matter is that under the aforesaid conditions the exporting of capital must be an obligatory element of the export strategy of Russian companies. Russia has everything necessary to implement such foreign in¬vestments. Particularly important in this respect is the fa¬vourable balance of trade throughout the 90fies. This indica¬tor has been showing steady growth: the conclusion has been proved by analytical studies of the RF balance of payments. On average, the balance of trade constituted US$20 billion an¬nually during the past decade. Of no less importance and promise is another asset - intel¬lectual11 capital, particularly in the form of knowhow. Accor¬ding to the data provided by the RF government, the total cost of Russian intellectual property constituted in 1998 around US$ 400 billion. What Russia has to do is to find its niche in modern world economy. Today Russia cannot be oriented for exporting fini¬shed products which fail to compete internationally (ie, are not let into market niches occupied by the international glo¬bal technological chains): in this case Russia would have found itself acted upon by the centrifugal forces of world economy and displaced to the verge of world economy periphery. Russia should be placed into global technological chains by virtue of: cooperative alliances of Russian and foreign com¬panies and attraction of foreign capital to Russia; export of Russian capital abroad in the form of direct investments. Export of capital has the following advantages: there are certain benefits for the promoters, shareholders and lenders who export capital abroad; there are revenues collected for the state budget from the earnings received by the firms abroad; there is greater employment of the population thanks to the expatriate-employees whose business activities are inalienable with trips abroad. However, while analyzing the situation in Russia, one cannot but mark: ,tHQ process in ge¬neral, and particalry that of capital export, is counterac¬ted, although implicitly, on the part of the state. In this, Russia loses: a chance to apply a foreign-economic production investment model for associating its economics with the world economic system; a chance to associate itself with the international reproductive core; a chance to obtain an access to the world income earned by national industries which par¬ticipate in the world productional-technological chains; a chance to avail itself of foreign sources of raw material and. advanced knowhow; a chance of extraterritoriality which means spreading its laws and habits over the affiliates and subsi¬diaries of Russian companies abroad. The experience of world business activities proves that the role of transnational corporations (TNG) has been steadily growing in world economy. The transnationals have originated as a natural, outcome of the exporters phase-by-phase entering the world market. Studied in the work are the main reasons objectively demand that the Russian exporters have to establish production faci¬lities abroad. First, they must overcome the trade barriers (import custom tariffs, quotas, other non-tariff restrictions), Second, there is always a desire to use scarce or cheap raw stock resources abroad (raw materials, fuel and power resour¬ces, cheap labour, cheap capital). Third, better privileges granted to businessmen in some foreign countries (low taxes, soft credits, preferences for foreign investors). Fourth, the conditions of market micro-economics (following the cus¬tomers and competitors, adaptation to the local tastes of customers). The aforesaid reasons may help throw a bridge11 towards the world space but at a new qualitative level. At first the glo-balization of the exporters status can be expressed through the very process of transformation of his foreign portfolio investments into direct investments. Naturally, this process should come out as a result of the goal-oriented strategy. The creation of grounds for exporting high-processed goods is of vital importance for Russia. This can be brought about by entering the foreign market sectors from within through direct investments, which presupposes that affiliates and subsidia¬ries are set up abroad. The sphere of foreign investment (as a means of expanding the field of Russian export) is confined in the work to the Middle East countries. The state and prospects of trade-economic re¬lations of Russia with these countries are examined to give a deeper understanding of the investment objectives that face Russian companies. Up to the 90fs the share of the Middle East countries in the total trade turnover of the USSR with developing countries constituted around 30% and at least 20% of the total tech¬nical-economic assistance rendered by the USSR to the third world1 countries. The analysis of scope and trade structure of the Siviet-Arab trading shows that Arab countries were heavy buyers of Soviet machines and equipment, including complete sets of equipment for the national economy objects under construction in those countries and special supplies of military materiel: in the 80ies up to 45% of the above-mentioned items of Soviet ex¬port went to the Arab countries. The supplies of arms and military materiel to Arab countries constituted a most important element of Soviet export to these countries. Most of the supplies were delivered on credit. As the available data show, within the period of 1973-1989 the special Soviet supplies to the Middle East exceeded in cost US$70 billion. Simultaneously, by importing goods from Arab countries the Soviet Union covered its needs in some goods quite to a substantial amount: phosphoric fertilizers - 55%, cotton products and oranges - 70%, cork and cork chips - 65%, dates - 100%, sesame seed - 50%, perfume and cosmetic pro¬ducts - 25%. One of the most important features of the trade-economic re¬lations between the USSR and the Middle East countries was a a big-scale economic and technical cooperation, including large Soviet investments in the form of long-term credits ma¬de in primary industries of these countries. Amongst them can be mentioned hydropower facilities, iron and steel works, oil production and refinery facilities, machine building, chemistry, agriculture and transport. Worthy of special mentioning are such giants as the Aswan High Dam, Heluan Iron and Steel Work, oil refineries in Egypt, the Euphrates Hydropower Sta¬tion in Syria, oil extraction facilities in Northern Rumeila in Iraq, deep-sea port of Hodeida in Yemen. The participation of the USSR in the construction of the said and some other objects embraced all stages of capital const¬ruction - from making feasibility studies, conducting planning and surveying works, supplying complete sets of equipment for the objects to be constructed, rendering technical services in construction and up to the mounting and running-in the equipment in situ. The development of trade and economic cooperation to a no small degree was promoted by hefty Societ credits. In the opi¬nion of some Russian economists the problem of Soviet loans repayment after the USSR had collapsed, turned into a rather negative factor of the Russian-Arabl interrelationships -by the middle of 1991 the aggregate debt of the Middle East Arab countries was in excess of US$25 billion. We believe that these are mainly the debts of military origin because the debts for economic objects (in the sphere of investments) have already been repaid. The disintegration of the Soviet UNion has brought about ag¬gravated instability in politics, economy and exchange and finance. In the upshot the total trade turnover of the Russian Federation with the Middle East countries in the last five years (1995-1999) constituted only US$5.7 billion which is 5-6 times lower as compared with the period prececeding the USSR collapse. Another feature of importance: in 1995-1999 the export had outdone import 11.6 times and the positive balance constitu¬ted nearly US$4.8 billion. On one hand such marked difference can be attributed to large supplies (for cash and on credit) of military equipment and resumed supplies of complete sets of equipment to some countries, and on the other hand to Russias policy to restrict import by all means and almost from everywhere. As our calculations show, during the above-said five-year pe¬riod the share of the Middle East Arab countries in the Rus¬sian trade turnover constituted 1.2% of its total turnover with foreign countries(excluding the former Soviet Republics) and 5.5% of its trade with the developing countries. Hence, a conclusion is made that since the USSR disintegra¬tion the cooperation was practically axed and the mutual tra¬de volume cut down radically. In the new conditions the task is not only to recover lost positions but to increase the amount of Russian machinery export to the countries of the region, primarily on the basis of most effective means, to-wit: the investment mechanisms. It is in this connection that the economic feasibility of Russian investments in the Middle East region is assessed. However, a more detailed and com¬plex analysis of the problem requires that the specific na¬ture of the very object of investment - the economy of the countries - be studied. Second Chapter of the Dissertation analyzes the key macroeco-nomic indicators which describe the state of econpmy in Syria, Jordan, Lebanon and the Palestinian Autonomy in the priod under discussion; also, the economic development of the Middle East countries is studied from an angle of those main fac¬tors and conditions which shape the investing atttractive-ness of these countries for direct foreign investments (DFI). Studied separately are the structure and range of foreign eco¬nomic relations of each of the states since this, in fact, reflects the real effectiveness of state policy in the regu¬lation of foreign investments and shows the openness of eco¬nomics. The basic elements of DFI mechanism are examined as applied to the economies of Syria, Jordan, Lebanon and the Palestinian Autonomy. Such elements are: national legislation -in the DFI sphere; international agreements relating to the protection of foreign investments; national taxation systems and regulations of the free economic zones. In his work the author has paid attention to liberalism of the countrys in so far as it concerns the business activi¬ties. Specially singled out is the possibility of the state to apply the following means for the purpose of attrac¬ting direct foreign investments (DFI) to the country: (a) national system in the field of foreign investments in its own self; (b) special (ie, extraterritorial) legislative system appli¬cable only to a part of the national economic space in the free economic zones; (c) bilateral preference regulations which are governed by intergovernmental treaties on the encouragement and pro¬tection of investments. It is from this angle that the logic of examination is followed in this part of the Dis¬sertation. Third Chapter makes use of the results of the preceding ana¬lysis to assess the investment climate in each of the count¬ries of the region and to prove the forecast of a foreign in¬vestment inflow to the region of foreign investments. Studied also are the modern trends in foreign investors1 ac¬tivities in the Middle East countries. Theirs activities are considered as broken down departmentally and geographically and the specific nature of key projects with foreign capital is identified. Special attention is paid to the objects of capital construction erected on the basis of foreign credits and with the participation of foreign contractual-building companies, suppliers of complete sets of equipment and engi¬neering firms. A tendency towards their appreciable extension in the region has been detected. An important section of the research is the analysis of Russian-Arab investment collaboration. This analysis has brought the author to conclude that in the 90ies such col¬laboration whose main core was made up of the objects of ca¬pital construction on contractual terms and Soviet state cre¬dits was not developing and actually discontinued. Private structures, that replaced the state-run enterprises, have so far been unable to restore the cooperation in its former scope. Meanwhile, private initiative, with adequate state sup¬port, can open certain vistas for further development of mu¬tually beneficial ties. The work illustrates this argument with concrete suggestions, including a list of feasible and promising lines of cooperation as objects for Russian invest¬ments . The research has made it possible to establish that the eco¬nomic development of Syria, Jordan, Lebanon and the Palesti¬nian Autonomy is progressing todays under the impacts of in¬tensifying and diverse factors, both external and internal. The policy of intensive industrial development is conducted in parallel with such industries as power, communication, the spheres of finance and credits, training of national person¬nel; a lot of other social-economic problems are being solved. The total GDP value of Arab countrieshas grown in the pariod nearly five-fold as compared with the preceding decade. This is mostly the result of vigorous rise of productive forces and growth of labour productivity. A characteristic feature of the economic development of the countries of this region consists in the active realization of liberal principles: privatization, deregulation of econo¬my, attraction of foreign investments, lifting of restric¬tions in free entrepreneurship. At the same time the markets of the Middle East countries have been preserving their relative isolation which, though often criticized, helped these countries to obviate negative external impacts and consequences of the Asian exchange-fi¬nancial crisis. The Middle East has not encountered the out¬flow of hot11 money and possession of sufficient foreign ex-change reserves made it possible to maintain the rate of lo¬cal monetary units. The specific character of the process of liberalization of the foreign economic relations and of the DFI policy, that has been discovered in the course of research, should be attributed to the fact that the countries of this region are carrying out market reforms at different speeds11. The leader is Jordan which is c ~ut the reforms on inst¬ ructions of the IMF, and Lebanon realizing a large-scale in¬ vestment program which got the approval of the IBRD and which presumes that external loans be used. The analysis of investment climate in the region,conducted in line with Burys and Deify*s methods, has shown that the¬se two countries are the leaders in the foursome11 of the Middle East countries. Worthy of noting is the fact that during the 90fies in all the countries under investigation there have been created quite modern national legal systems for encouraging foreign investors. A unique feature of the mechanisms by which the state regulate the DPI activities consists in the creation and improvement of special state authority bodies managing the encouragement of foreign investments and provision of a well thought-out systematized policy adapted for a certain country conditions. Such policy includes rather an extended list of privileges and exemptions for foreign investors, such advantages holding also true in regard of the require¬ments imposed on foreign investors in general. Particularly great are the privileges in Jordan. One of priorities in the economic policy is the creation of favourable conditions for business activities and encouragement of foreign investors. Foreign capital investments are welcome in industry, agri¬culture, tourism, transport, communications and health care. In Jordan they impose the following requirements upon the objects that are erected on the territory of the country with tba participation of foreign capital: obligatory employment of local (Jordanian) labour; utilization of local raw mate¬rials; export-orinted project; minimum authorized capital of companies that are established with the participation of foreign capital (from 10 to 75 thousand Jordanian Dinars, the variation depending on the sort of industry involved). In Lebanon, a number of advantageous provisions have been adopted by the government to stimulate DFI in the real sector of economy: reduction of income tax from legal persons down to 10%, continuous improvement of investment legisla¬tion and some other. Of particular importance is the provi¬sion that any industry of the economy may use foreign capi¬tal. Furthermore, the authorized capital of a company inclu¬ding foreign investments, shall by law constitute at least L£300,000. In Syria they have got on the whole the same pack of privi¬leges. The essential difference consists in that these pri¬vileges are built-in11 into a more intricate system of red-tape procedures. Worthy of special noting is the fact that in Syria especially encourage the Syrian and Arab capital which is backed up by a set of encouragements, guarantees and privileges. In the Oalestinian Autonomy the investment-related legisla¬tion is aimed at encouraging foreign investments for the sa¬ke of economic recovery. In this, a most important criterion in granting various privileges to the foreign investors is primarily the amount of capital investments and employment provided within the project. Tax exemption may vary from 5 to 15 years and the equipment imported for the objects to be built shall also be subject to exemption from custom duties, taxes and collections. Special privileges are granted to big investment objects, export-oriented and agrarian production. On the whole, even though the Middle East countries1 policy is aimed at raising as much foreign investment monies as possible, it imposes certain regulating norms and require¬ments upon such monies which are dictated by the rule of na¬tional priority interests. In this sense it is not fully li¬beral, ie, an open-door11 policy. Rather, it should be des¬cribed fairly favourable for foreign investors. On the other hand some of the aspects of this policy need, the author believes, refurbishment. Thus, the exemption of foreign investors from taxes for a period of time determined by legislation, is regarded by Arab economists as a powerful incentive and important tool for attracting foreign capital. We believe that this is but a temporary means since it att¬racts the capital of which quick turnover and short payback period are typical. Such capital can easily leave the coun-ry as soon as the incentive is revoked. Therefore the prio¬rity, as it seems, is to be given to a complex of taxation policy measures, particularly to those of a long-term depre¬ciation. Also promising seem to be more modern incentives in the form of industry-related rebates from the tax rates as they may help attract foreign investors to certain indus¬tries and spheres of activities. Besides national legislative systems, acting in the DPI fi¬eld, the Dissertation separately treats the free economic zones (FEZ). The analysis of FEZ phenomenon shows that this technique of attracting foreign capital has been applied in the countries of that region for a rather long time and in numerous forms too. A conclusion is made that the FEZ areas in the Middle East are mostly the zones of the first and se¬cond generations, ie, belonging to the trading and industrial-production types. In the nearest future special state sup¬port will be lent to those companies which though not requi¬ring hefty capitals, will be capable of producing the pro¬ducts that will be in great demand at the world market: com¬puter facilities, means of communication, electronic toys, sports goods, also sewing and textile industries which can be of interest to the Russian investors as well. By the beginning of 1999 the share of Arab countries in the DFI volume constituted over 2% of the DFI total volume which is equivalent nearly to US$10 billion. Of no small importance is the conclusion of the work that in taking investment decisions the traditional reasons of the DFI (investment climate, market capacity, availability of raw stock materials, etc.) should be supplemented with new factors. During the recent 15 years a favourable investment climate has been created (with certain variations) in many states. In these conditions the investors are looking for such centres of investments where specific advantages exist: extensive infrastructure, marketing network, such invisible11 factors as loyal attitude towards the growth of capital of natural and legal persons, business ethics, active innova¬tion activities, etc. In our opinion the Middle East coun¬tries will not enjoy any competitive advantages at the in-ternational market of capitals unless taking account of all these tendencies. The author has found out that direct capital investments constitute the lions share which in some years exceeds 90% of the total transboundary investments in the countries of this region. Of lesser importance for the Arab countries is the relative volume of portfolio investments. In the 90fies the direct foreign investments in the Middle East countries showed a rising trend which was mainly owing to the activity of the US, West European and Japanese companies in the region, The outlook for Russian-Arab cooperation in the investment field is fairly promising. The key factors in favour of such conclusion are: the strategic position of the Middle East countries; better investment climate; effective (solvent) de¬mand in the domestic market; growing GDP (gross domestic pro¬duct); favourable economic prospects and rather attractive grounds where DFI can be applied. The matter is to work out a well-balanced strategy and on its basis guarantee not only ones own return to the region under consideration but also keep a firm footing in this part of the world for a long time. Nowadays Russia and Arab countries occupy approximately the same technological niche. Quite a sizeable part of production is based on technologies that are not the most advanced ones; man labour quota is still high whereas labour productivity is low; science content is below the modern level. Economically the ME countries to a certain extent have been tied to Russian technologies as a result of many a year use (in heavy, mining and processing industries, at the objects, infrastructures) of Soviet projects, technical documentation, equipment and spare parts. Arabs are actually interested in that Russian structure acti¬vely participate at the local markets as a counterbalance to the economic activities of industrially developed countries. The have got at their disposal sufficient financial reso¬urces. Amongst the other factors that will objectively help towards the promotion of partner-like relations are: - the key role played by the Middle East region in provi¬ding the fuel-power balance in the world, such rol attach¬ing to the region particular significance in the world economy ties; - geopolitical significance of the Arab East where the inte¬rests of Great Powers and other numerous countries are fo¬cused: it is this region whence the above-said countries get their oil and gas supplies, thus maintaining their fuel-power balance; - geographically Russia and the Middle East are close, hence the significance of the region as a crossing of strategic transport traffic lines providing ouylets to the Mediter¬ranean Sea and zone of the Indian Ocean. An important conclusion of the work consists in that the sta¬tes must promote still further their support of the Russian companies1 investment activities along the following lines: - provision of communication facilities necessary for the partners from the countries under consideration. One of the ways to overcome the information barrier can be active par¬ticipation of Russian enterprises, firms and organizations in international exhibitions and fairs that will be held in the Arab countries, also organization of similar speci¬alized events both in Russia and the Middle East. Other ways and means to get into gear the exchange of informa¬tion, particularly to set up information-consultation cen¬tres and adbertisement bureaux, provision of sites in Internet, etc.; - promotion of Russian companies in international tenders held in Arab countries insofar most of import purchases of machinery and equipment and investment projects are made in the region through sales; - provision of a financing system intended to subsidize fo¬reign economic activities that would provide rendering different sorts of bank credits and state guarantees while conducting export-import and investment operations with the said group of countries, also when taking part in sa¬les, etc.; granting soft credits and insurance as far as export and direct investments are concerned. To ensure more active participation of Russian organizations and com¬panies in international tenders to be held in the Arab countries and to make edge-competitive offers, it would be reasonble to choose some Russian banks which could issue guarantees for participating in such tenders and for sign¬ing in due legal form the contracts on the basis of bilate¬ral agreements with the Middle East commercial banks. The work contains specific offers aimed at promoting bilate¬ral investment cooperation with each of the countries of the region. In Syria rather promising seems to be the extension of inves¬tment collaboration in oil and gas industries: exploitation of oil and gas fields; conducting the surveying and working drilling operations; repair and recovery of bore-holes; con-struction of oil- and gas-pipelines, oil reservoirs and other objects. In these sphere such giants of Russian oil industry as Lukoil11 and Yukos11 and some other could participate. Amongst promising for Russian investments objects one can call: construction of Tishrin - a hydroelectric power sta¬tion on the Euphrates River (630 MW); running the first phase of the thermal electric power plant Tishrin11 (400 MW) and the Euphrates Hydroelectric Power Complex with a hydroelec-tric power station (800 MW); projection and construction of the second phase of the Tishrin11 TEPP; projection of hydro¬electric power station Balih; supplies of machinery and equipment for construction of two high-voltage pylon-mounted electricity transmission lines of 203 kW and 66 kW each; construction of irrigation and other hydroeconomic objects; cultivation of lands; supplies of drilling equipment, etc. The military-technical ties between Russia and Syria should be regarded as priority ones; a new impetus was given to them in June 1999 during the negotiations of the Syrian President H.Asad in Moscow. In connection with a large Syrian debt -US$12 billion - the work suggests that such a debt can be paid off by a mechanism based on interactive investment po¬tential evolving in the form of private investments, inter-company cooperation and technological collaboration. In Jordan it is power engineering that is considered as the main route of development of the Russian-Jordanian cooperation in investments: supplying rural areas with electricity and participating in the implementation of projects aimed at crea¬ting a common power system of the Middle East Arab countries, also combining in one whole the power systems of Jordan and Egypt. Of no small interest is cooperation in the construction of plants for production of phosphor-containing produce. In this the Russian companies and organizations will have to find the ways to supply to the Kingdom the products of conversion industries (apart from conventional supplies of machinery, equipment, rolled products, lumber). In the field of rural economy the following seems of promise: construction of greenhouses, cooperation in animal husbandry, fighting the desertification and salinization of soils. Promising also seems to us to study the prospects of coopera¬tion in the processing of mineral resources (clays, bentoni-tes, silica sand, volcanic tuff, etc.), fishery, oil pipeline and oil reservoirs building, in medicinal tourism on the Dead Sea coast. In the Palestinian National Autonomy (PNA), which by mid-2000 is.expected to become a sovereign state, there are good pros¬pects for Russia to take part in the investment projects. At a conference of the External Donors in 1999 in Washington it was resolved that the Palestinian Autonomy in the nearest five years will have received a financial aid in the amount exceeding US$3 billion. Within the framework of this resolu¬tion a consulting group of the IBRD will have to be set up which must specify a list of projects subject to the Palesti¬nian Investment Program that has already been worked out. An outlook for Russian investors in the PNA market is good: they could, in particular, take part in contracts on construc¬tion works in the infracture and municipal economy, in getting things going in new productions, also in such fields as tour¬ism, quarrying construction stones and marble, processing of farm products, sewing and boot and shoe industries, packing industry, making of souvenirs, etc. Lebanon will be attractive to Russian investors as an area of immense contractual construction business under plans of reco¬very of national economy. There are good prerequisites for it: such are the agreements on trade and economic cooperation bet¬ween the two countries, also on double taxation relief, on protection and promotion of investments. The Lebanese have also made offers to build and reconstruct oil refining plants, to construct hotels, factories in light and food industries. The reconstruction of industry, infrastructure and municipal objects requires huge amounts of construction materials, tech¬nologies and capital investments, thus favouring the coming of Russian private capital in various forms. The restoration of the country will cost about US$10-15 billion. Repatriation of the national capital that has been withdrawn during the pre¬war period in the amount of US$30 billion will undoubtedly enlarge the market capacity. It would be reasonable to concen¬trate Russian investment activities in such sectors of the Le¬banese economy as power engineering, road construction, water supply facilities, telecommunications sea ports and Beirut Airport since these are the priorities in the economic policy of the Republican Government. The participation of Russian ca¬pital in the Lebanese banking is worthy of examination. For Russia cooperation with Lebanon is promising in that it can use that country as a financial transit centre for pushing Russian goods, services and investments into the states of the Middle East, as well as in the countries of Africa and Asia. In conclusion of the Dissertation the following possible app¬lications of Russian investments in the Middle East countries can be sorted out: - establishing in the region Russian companies for rendering services and engineering support to the technical facili¬ties that have been supplied there earlier, including moder¬nization of equipment, delivery of spare parts and machine components needed to restore and reconstruct the factories that have been built with the aid of Soviet organizations; - making direct Russian investments in the production of cer¬tain types of machine-building products, spare parts and ac¬cessories; - making joint Russian-Arab investments on the territory of the Middle East with the participation of regional Arab and Saudi Arabia and Kuwait funds of development. In view of the fact that the countries in this region are conscious of the necessity to extend in the region the inter-Arab lateral in-gration economic ties, there is nothing improbable in the suggestion that the development and implementation of joint investment projects between Russia on the one hand and Pa-lestinian Autonomy, Jordan, Lebanon and Syria on the other; - exporting Russian capital to the above-mentioned countries which will later be paid back in the form of products turn¬ed out by the Russian subsidiaries and oriented to a large-scale Russian market (cotton, subtropical food products, cotton articles); - within the framework of offset transactions at the regional market of armaments: the realization of Russian investments at civil objects in the form of supplies of Russian techno¬logical equipment, also by applying compensatory mechanisms by means of which the invested Russian financial resources are to be paid back by supplies of products turned out at such objects. In this objects must be subject to a free choice of investments: in this way it will will be ensured that the the products thus produced are actually in demand in Russia and that the latter will be provided with scarce goods on a long-term basis. Amongst such goods can be named products of tropical farming: cotton, oranges and other fruits, olives, other oil seeds and oils, other products; - working out a mechanism by means of which the debts of Arab countries could, on preferential terms, be transferred to private Russian entrepreneurs, the latter free to act either independently or jointly with foreign companies. In this provision has to be made that liabilities for debt will not be used for financial profiteering but will be used solely for investment purposes; - participation of Russian construction companies and makers of complete equipment sets in the construction of capital construction objects on contractual terms in the region; also, participation in international economic investment projects within a common Middle East market that is being formed on the basis of multilateral inter-Arab cooperation; - cooperation between industrial factories aimed at producing the products that will be necessary for both parties, on the basis of Russian raw materials, technologies and labour and with the aid of Arab investments; - joint manufacture of distilling plants designed to produce fresh water from seawater on the basis of Russian technolo¬gies, thus solving the problem of fresh water shortage in the region; possible cooperation with Islamic banks bearing in mind that Islam is one of the traditional religions in the Russian Federation. Such collaboration in the field of investments could help Russia escape the isolation in which the country has found itself in the region because of its strongly pronounced pro-American policy that has been pursued after disintegration of the USSR. Russia can come back to a large-scle Middle East market that has fairly well been mastered in the Soviet pe¬riod. Russian companies will undoubtedly find favourable con¬ditions at the Middle East market thanks to existence here a good investment climate, solvent demand for investment instru¬ments and objects of capital construction. As long-term prospects one should expect here a rally of eco¬nomic activities with subsequent greater interest in the Arab market and increased amounts of direct foreign investments drawn to the region. Of course, such increase will not happen automatically. The governments will face the need for deepen¬ing the corresponding reforms at a state level, thus creating prerequisites for ampler influx of DPI into the Middle East region. Russian DPI will have to gain quite a prominent place in it. The Dissertation has underlied the following publications: 1. The Middle East: Special features of foreign investments here in the 90ies.// Economics. Politics. Culture11 A collection of research works.-Issue N 7.-M.,2000.-0.4 quire. 2. The motives underlying the direct foreign investments in the economy of the Middle East countries.// Econo¬mics. Politics. Culture11 A collection of research works. -Issue N 7.-M., 2000.-0.5 quire. Director, Centre for Interna-tional Programmes (signature) N.B. Filippov Seal: Ministry of General and Professional Education of the Russian Federation* Moscow.State University of Management. Reg. N 067334. _________________________________________________________ Translation from Russian into English N 3465 Made by Yu.Travnichev This is a true and correct translation of the original document. Director of the Central Bureau of Interpreters Moscow,06th October 2000.
Posted on: Thu, 01 Jan 2015 21:47:42 +0000
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