SUMMARY -- NEWLY INDEPENDENT STATES UPDATE: INTERNATIONAL AGRICULTURE 
AND TRADE
October 1997, WRS-97-S4                             October 20, 1997
 
            Approved by the World Agricultural Outlook Board
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This SUMMARY is published by the Economic Research Service, U.S. Department 
of Agriculture, Washington, DC 20005-4788.  The complete text of the report
available 1-2 weeks following this summary release.
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Despite Low Foreign Direct Investment to Date, NIS and Baltic Investment
Climate Expected To Improve Over Long Term

Foreign direct investment (FDI) in the Newly Independent States
(NIS) and Baltic countries lags  well behind FDI in other
emerging markets, but has increased in recent years. 1/  In
absolute terms, Russia is the largest NIS/B recipient, with
accumulated FDI (generally for the period 1989-96) estimated by
various sources between $5 and $8 billion.  Kazakstan and Ukraine
are the next largest destinations, receiving around $3 billion
and $1 billion, respectively.  The United States is a top
investor the NIS and Baltic region, along with European and Asian
(Japan, South Korea) countries.  Although FDI has been largest in
natural resource sectors (oil, gas), investment in the food and
related sectors is growing, and was the third largest category
for FDI in Russia in 1996.

1/ FDI occurs when a firm in one country makes capital
expenditures to either acquire assets of an existing firm in a
foreign country or to establish a new firm.  FDI is defined as
the acquisition of at least 10 percent of a foreign firm's
assets.

Based on ERS data, FDI in the NIS and Baltic countries is
concentrated in three main areas: beverages (beer, wine,
and non-alcoholic beverages), confectionery (candy, cookies,
etc.), and tobacco processing.  Strong domestic demand for these 
products (especially in higher-income niche markets), relatively 
high import protection, brand recognition, and limited domestic
competition are reasons for investment in these sectors.

While the climate for investment in Russia and some of the other
NIS is improving, investors still face a daunting combination of
political and economic risk, uncertainty, and a vast array of
infrastructural and policy-related impediments.  

In most NIS, an inconsistent regulatory climate, lack of
transparency in the legal system, and conflicting rules increase
uncertainty in the investment climate.  Laws are often vague and
subject to wide interpretation, which invites corruption and
inconsistent application.  Moreover, in many NIS, especially
Russia and Ukraine, regional and local governments often
introduce measures that run counter to federal regulations, or
don't enforce federal laws and decrees.

In addition to a vague or non-existent commercial code, many NIS
have inconsistent and nontransparent tax laws, as well as
numerous and high taxes.  These costs of doing business not only
increase risk or uncertainty, but they directly reduce the
expected rate of return on an investment and usually require a
higher rate of return to compensate for the additional fees and
payments associated with it.  Poor transportation and
communication infrastructure also increase costs of doing
business.  Less obvious but also significant are lack of contract
enforcement, effective dispute resolution mechanisms, and modern
credit institutions, all of which raise the cost of transacting
business.

However, several factors point to improved long term (10 or more
years) prospects for FDI in the NIS and Baltic countries. 
Despite possible setbacks that could slow improvement in the NIS
and Baltic investment climate, continued progress in market
reforms and stabilization of the region's economic and political
environment are expected to lead to increased growth in FDI. 
Membership in the World Trade Organization (WTO) and lending
requirements of international organizations (such as the IMF)
should also improve conditions for investment.

For further information contact: S. Sheffield, P. Liapis, R. Hoskin,
C. Foster, J. Mitchell, NIS and Baltic Team, 202-219-0620.

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