Korea, Russia urged to beef up economic ties
More than a decade ago, following the disintegration of the Soviet Union and the deep post-transition fall in output, Russia seemed to have become an economy of secondary importance.
Since 1999, however, the Russian economy has staged a spectacular comeback, thanks to various favorable international factors, such as the consistently high prices of its main exports, and is now again a major player in the world economy. One clear expression of this is found in its foreign direct investment (FDI) abroad.
From 2001 to 2005, Russian outward FDI averaged $7 billion a year on a BOP basis, and over the next three-year period, 2006-2008, this average jumped to $34 billion.
In 2009, Russia became the seventh largest investor in the world by reaching a record $46 billion in outward FDI.
Outside observers were surprised by outward FDI from Russia, especially its landmark deals. One was the September 2009 purchase of a 55 percent stake in General Motors’ German affiliate Opel by a consortium of the Canadian car maker Magna and the Russian state-owned bank Sberbank, the largest creditor of the Russian car maker GAZ.
Most of these cross-border purchases had previously been in the primary sector, such as oil, gas, and metals.
However, the target industries of Russia’s outward FDI for M&A have diversified, including in the manufacturing, telecommunications, and finance sectors. Three important industries in the manufacturing sector were machinery, metals and motor vehicles.
As to the geographical distribution of acquisitions abroad, Russian firms have generally targeted firms in developed countries, especially in Europe and North America.
In contrast, Russia’s investment in Korea increased to merely $5 million in 2010 from $1.5 million in 1992, when the Russian Federation was launched, reflecting weak economic relations between the two countries.
In terms of economic cooperation in natural resources, basic science technologies, and logistics including trans-Siberian railways, our relationship with Russia must be strengthened, as must our partnership with Russia in terms of geopolitical and security reasons.
Korea could contribute to Russia’s economic modernization and the development of its Far Eastern region, while Russia could play a crucial role in helping Korea stably secure natural resources.
In so doing, a long-term and comprehensive approach, including both inward and outward FDI, needs to be taken based on the principle of a market economy.
As part of these efforts, Russia and Korea must establish both in Moscow and Seoul a dialogue vehicle, the Russia Desk that would serve as a useful information channel for developing ideas into actual investments.
Businesspersons, government officials, financial and industrial professionals, and regional government officials would participate to obtain reliable investment information and investment support.
In the case of industries corresponding with Russian industrial development policies, which focus on the diversification of industrial bases, particularly in manufacturing, such as steel, metallurgy, automotive, construction, telecommunications, IT and renewable energy, Russia must be encouraged to partake in the overseas purchasing of Korean companies, including medium- and large-sized companies.
In the downstream oil and gas industry, Russian investment is welcomed by shipbuilding companies, energy supply firms, tank terminals, and related steel and metal manufacturers. Further, upstream joint ventures, including excavations, development and manufacturing, must be explored.
In technology development projects in the industries of basic science, nanotechnology, nuclear power, space shuttle, engineering, and high-tech, Russia-originated technologies can be commercialized by Korean partners.
In the agricultural industry, reverse round-trip investments combining Korean entrepreneurship and technologies with Russian capital and land are compelling examples. In the transport industry, joint ventures covering Siberia to the Far East region are sure to be lucrative.
Regional development in Jeju Island and Busan, favorite tourist destinations among Russians must be included.
Of course, to ensure the success of sustainable and mutually beneficial cooperation, active participation of top-level and senior officials will be of essence.
Hank Ahn serves as commissioner of Invest Korea at KOTRA.