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Influence of International Companies on the Economy of Russia

3693 words (15 pages) Business Assignment

30th Nov 2020 Business Assignment Reference this

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Introduction

Historically, Russia has had a vast growing economy. It is a developing country whose economy ranks in the upper-middle-income class (Bulman, Eden, and Nguyen, 2017, p. 5.). There have been continued reforms in the trade sector in Russia, which include the continued privatization of most industries in the country. However, this privatization has excluded the defense sector and the energy sector in which oil is part. These two remain under government management. Russia has oil as a leading economic commodity for which it makes massive exports. With the flatulating market prices of oil in different destinations, Russia is entitled to reaping vast sums of revenue from the increase. Significant positive oil price movements usually result in higher returns on the stock market if markets thrive for oil-producing nations (Tchatoka, Masson and Parry, 2018).

Generally, for a state economy to thrive well, the state needs to embrace change as time is changing. Practicing a rigid economic structure may harm the economy as the needs of their consumers' changes with time (Hamilton and Shin, 2015, p. 390). These changes, however, require an innovative spirit whereby a country is willing to try new things, new methods of conducting business operations, and also modern technologies. Thus, demand-responsive industrialization, as in the case of Easter Asia, is what can genuinely reform (Hamilton and Shin, 2015, p. 390). It is evident that the adoption of advanced technology has become a must-do for prosperity to be realized in many countries. The speed with which a company produces its products determines the ability to meet short deadlines and hence, the ability to satisfy the customers.

Russia, as a country, has not been left behind when it comes to international trade. It is a thing of history that Russia exports oil products. The state has also made efforts to join several trade unions that help it grow healthy business relations with trade partners. Such organizations include the World Trade Organization, which controls business between member states to promote the state economy. It is this organization that shields the states from exploitation by foreign countries involved in the trade. Russia had its economy thriving well in the 1990s. The critical contributor earned revenue, which had drastically increased. This was not necessarily because it had increased its export volumes but rather the increase in the prices of products exported. The rise in oil price fetched the country some extra revenue that saw its GDP increase. It is the extra price that increased GDP and not necessarily additional products exported (Tchatoka, Masson and Parry, 2018). This paper discusses the Russian economy and how
international companies influence it.

Figure 4 Growth of export

The Russian Economy

Russia's economy is a combined upper-middle-income and even a transitional economy with government ownership in strategic sectors of the economy. Economic reforms in the 1990s resulted in the privatization of most of Russian agriculture and industry, with obvious exceptions in the power and defense sectors to such privatization. While Russia's systemic trend of throughput is increasingly similar to that in the upper and lower-middle classes of high-income states, the framework of Russian production or manufacturing is inconsistent with its level of wealth, and the level of labor distribution remains inadequate. Russia's sequence of usage tends to be distorted by incomplete market reform (Gregory and Lazarev, 2004). The real GDP growth in Russia exceeded expectations in 2018, hitting 2.3%, largely attributable to the one-off impact of power building. The estimated rise of 1.2 percent in 2019 and 1.8 percent in 2020 and 2021 indicates a more cautious perception (Bulman, Edenand Nguyen, 2017, p. 5).

Figure 3 Growth of GDP

Developing countries depend highly on international trade for the growth and stabilization of their economy. Global capital significantly reduces the negative impact of the economic recession as it benefits the country's economy directly. However, the accumulation of overseas investment for the same country may have no direct effect on the performance of any given company or the country's economy. Therefore, foreign ownership in the country is seen as a tool of addressing financial constraints within the state of operation as it contributes significantly and directly to the country’s income and livelihoods (Bykova and Jardon, 2017, p. 1). Russia, being one of these countries, places its bet on foreign investment and trade. It has traded on oil for many years now and still exports the product to diverse countries in the world. It is the proceeds of this trade that the government uses for development projects. As such, it is essential to know the relation between the Russian economy and the international companies investing in Russia. This is because if the revenues imposed on their products rise, exports may drop and hence economic stagnation or even decrease in the performance of the economy (Evans, 2019). Generally, developing countries’ economies are described as being dynamic; anything can happen. Whereas some nations have consistent growth, others might have rapid growth that is eventually accompanied by stagnation, rapid growth quickly followed by decline or even advanced drastic declines, constant stagnation with no visible changes, or steady decline (Bulman, Eden, and Nguyen, 2017, p. 5). For instance, more recently, the prices of oil were observed to change drastically.

Many economists believe that tariffs affect trade with high taxes restricting trade. They also believe that countries imposing such tariffs should consider reducing them to friendly levels to encourage business in produced items. This was evidenced in Russia in 2014 when the Obama administration laid out sanctions on Russia. At the time, the Russian ruble fell by 76% as compared to the U.S. dollar with the gross domestic product (GDP) expected to fall by about 3% (Ashford, 2016, p. 114.). Even though researchers have reported that the boycotts only hurt the country in the short run, fragile economies may never recover or may take a long time to recover from such downfalls (Heilmann, 2016, p. 179). Russia's macro-fiscal reserves continue to be strong, with budget surpluses throughout all levels of the administration and lower planes of public loaning.  Relative with advanced economies, its expenditure on education and health matters is low in Russia as opposed to other countries where health and education form the most significant agenda of the government with vast numbers of resources channeled to the two working these categories will enhance the overall quality of public expenditure. Short-term inflation warnings have been lowered, with the Financial Institution of Russia indicating a come back to a balanced policy level. Lending activities are growing; however, the financial services industry remains concentrated and controlled by the administration. The government decides the activities of this industry in a manner that tends to favor it.

Fig.1 shows the changes in prices of crude oil with time (source: Sanghi et al., (2019))

Sometimes, expanding business relations at an individual level is more comfortable than at a state level. Consequently, slowed project funding and other operations are seen increasing. Slightly reduced, the rate of poverty continues to remain in double-digit numbers, with a large number of families near the poverty mark and a lack of properly paid work.

Casual work is growing in the face of near-to-zero net job development by medium-sized and large legal enterprises. It is unfortunate that a government that needs to fight for its people becomes their oppressor. Many are educated, but few have got the relevant jobs that benefit their professional standards. Primary threats to medium-term growth include a sharp reduction in oil prices, the extension of economic sanctions, and the souring of the global trading climate and renewed financial turmoil in EMDEs. The ongoing dual-digit increase of household borrowing could also result in a serious threat to economic steadiness in the event of a downturn in the macroeconomic climate (Sanghi et al., 2019).

International companies have recently shown immense interest in investing their capital and resources in Russia. In the last year, foreign investors put up money in a record number of projects and, thus, foreign investors contributed a sixteen percent growth in the Russian economy by expanding projects. It was seen that Russia had grown its international project numbers to 238, which was higher than in the previous year, which had 33 fewer plans attracted to the country. In the year 2016, the growth recorded was only two 0percent making the recent growth a striking one. As in 2016, foreign companies concentrated on the development of new production plants in Russia (202 projects) instead of on business growth which had 36 projects.

The growing interest in Russia

According to Kuznetsov et al. (2016, p. 26) on the current feature trends explain that trends are higher compared to the growth of the agricultural industry in Russia and the factors that influence its further progress. The study identified the critical creativities of the state on the conservation and development of favorable conditions for the agro-industrial complex. In such a case, the most vital issue is the ability to manage its investment attractiveness and management efficiently. The researchers describe the construction of the analytical role of business trend modeling in agriculture, as well as the analysis of rates of investment growth and how to influence production and import quantities of agricultural products in the Russian Federation in
the Netherlands. 

Figure 1 FDI by industries

In 2017, Asian nations showed a great interest in the Russian economy, with their participation growing by more than 2.5-fold, from just 30 ventures in 2016 to 76 last year (EY 2018). For the first time, China has taken the lead, increasing the number of new FDI projects by more than three and a half fold, scoring 32 in 2017 from nine in 2016. Since the release of the study, this is the highest number of projects funded by foreign investors. The common interests of Russia and China include: moving away from a unipolar system, to maintain the concept of independence of countries at the center of which has been the Security Council. Achieving similar results in regional conflicts, improve the global financial system, to support one another as economic partners, and also to achieve the same goals in Central Asia (Lukin, 2018, p. 75). Consequently, both Russia and China respond negatively to "interruption in one's domestic affairs" and assist one another in the fight against separatism. Evermore, they do not embrace the principles that the West calls ' normal.' Although China and Russia may have moved closer even without the Ukraine crisis, this speeds up the process, and a major strengthening of relations is unavoidable, as the Greater Eurasian Union is starting to take shape (Wishnick, 2017, p. 114).

South Korea ranked among Russia's ten biggest developers for the first time, with 12 projects in 2017. That compares to only two in 2016. The conducive environment the Russian government has created has opened doors for more investors in the country with a drastic rise in the number of new investment projects. Japanese lenders maintained the increasing trend, funding 17 ventures in 2017 as compared with 12 in 2016. Western European states showed inconsistent levels of economic investment in Russia in 2017. Germany placed first in the number of new ventures in 2015 and 2016, but lost its position in 2017, with the financing of only 28 proposals last year compared to 43 in 2016.

Similarly, France followed suit, decreasing the number of new ventures from 20 to 11 over the previous year (EY 2018). Thus, the interest of Russia in international trade is enormous. Global companies investing in Russia provide several advantages to the people of Russia, which directly affects the income gains by the country through revenues collected from the companies as well as improving the standard of living of Russians through the provision of jobs and income. Brazil is not left out in the quest to trading with Russia as it became the world's leading exporter of beef in the early 2000s. It is in the mid-2000s that Russia became the largest importer of Brazilian meat (Schierhorn et al., 2016, p. 84).

The effect of international trade on Russia

Russia has had its economy influenced by other countries, especially, France, Germany, and the US. These countries have conducted business with Russia for many years. These countries have influenced the new introduction of corporate governance. Elements of Russian heritage and culture are then analyzed to see how they could affect the country's changing corporate governance process (McCarthy and Puffer, 2002, p. 630) While Russia may continue to be conditioned by international standards and structures of other governments, it is conclusive to state that Russian corporate management will become its unique model, demonstrating the state's practices, culture, and values. Any slight change in the market patterns in the trading partner states spells effects on Russia's side. It is how the market controls the flow of products. The US, for example, is also a member of the world trade organization (WTO). These organizations were mandated to control the trade activities between member governments based on rules formulated through negotiations. Democracy was highly valued nations, and member countries were allowed to participate in talks aimed at formulating governing trade rules.

In their approach to problem-solving, members experiencing the various trade problems such as restricted trade, financial issues would negotiate to arrive at an average level, which was more comfortable for both sides. Similarly, cases of violation of rules were also resolved and enforced on the violators to correct their shortcomings. This was and remains a good governance structure over trade as the views of the trading countries are heard and taken into consideration in decision making.   However, for years now, it has engaged in severe economic and trade battles with China. This has seen the two states impose tariffs on each other. They engage in the tax me I tax you fight.  These two countries have seen their economies stagnate over the war, which was triggered and started by the US. China, in return, decided to retaliate by restricting the flow of their products into the country. With this constant war, US trade relations are affected. The way of conducting business has changed, and the exportation of products to the US may involve additional restrictions than were before the tariff imposition.

Consequently, businesses, on the other hand, would shift from the united states to other states where trade tariffs are more friendly to investments as well as the growth of firms. Some, still operating within the US, have been faced with the challenge of making hard but unavoidable decisions. Such alternative states include Russia. Nevertheless, trade between Russia and China has been influenced by trade sanctions imposed on Russia by the US as seen in 2014 (Heilmann, 2016, p. 179). A study evaluating the unique relationship between the price of oil shocks and trade sanctions and Russia's main macroeconomic variables using vector autoregression to assess the effect of the price of the oil shock and Global economic sanctions on actual GDP, actual and active exchange rate, unemployment, actual government spending, actual consumption and international trade. They concluded that the real GDP of Russia would contract by as much as 19 percent for two years if the sanctions and trade restrictions were not lifted (Tuzova and Qayum, 2016, p. 140). This shows the adverse effects that the disputes have laid on the Russian economy.

Determinants of the economic performance of Russia.

The actual role of a country throughout the international division of labor is defined by the competitiveness of all its trade, the structure which may expose and perpetuate the comparative competitive advantages it possesses. This is true in the case of economies such as Russia (Falkowski, 2017). Generally, the economic performance of a country is determined by several factors, which include; research and development, population, investments, and education. The level with which these factors are considered critical by different countries determine how much it invests on the and hence the overall economic impact they will have. Countries that have invested in research and development, their output, as innovations may increase, increasing their market share globally. As a result, the revenues realized contribute positively to its gross income with time; such products may gain a competitive advantage while others monopolize the line of production hence, the benefits to the country's economy. States to increase their income should, therefore, invest wisely with properly analyzed prioritization criteria for the above factors to get the best outcome out of their investment.

Developing countries being part of the hardest hit because, on average, tariffs applied to their goods will increase exponentially, as illustrated by an old African proverb, "As elephants fight, it's the grass that loses." Trade conflict is a serious blow to the countries that are poor in the world as it would jeopardize the fragile global economic recovery, threatening global growth and development. Also, developing countries are more likely to face much higher tariff barriers that may adversely affect export-oriented production.

Conclusion

Russia's economy, though in the middle class, requires significant contributions of different investors and stakeholders to stabilize. As demonstrated by the fluctuations existing in their product prices, the system needs many efforts if the future has to be a stable economy. The relation with international investors is of great importance as these companies contribute to the growth of the economy. Relations with the great economies and the developed countries would go a long way to improve stability.

References

  • Ashford, E. (2016) ‘Not-so-smart sanctions: The failure of Western restrictions against Russia’, Foreign Aff. HeinOnline, 95, p. 114.
  • Bulman, D., Eden, M. and Nguyen, H. (2017) ‘Transitioning from low-income growth to high-income growth: is there a middle-income trap?’, Journal of the Asia Pacific Economy. Taylor & Francis, 22(1), pp. 5–28.
  • Bykova, A. and Jardon, C. M. (2017) ‘Lean against the wind: The moderation effect of foreign investments during the economic recession in Russia’, Journal of Economics and Business. Elsevier, 93, pp. 1–14.
  • Falkowski, K. (2017) Russia-EU28 and Russia-China trade interdependence vs. the competitiveness of the Russian economy.
  • Gregory, P. R. and Lazarev, V. (2004) ‘Structural change in Russian transition’, Yale University Economic Growth Center Discussion Paper, (896).
  • Hamilton, G. G., and Shin, S. I. (2015) ‘Demand-responsive industrialization in East Asia: A new critique of political economy’, European Journal of Social Theory. SAGE Publications Sage UK: London, England, 18(4), pp. 390–412.
  • Heilmann, K. (2016) ‘Does political conflict hurt trade? Evidence from consumer boycotts’, Journal of International Economics. Elsevier, 99, pp. 179–191.
  • Kuznetsov, N. et al. (2016) ‘Interaction and influence of investment process stimulating factors in agriculture on the main trends in the development of the agricultural sector in Russia’, Економічний часопис-ХХІ. Інститут суспільної трансформації, Національна академія наук України, (158), pp. 26–31.
  • Lukin, A. (2018) ‘Russia, China, and the Emerging Greater Eurasia’, in International Relations and Asia’s Northern Tier. Springer, pp. 75–91.
  • McCarthy, D. and Puffer, S. (2002) ‘Corporate Governance in Russia:: towards a European, US, or Russian Model?’, European Management Journal. Elsevier, 20(6), pp. 630–640.
  • Sanghi, A. et al. (2019) Russia Economic Report. Available at: http://documents.worldbank.org/curated/en/332081560895493011/pdf/Russia-Economic-Report-Modest-Growth-Focus-on-Informality.pdf.
  • Schierhorn, F. et al. (2016) ‘The dynamics of beef trade between Brazil and Russia and their environmental implications’, Global Food Security. Elsevier, 11, pp. 84–92.
  • Tchatoka, F. D., Masson, V. and Parry, S. (2018) ‘Linkages between oil price shocks and stock returns revisited’, Energy Economics. Elsevier.
  • Tuzova, Y. and Qayum, F. (2016) ‘Global oil glut and sanctions: The impact on Putin’s Russia’, Energy Policy. Elsevier, 90, pp. 140–151.
  • Wishnick, E. (2017) ‘In search of the ‘Other’in Asia: Russia–China relations revisited’, The Pacific Review. Taylor & Francis, 30(1), pp. 114–132.

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